Pessimistic sentiment foreshadows a challenging start to the year for retailers

Consumer sentiment decreased by 1.3% to 81.0 in January 2024, the weakest January read outside of the early-90s recession, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. The most recent ABS Retail Sales increased by 2.0% in November 2023 as consumers made the most of the November sales events. While the November sales events continue to increase in popularity, the Australian Retailers Association (ARA) has also projected strong December and Boxing Day sales. According to the ARA, many consumers purchase gifts in the November sales events and then use the post-Christmas sales to purchase items for themselves.

Despite the relatively strong end to 2023, retailers should brace themselves for a challenging year ahead, particularly the first half of the year. Consumers are expected to curtail their spending following the end of the holiday season splurge, as a result of depleted savings levels, softer labour market conditions and the impact of sustained elevated cost-of-living pressures. Retailers will continue to face heightened competition leading to a "war for wallet" as operators battle for sales dollars in a reduced demand environment and travel back on consumers’ agenda as well. This competition is likely to result in increased promotional intensity, with consumers remaining cautious and reserving spending for when they consider they are getting “value for money’”. Simultaneously, ongoing uncertainty and elevated operating costs, including increased input costs and higher wages, will make it challenging for retailers to forecast and maintain margins. The lower-demand environment will also pose difficulties for inventory and working capital management. In this environment, retailers can improve their operations and seize opportunities through programmatic and personalised promotions, robust financial management practices and a focus on relentless operational excellence.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

Consumer sentiment decreased by 1.3% to 81.0 in January 2024, according to the Westpac-Melbourne Institute Index of Consumer Sentiment. Despite the recent announcement of lower monthly CPI in November 2023 (down from 4.9% to 4.3%) indicating we might be closer to an interest rate cut than another increase, last year’s extreme pessimism has continued into 2024, setting an unfavourable tone for the start of the new year. Despite conditions easing, the experience of multiple sustained interest rate rises in 2023 has left many consumers cautious, with 60% of those with mortgages still expecting further rate rises. There were mixed results across the component sub-indexes in January, with a renewed strain on finances, particularly among low- and middle-income households (‘finances vs a year ago’ decreased 7.6% to 63.0). Many consumers might experience a more significant post-Christmas financial "hangover" as the true extent of elevated living costs during the festive season spending becomes apparent. Short- and longer-term economic outlooks recorded increases, likely due to the reduction of interest rate fears (‘economic outlook, next 12 months’ increased 3.9% to 81.8, ‘finances, next 12 months’ increased 2.9% to 93.0). Sentiment related to housing revealed buyers’ outlook reacting to price expectations, with the ‘time to buy a dwelling index’ down 3.1% to 72.0 (within the very weak range) and the index for House Price Expectations edging up 0.5% to 158.1, with more than 66% of consumers anticipating a continued increase in prices in the coming year. These expectations are significantly elevated compared to a year ago (+51.5%). Elevated cost-of-living pressures are expected to continue, and with savings buffers having been depleted in 2023, the impacts on household budgets are poised to intensify in 2024. With relief not expected until the Budget in May at the earliest, and Australian interest rates not expected to be lowered until at least mid-2024 or as late as 2025, it appears sentiment will remain pessimistic for a while longer.

Source: Australian Bureau of Statistics

The most recent ABS retail sales increased by 2.0% (seasonally adjusted) in November 2023, following a fall of 0.4% in October 2023 and a slight 1.0% increase in September 2023. The strong increase is attributable to the success of the November sales events, with retailers starting promotional periods earlier in the month and running them for longer compared to prior years. As expected, the decline in retail spending seen in October 2023 appears to include a level of “sales hacking” with consumers delaying purchases to take advantage of the sales events in November 2023. Most of the increase in spend in November 2023 was due to an uptick in discretionary goods purchases, as consumers responded to increased promotional intensity. While all retail categories recorded increases, the strongest performing categories were household goods retailing (+7.5%), department stores (+4.2%), clothing, footwear, and personal accessory retailing (+2.7%) and other retailing (+1.1%). Around the country, retail turnover grew by more than 1% in all states and territories with South Australia recording the largest rise (+2.8%). The trend of a return to in-store shopping has continued, slowing online trade growth, with online retail sales constituting 12.7% of total sales in November 2023. This compares to 12.6% in November 2022 and 12.5% in November 2021. For retailers, this is an opportunity for them to differentiate though their in-store retail experience while needing to maintain integration across all touch points with consumers. While there are some suggestions of certain operators having reasonable Christmas and Boxing Day sales periods, it is clear the November sales period remains critical for many.