Retail

Increasing DIO as a result of supply chain concerns drove DWC higher by 10 days.

Strong sales growth was seen across the sector, with 80% (28 of 35 sampled companies) seeing an increase in revenue, driven by a redirection of consumer spending from sectors adversely impacted by COVID, such as tourism, entertainment, and hospitality. After a lockdown-impacted H1, foot traffic built slowly in H2 while conversion rates and basket sizes increased more rapidly, indicating that consumers were more deliberate in their purchases. After a record Christmas period, H2 was also impacted by falling consumer confidence however that did not translate into a contraction in sales, with record sales attributable to historically high savings and high employment.

Costs of sales increased, driven by higher logistics and labour costs and many retailers were unable to pass those higher costs onto customers in full. More than half of the retailers who achieved revenue growth experienced a fall in gross margin.

DWC increased by 10 days to 50.5 days driven by a sharp increase in DIO resulting in 71% of the sample experiencing a deteriorating cash conversion metric.

DIO increased by 22.5 days, which translated to an additional $12bn in cash locked up in inventory. Many retailers reacted to supply chain challenges by moving from “just in time” to “just in case” inventory management. The supply chain issues particularly impacted seasonal retailers, who were required to “place their bets” on seasonal trends at an earlier stage in the annual cycle. Discounting was less prevalent in 2022 so a return to pre-pandemic discount cycles may provide a lever to unwind the high year-end inventory levels, as will Christmas sales.

DSO deteriorated by 1.4 days and DPO improved by 2.9 days, with almost all sampled companies who experienced an increase in DSO passing the burden onto their suppliers in the form of longer payment times.

Australia’s DWC was approximately 20 days higher than international counterparts. While an increased DIO was experienced globally, international counterparts still held lower levels of inventory and were better able to offset increases in DIO by increasing the days to pay suppliers (DPO).

There are headwinds ahead for the sector, with pessimistic consumer confidence figures compounded by further interest rate increases and cost of living pressures. With COVID-related stimulus and savings now cycled through, discretionary spend may be challenged, and increased levels of discounting may be needed to reduce inventory holdings and attract consumers. Conversely, international supply chain pressures are easing and retailers that can find the right distribution model will see increased market share.

Net working capital performance

*A positive cash impact is a “release” of cash from working capital (improvement). A negative cash impact is additional cash invested or “locked up” in working capital (deterioration).