Inflation, not volume, will drive retail sales growth through 2025 – report
Australian retail spending is now higher than it was before the pandemic, but data from Deloitte suggests the celebrations should be brought under control.
Deloitte Access Economics’ quarterly retail forecast reveals that, based on trend analysis, actual retail spending in the quarter ending March 31 was 6.2% ahead of what might have been expected if the Covid-19 had not disrupted the markets from the beginning of 2020.
That’s the good news. The downside is that Deloitte expects inflation may prove more problematic in the coming months and predicts that overall spending will slow from the second half of this year. Retailers are faced with the challenges of consumers turning to value purchases, shrinking margins and rising business costs.
“Inflation is now a cold hard reality, as the majority of revenue growth over the next few years is expected to be driven by prices rather than volumes,” says the lead author of the report and Deloitte Access Economics partner, David Rumbens.
He expects retail volume sales to grow an average of just 1.1% next year through 2025, compared to 1.9% for retail price growth.
The report found that hospitality sector sales are growing, benefiting from pent-up demand for social interaction. The colder weather is expected to boost the clothing sector as consumers – who have spent the past two winters in lockdown – buy warmer clothes to return to work and outdoor activities during the winter.
These sectors, Deloitte predicts, will drive double-digit sales growth of 5.5% this calendar year, with food expected to rise 7.6%.
However, warns Rumbens, households face an almost inevitable “price pinch” as CPI price growth for non-discretionary goods and services jumped 6.6%, more than double that of discretionary items, which increased by 2.7%.
“These non-discretionary goods and services are those of which households are least likely to reduce their consumption, including food, fuel, shelter and health, putting significant pressure on other components of spending.
“The March quarter saw retail prices rise 3.2% year-on-year, driven by a 4.5% increase in retail food prices. Input costs are unlikely to decline soon, as producer prices were 16% above pre-pandemic levels in March. This means that retailers are likely to feel the brunt of rising costs for some time.”
While noting some “early and encouraging signs” when it comes to lower shipping costs, he advises retailers to look for ways to cut costs and reduce disruption to operations to avoid losing competitiveness.
“This could involve diversifying and building more resilient supply chains, or moving to a more vertically integrated structure to better control supply chain visibility. With high salary pressures, companies may need to maximize staff retention as much as possible by investing in training, talent pipelines and automation,” he says.
“Overall, the cost-of-living squeeze, rising interest rates and preference for spending on services are expected to lead to slower retail momentum in the second half of this year, which which could then lead to lower real per capita retail spending next year and into 2024. This means that the speed of return of net migration will become an important driver of future retail growth prospects.