Deloitte: What does the year look like for apparel retailers?

Australian retail sales have come out of the pandemic better than if it had never happened.

But the country’s inflation challenges could prove more problematic, with overall spending expected to slow from the second half of 2022, and retailers facing a shift towards value buying, margin squeezes and increased business costs.

That’s according to Deloitte Access Economics’ latest quarterly retail forecast subscriber report, covering the second quarter of 2022.

Retail spending surged at the end of 2021 and followed that with an additional 1.2% gain in actual sales in the March 2022 quarter, the report documents.

This saw actual retail spending around 6.2% ahead of its pre-COVID trend.

Analysts say colder weather is likely to support wardrobe updates after consumers spent the past two winters in lockdown.

Double-digit sales growth is expected for apparel and department stores in 2022 (compared to locked 2021), driving retail sales performance of 5.5% growth in calendar year 2022.

The report’s lead author and Deloitte Access Economics partner, David Rumbens, said overall findings are mixed for the year ahead.

“The outlook for growth is positive, but it still presents a number of challenges for retailers. Inflation is now a cold hard reality, as the majority of top line growth over the next few years is expected to be driven by price rather than volume.

“For households, the pinch in prices is almost inevitable, with CPI price growth for non-discretionary goods and services up 6.6%, more than double that of discretionary prices which rose by 2.7%.

“These non-discretionary goods and services are those that households are least likely to reduce their consumption of, including food, fuel, shelter and health, putting significant pressure on other components of spending.

“The March quarter saw retail prices increase 3.2% on the year, driven by a 4.5% increase in retail food prices. And input costs are unlikely to decline by soon, as producer prices were 16% higher than pre-pandemic levels in March. This means that retailers are likely to feel the brunt of rising costs for some time.”

Retail price growth is expected to peak at 5.5% in the year to December 2022 (with retail food prices increasing by 7.6% over the same period).

Most of the retail turnover growth in the second half of 2022 and in 2023 and 2024 will be driven by prices rather than sales volumes. Retail sales volume growth could average just 1.1% from 2023 to 2025, compared to 1.9% per year for retail price growth.

This forecast includes some moderation in price growth after peaking in December 2022.

There are early and encouraging signs of lower shipping costs. In particular, the Reserve Bank seeks to actively suppress price growth via interest rate hikes.

“For now though, companies may need to look for ways to cut costs and reduce disruption to operations to avoid losing competitiveness,” Rumbens said.

“This could involve diversifying and building more resilient supply chains, or moving to a more vertically integrated structure to better control supply chain visibility.

“With high salary pressures, companies may need to maximize staff retention as much as possible by investing in training, talent pipelines and automation.

“Overall, the cost of living compression, rising interest rates and preference for services spending are expected to lead to slower retail momentum in the second half of 2022, which could then result in lower real per capita retail spending in 2023 and 2024.

“This means that the speed of return of net migration will become an important driver of future retail growth prospects.”

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