"War for wallet” will intensify before conditions improve

According to the Westpac Melbourne Institute Index of Consumer Sentiment, 2023 was the second most pessimistic year since 1974 (when records began) due to sustained cost-of-living pressure from rising interest rates and inflation in basics such as rent, fuel, utilities and groceries. Despite the difficult backdrop, retail sales grew 3.3% (seasonally adjusted) in 2023. However inflationary pressures drove much of this increase, with demand and volumes falling.

Challenging conditions for retailers are likely to persist, at least during the first half of 2024, before the prospect of any meaningful interest rate cut or tax relief comes into play. We expect retailers will face an intensifying “war for wallet”— not only from competitors increasing promotional intensity to attract a more value-conscious consumer, but also from travel and leisure as consumers return to, or even prioritise, experiences over discretionary retail spend.

We also expect a continuation of challenging operating conditions, including an uncertain geopolitical environment which will impact supply chain reliability and cost. Closer to home, we expect elevated operating and input costs, including higher wages. These factors will make it difficult to forecast and maintain margins and manage working capital. Retailers will need to simultaneously offer value for money, and meet consumers’ already high expectations for service standards, personalisation, convenience, and low friction customer experiences.

In this environment, retailers can improve their operations and capture opportunities by:

  • Better leveraging data to enable programmatic and personalised promotion to capture consumer spend, while maintaining healthy margins.

  • Maintaining a focus on cyber risk protection.

  • Ensuring access to robust, timely integrated financial information, regularly updated forecasts based on recent data rather than historical trends, and practical contingency plans should forecasts not be achievable.

  • Relentless pursuit of operational excellence by understanding and driving the levers available to them to trade their business “harder” and continue to improve efficiency.

More from the author, Partner Jason Ireland

Retailers will continue to face challenging conditions during the first half of 2024, before the prospect of any meaningful interest rate cut or tax relief comes into play.

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