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Inflation, not volume, will drive retail sales growth until 2025 – report

(Source: Bigstock)

Australian retail spending is now higher than it was tracking before the pandemic, but data from Deloitte suggests celebrations should be held in check. 

The quarterly Deloitte Access Economics’ Retail Forecasts finds that – based on trend analysis – real retail spending during the quarter to March 31 ran 6.2 per cent ahead of what might have been expected had Covid-19 not disrupted markets from early 2020. 

That’s the good news. The bad is that Deloitte expects inflation could prove more problematic during the coming months and predicts that overall spending will slow from the second half of this year. Retailers face challenges of consumers shifting toward value purchases, squeezed margins and rising business costs.

“Inflation is now a cold, hard reality, to the extent that the majority of turnover growth over the next few years is expected to be driven by prices rather than volumes,” says the report’s principal author and Deloitte Access Economics partner, David Rumbens. 

He expects retail sales by volume will increase by an average of only 1.1 per cent from next year through to 2025 compared with 1.9 per cent for retail price growth. 

The report found that the hospitality sector’s sales are increasing, benefiting from pent-up demand for social interaction. Colder weather is likely to boost the apparel sector, as consumers – having spent the past two winters in lockdowns – purchase warmer clothing for returning to work and outdoor activities during winter. 

Those sectors, predicts Deloitte, will drive double-digit sales growth 5.5 per cent during this calendar year, with food projected to increase by 7.6 per cent. 

However, Rumbens warns, households face an almost unavoidable “price pinch” given CPI price growth for non-discretionary goods and services have surged 6.6 per cent – more than double that of discretionary items, which rose by 2.7 per cent. 

“These non-discretionary goods and services are the ones households are less likely to reduce their consumption of, including food, fuel, housing and health, placing significant pressure on other components of spending.

“The March quarter saw retail prices up by 3.2 per cent over the year, driven by a 4.5 per cent increase in retail food prices. The cost of inputs is unlikely to taper anytime soon as producer prices were 16 per cent greater than pre-pandemic levels in March. This means retailers are likely to feel the brunt of rising costs for a while.”

While noting some “early and encouraging signs” in relation to lower shipping costs, he advises retailers businesses may need to look for ways to lower costs and reduce disruptions to operations to avoid losing competitiveness.

“This could involve diversifying and building more resilient supply chains, or shifting to a more vertically integrated structure to better control supply chain visibility. With wage pressures high, businesses may need to maximise staff retention as much as possible through investment in the likes of training, talent pipelines and automation,” he says.

“Overall, the cost-of-living squeeze, higher interest rates and preference for spending on services are expected to lead to a slowdown in retail momentum through the second half of this year, which may then result in real per capita spend on retail falling next year and 2024. That means the speed of return of net migration will become a significant driver of retail’s future growth prospects.”

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