Challenges likely to continue into 2018.

The first quarter of 2017 was a tough one for Australian retailers, as consumers tightened their wallets. Real inflation-adjusted retail turnover growth was 1.2% for the year to March 2017, according to Deloitte Access Economics’ latest Retail Forecasts subscriber report.

Deloitte Access Economics partner and report author David Rumbens said: “The March quarter was a low point for retail spending, continuing what has clearly been a problematic 2016-17 for the retail sector”. He said current challenges are likely to remain in 2017-18, however  expected labour income growth will drive improved spending growth over the next few years.

However, the imminent arrival of US giant Amazon presents a series of challenges for existing retailers in terms of heightened competition in both online and in-store sales, Rumbens said.

“An effective omni channel strategy, as well as strong brand equity and excellent customer service will be crucial to keeping shoppers where retailers want them. Prices will get squeezed as Amazon has so much scale to absorb very low margins in most of its products. The bigger the retailer, the more a threat Amazon’s entry will be. But on the other hand, small players have a chance to thrive by leveraging Amazon’s role as a consolidated marketplace.”

Small-to-medium enterprises (SMEs) are key drivers of online retail growth in the order of 23% for the year to March 2017, and  total online retail sales growth of 9.0%. Online retailing now accounts for around 7.3% of total retail spending.

“There are plenty of technology, political, economic and competition risks on the horizon for Australia. And for retailers, China’s economy stumbling badly would be a major concern. That said, a major US-China tariff war might not have the impacts one might expect, and significant upside potential exists in maturing Asian economies and the rise of middle class consumer power in the region,” he said.

Deloitte expects total nominal retail spending to come in at 3.0% in 2016-17, and to moderate to 2.6% in 2017-18. However, more of the growth next year may come from volume growth, with prices increasingly under pressure. Retail volume growth in 2016-17 is expected to be 1.6%, rising to 2.2% in 2017-18.

Big house prices mean big mortgages

“When people in Sydney and Melbourne start talking about moving overseas because housing is more affordable, you have a problem,” Rumbens said. “The surge in house prices has provided significant support for retail over recent years, with the wealth effect underpinning a declining savings rate and stronger consumer confidence amongst homeowners. But many are also being left with eye-watering mortgages to chase the housing they might have more comfortably afforded just a couple of years ago. Servicing these higher debts will eat into retail spending capacity going forward, and also create macroeconomic risks about which the Reserve Bank is increasingly becoming more vocal.”

Other influencers to retail spend trends include the ubiquity of the part-time job which now accounts for 33% of all jobs but is also associated with rising underemployment. “Pumped up wealth from the housing market may be keeping consumer spending afloat, but it isn’t enough to offset the impact of record low wage growth.  And when wages aren’t growing, it means CPI inflation is also subdued,” Rumbens said.