Retail sales growth up 5.5% this year, as inflation sets in

Australian retail sales are on the rise but new research suggests growth is being driven by inflation, not by consumers buying more.

Deloitte Access Economics, in its latest Quarterly Retail Forecasts. This edition dubbed “Retail’s Turning Point” warns that while retail is for now “still riding the post-pandemic high” the outlook remains a lot bleaker than the current figures suggest.

Real retail spending grew by 1.4% through the June quarter after what was already a strong start to the calendar year. “That left real sales growth up 5.5% over the year, with the spending spree particularly centred around discretionary categories,” said David Rumbens. “But cracks are starting to show as the economy faces a number of challenges.

Retail prices increased 4.8% through the year to the June quarter with the largest price rises seen in food and household goods. “On a quarterly basis, overall retail price growth has already exceeded sales volume growth in both the March and June quarters,” said Rumbens.

Deloitte predicts that retail sales growth volume will end the year at 3%, however, retail price growth is expected to peak at almost twice that rate: 5.9%. “Having prices as the main driver of nominal retail sales or top line revenue is relatively unfamiliar for retail,” observed Rumbens.

The report concludes that the post-COVID spending spree has been particularly centred around discretionary categories including department stores, apparel and catered food. A growing desire of consumers to eat out and engage in experiences supported an 8.6% increase in spending at restaurants, cafes and takeaway food, while winter outfit refreshes likely supported the 3.9% increase in apparel spending over the quarter.

Deloitte predicts the pent-up demand for discretionary retail is expected to weather the inflation challenge “a little longer” with the volume of spending at cafes and restaurants projected to leap 42.8% over the full year.

“But price growth for these categories is creeping upwards, and as consumers rein in their discretionary retail spending, most non-food categories are likely to reach their turning point in annual price vs volume growth in the 2022 December quarter,” the report said.

In another indicator of short-term Australian retail sales growth, Access believes larger retail categories have already passed that turning point.

“Significant price rises for food and household goods have contributed to a slowdown in the volume of spending at these retailers,” the report said. “Excluding the impacts of the numerous lockdowns and restrictions, at-home food (supermarkets and speciality food and liquor retailers) saw a significant difference between price and volumes growth starting in the March quarter this year. This is expected to balloon in the September quarter with prices upward of 6% through the year, but volumes around 4% in the red.”

Deloitte predicts supermarket sales in volume terms will fall 2.1% from 2022 to 2023 before recovering 1% the following year. However, supermarkets may not see their top-line sales dip by the same degree. “The value of supermarket spending over 2022-23 is expected to grow 3.3%, driven by the expected 5.5% price growth.”

Meanwhile, as retail prices rise, Rumbens is also warning of the impact of labour shortages on the retail industry. “Australia is operating at close to full employment and retailers are concerned about having enough labour in such a tight labour market. Retail job vacancies have more than doubled since May 2019, with no sign of slowing down,” he said. “These positions aren’t being filled and employment in the retail industry is lower than in May last year, down 1.2%.”

The issue is being exacerbated by the absence of a key supply of workers — international students. “Even with this being a key focus of the federal government’s Jobs and Skills Summit last week, it’s unclear if, and when, international students will return to their pre-pandemic levels,” said Rumbens.

“The higher share of casual and part-time workers in the retail workforce is likely also weighing on the industry’s ability to retain workers. With fewer entitlements binding these workers to retail jobs and high transferability of skills between retail jobs, workers are more likely to shift between employment.”

Download the Deloitte Access Economics’ Retail Forecasts subscriber report here.