Retail - A challenging road ahead for retailers

Buoyed by significant household savings and strong labour market conditions, Australian retail sales remained resilient in 2022 despite consumer sentiment plummeting to levels of pessimism not seen since the GFC. Retail sales grew 11.4% during 2022, compared to 5.5% in 2021 (noting volumes grew more slowly after adjusting for inflation). Retail sales of $411.5bn represented a 20% increase above 2019 pre-pandemic levels.

In 2023, the retail environment will become more challenging. Rising interest rates, inflation-fuelled cost of living pressures, and falling property values reducing on-paper wealth, will all present headwinds. The tailwinds from high personal savings levels and pent-up demand or “retail therapy” will also unwind. Consumers will become more likely to opt out of discretionary categories.

Retailers will therefore face:

• Increasingly “value-conscious” consumers, reducing their ability to pass on price increases and amplifying the importance of pricing/discounting strategies and product mix.

• Heightened competition for share of wallet from other sectors.

• Increasing margin pressures as input costs rise, in particular utilities and staffing costs.

• Consumers wanting to understand a brand’s values, including sustainability commitments.

• Inventory challenges when operating in a lower demand environment, reverting to “just in time” management.

• The need for investment in an omnichannel strategy as online shopping momentum continues.

• The threat of cyber attacks as retailers digitise operations and store vast amounts of data.

• An easing of global supply chain issues, alleviating cost pressures.

Retailers can improve their operations and capture opportunities by:

• Maintaining market momentum by keeping brand awareness strong.

• Engaging with consumers through authentic brand values.

• Reviewing company structure and fixed cost bases.

• Implementing comprehensive pricing and marketing strategies to capture “value conscious” customers.

• Reviewing cyber security strategies to ensure resilience against attacks.

• Optimising working capital management to drive supply chain improvements.