Consumer sentiment recorded a steep fall of 6.9% to 78.0 in November 2022. Consumer sentiment has now fallen 34% since the post-COVID high point in April 2021 (118.8) and 26% since November 2021. The index now remains only slightly above the extreme low recorded during the first COVID-19 wave in April 2020 (75.6). The deeply pessimistic read was driven by escalating inflation and interest rate pressures on family finances, with falling confidence in the labour and housing markets compounding the decline. As rising costs in essential categories such as transport, medical care & health, food and domestic fuel and power show no signs of abating, consumer concern about the cost of living is expected to continue and will likely keep confidence firmly in pessimistic territory in the coming months. Despite consumer sentiment consistently declining nearly every month since November 2021, the most recent ABS retail sales in September 2022 recorded a 0.6% increase, largely driven by growth in the “clothing, footwear and personal accessory retailing” category. Online sales also recorded a small increase of 0.2% in September 2022 yet remain significantly down in year on year terms. With many retailers holding elevated inventory levels due to supply chain concerns, the pre-Christmas sales period represents an important opportunity for retailers to sell down inventory and free up cash for what may be a challenging start to 2023.
Source: Westpac – Melbourne Institute Consumer Sentiment Index
Consumer sentiment declined a further 6.9% in November 2022 to 78.0, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. Continuing rate rises and cost of living pressures has forced down consumer sentiment to levels below the low point observed during the GFC (79.0). The survey was conducted in the week the RBA raised interest rates a further 0.25% (to 2.85% – the highest level in nine years), warning of the possibility of a ‘severe recession’ if inflation is not brought under control. Despite rate rises being widely anticipated, there was a significant discrepancy between respondents surveyed before and after the RBA’s interest rate announcement. Respondents surveyed prior to the RBA’s announcement recorded sentiment of 83.1 (similar to October), while those surveyed after recorded a sharp decline to 75.6, which is a level comparable to sentiment levels during the first wave of COVID-19 in April 2020 (75.6) and points to further softness should rates continue to rise. The survey also asked consumers’ Christmas spending intentions and 40% indicated intention to spend less than last year, meaning retailers will need to carefully consider their pricing strategy heading into the holiday period to capture increasingly cost-conscious consumers, while also managing elevated supply chain costs, rising wages and surging utilities.
Source: Australian Bureau of Statistics
Retail sales growth continued momentum despite the persistent and ongoing rate rises, on the back of elevated savings rates (which have started to reduce but remain higher than historical averages). The most recent ABS retail sales data for September 2022 recorded a 0.6% increase in sales to $35.1 billion (+17.9% vs September 2021, +20.1% vs September 2020). However, underlying inflation rose 1.8% in the September quarter and inflationary influences may be masking softness in volume in some categories. We note that September was the only month in the past 12 months where sentiment improved (albeit still pessimistic), so it will be interesting to see sales data for the subsequent months when sentiment fell further.
Online retail sales
Source: NAB Online Retail Sales Index
Following seven consecutive months of decline, online retail sales posted a modest gain in September 2022 (0.2%, seasonally adjusted), however they were significantly down in year-on-year terms (-20.6%, seasonally adjusted) due to the various state-wide lockdowns in September 2021 contributing to a period of particularly strong growth. Despite the recent month-on-month declines, online sales in the twelve months to September 2022 were approximately 4.7% higher than the 12 months to September 2021, totalling $53.82 billion. Three clear standout categories over the past year in terms of contribution to growth have been department stores, grocery and liquor and takeaway food. Online shopping is expected to gain momentum in coming months as the pre-Christmas “cyber” sales events begin in November. As retailers digitise their operations and implement new data-driven technologies, the vast customer data they hold could make them targets for cyber-attacks. The recent high-profile hacks demonstrate the damage possible, meaning cyber security considerations should remain a significant focus for Australian retailers.
Supply chain concerns drove material increases in inventory holdings in the retail sector in 2022, according to McGrathNicol’s 2022 Working Capital Report. Days Inventory Outstanding (DIO) increased by 22.5 days to 134.6 days in 2022, resulting in $12 billion of cash being locked up in inventory. This is attributable to many Australian retailers changing from “just in time” to “just in case” inventory management to respond to supply chain disruptions and ensure inventory levels can meet consumer demand. This compares unfavourably to the DIO benchmarking in Asia (71.8 days), Europe (111.6 days) and the US (80.7 days). The November sales (Click Frenzy, Black Friday, and Cyber Monday) and the holiday period will be extremely important for retailers to unwind high year-end inventory levels. For further detail, refer to McGrathNicol’s 2022 Working Capital Report website here.