Deloitte Access Economics – Consumer reaction to cold, hard inflation

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Australian retail sales have come out of the pandemic better than if it had never happened.

However, inflation challenges could prove more problematic, according to the latest quarterly report from Deloitte Access Economics quarterly forecast subscribers:

Overall spending is expected to slow from the second half of 2022 as retailers face a shift to value buying, margin squeezes and rising business costs.

In the advertising sector, analysts expect advertising spending to maintain its solid course through the end of the year.

Zenith’s latest forecast notes that advertising spending has remained on track despite the macroeconomic headwinds that have emerged this year: “For now, consumer spending continues to grow as consumers demonstrate their strong appetite for travel and entertainment experiences that have been denied to them during the pandemic. Business confidence is generally high and business investment is increasing, and there is little evidence of widespread cost reduction.”

But inflation will result in a change in consumer behavior.

David Rumbens, Partner, Deloitte Access Economics “The outlook for growth is positive, but it still presents a number of challenges for retailers.

“Inflation is now a cold hard reality, as the majority of top line growth over the next few years is expected to be driven by prices rather than volumes.

“For households, price pinching is almost inevitable, with CPI price growth for non-discretionary goods and services
up 6.6%, more than double that of discretionary, which was up 2.7%.

“These non-discretionary goods and services are those that households are least likely to reduce their consumption of, including food, fuel, shelter and health, putting significant pressure on other components of spending.

“The March quarter saw retail prices increase 3.2% on the year, driven by a 4.5% increase in retail food prices. And input costs are unlikely to decline by soon, as producer prices were 16% higher than pre-pandemic levels in March. This means that retailers are likely to feel the brunt of rising costs for some time.”

According to Deloitte Access Economic Retail Forecasts:

  • Retail spending jumped at the end of 2021 and followed that with a further 1.2% gain in real revenue in the March 2022 quarter
  • This sees actual retail spending around 6.2% ahead of its pre-COVID trend (the level of spending that was expected had the COVID disruptions not occurred)
  • Hospitality is benefiting from pent-up demand for social interaction, while colder weather is likely to support wardrobe updates after consumers spent the past two winters in lockdown (in favor of clothing and department stores)
  • Double-digit sales growth is expected for apparel, catering and department stores in 2022 (vs. locked 2021), driving a very strong real retail sales performance of 5.5% growth over the course of the year. calendar year 2022.

Retail price growth is expected to peak at 5.5% in the year to December 2022 (with retail food prices increasing by 7.6% over the same period).

The majority of retail sales growth for the half of 2022 through December and in 2023 and 2024 will be driven by prices rather than sales volumes. Retail sales volume growth may average just 1.1% from 2023 to 2025, compared to 1.9%
per year for retail price growth.

This forecast includes some moderation in price growth after peaking in December 2022. There are early and encouraging signs for lower shipping costs. In particular, the Reserve Bank seeks to actively suppress price growth via interest rate hikes.

“For now though, companies may need to look for ways to cut costs and reduce disruption to operations to avoid losing competitiveness,” Rumbens said.

“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.

“Overall, the cost of living compression, rising interest rates and preference for service spending are expected to lead to slower retail momentum in the second half of 2022, which could then result in lower real per capita retail spending in 2023 and 2024. This means that the speed of return of net migration will become an important driver of future retail growth prospects.

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