KPMG’s flagship Retail Health Index (RHI) has lifted by a faster rate than was anticipated only 3 months ago, with our expectation now that the sector will return to a positive territory in the final quarter of next year as the cumulative impacts of higher population growth and moderating interest rates outweigh negative elements impacting the sector.
What do we see in the retail sector?
Consumer confidence remains well below its long-term average sitting at 77.9 points in October per Roy Morgan research. Indeed, consumer confidence remains lower the levels recorded in the GFC and 52 percent of households believe they are financially worse off than a year ago, 37 percent believe the next 12 months economic conditions will be bad and only 7 percent believe they will be good. Spending on discretionary retail remains soft and many retailers are concerned about November and December trading which often anchor the sales and margin performance for the whole year.
Despite a pause in interest rate rises, the Reserve Bank of Australia (RBA) raised rates in early November by 25 basis points to 4.35 percent and has signalled more to come. The simple reality is inflation remains unsustainably high at c.5.6 percent and the new RBA Governor, Michelle Bullock, is determined to wrestle it to the ground.
Considering the household savings rate has dropped below its long-term average to 3.2 percent and many homeowners are bailing out of their properties to avoid mortgage stress, an accelerated recovery of retail sector health seems a little hard to fathom.
So why is our RHI is suggesting a faster return to retail sector health?
Despite the anchors above, strong population growth (FY23 net population growth of c.600k), slowing interest rises, and the wealth effect of higher property prices underpinning consumption is promising to tip the balance of the retail health drivers into positive territory, albeit we are not out of the woods yet.
Where will retail leaders focus?
Retailers are concerned about the return to holiday discounting
Two years of consumers being price-takers rather than price-makers created a margin (and profit) bubble that was unsustainably good for many retailers. That bubble may not have burst yet, but it’s certainly under pressure and cost out and capex constraints are the name of the game, as CEOs seek to protect their promised results for shareholders.
Modest online growth doesn’t mean online sales are in decline
The COVID-19 pandemic gave online a boost globally and led to a structural shift in the mix of dollars spent online and offline. While it might be some time until Australia reaches the UK benchmark of c.38% of online retail sales, there is no doubt many retailers are now achieving much higher online sales penetration in Australia.
Supply chain cost savings have been offset by strong rises in operating costs
So, as price discounting returns to the market, this inevitably means margin squeeze, albeit off a high base for many, meaning cost out and operating efficiencies become the name of the game.
Discretionary spending on homewares, household goods and leisure equipment are hurting more than most
For some retail categories the pull forward effect of the pandemic was real. Many of us bought new TVs, furniture, BBQs, surfboards, bikes, and SUVs in the last two years. We simply don’t need to buy more or replace what we have (yet).
All Retail Health Index editions
Why KPMG
The KPMG Retail Health Index is based on a calculation that seeks to incorporate the revenue and cost drivers of a retail and consumer-focused business operating in the Australian economy, with an element of future expectations through incorporating a measure of consumer confidence.
If KPMG can help your business in any way navigate the current business environment and plan for any future developments that are facing the industry, please contact us.
