Retail

DWC decreased by close to a week in FY23, driven largely by a decrease in DIO as retailers strategically unwound inventory levels.

Retail sales remained resilient in FY23 (growing by 8%) despite consumer pessimism persisting at historically high levels. In the second half of FY23, demand began to slow on the back of ongoing cost-of-living pressure, however 76% of our sample recorded revenue growth overall.

Whilst retail sales grew, it was inflation (rather than volume growth) that drove much of the reported increase, with margin compression evident at both a gross margin and EBITDA margin level (both down 1%). Wage growth and other inflationary pressures impacted cost of sales (up 8%) and costs of doing business.

A significant 19 day decrease in DIO drove a 6 day improvement in average DWC across our sample. Many retailers moved from a “just in case” to “just in time” inventory strategy, as supply chains opened up. Responding to an increasingly “value” driven consumer, many operators increased promotional activity and rationalised product lines/SKUs. Retailers looked to reduce elevated inventory holdings from FY22 in the face of slowing demand and a rebalancing of sales between channels.

Some of the benefit of the lower inventory holdings was passed onto suppliers, resulting in a 9.5 day reduction in average DPO. 67% of sampled companies had a lower accounts payable balance at year-end compared to FY22, despite average revenue growth overall.

Australia’s improvement in DWC was higher than international counterparts, with Asia, Europe and the US experiencing an improvement of between 2 – 3 days, however the Australian sample still sits at the upper end of the DWC range on a comparative basis.

As noted above, some signs of weakness emerged in the second half of FY23 (more evident in discretionary categories) as legacy “protective forces” from COVID-19 (high household savings levels and pent-up lockdown demand) unwound. Despite this, many retailers are cautiously optimistic and anticipate an improvement in retail conditions in the second half of FY24 on the back of slowing inflation and an expectation that interest rates may have peaked. That said, conditions are likely to remain difficult in the near term, requiring careful inventory management.