Retail growth to be driven by prices instead of volume

While Australian retail sales have come out of the pandemic better than expected, inflationary challenges could prove more problematic, according to Deloitte Access Economics’ latest quarterly Retail Forecasts subscriber report.

The growth outlook is positive, but it still presents a number of challenges for retailers, says principal report author and Deloitte Access Economics partner, David Rumbens.

“Inflation is now a cold, hard reality to the extent that the majority of turnover growth over the next few years is expected to be driven by prices rather than volumes.

“For households, the price pinch is near unavoidable, with CPI price growth for non-discretionary goods and services up 6.6 per cent, more than double that of discretionary which was up 2.7 per cent. These non-discretionary goods and services are the ones households are less likely to reduce their consumption of including food, fuel, housing and health, placing significant pressure on other components of spending.

“The March quarter saw retail prices up by 3.2 per cent over the year, driven by a 4.5 per cent increase in retail food prices. And the cost of inputs is unlikely to taper anytime soon as producer prices were 16 per cent greater than pre-pandemic levels in March. This means retailers are likely to feel the brunt of rising costs for a while.”

Retail price growth is forecast to peak at 5.5 per cent over the year to December 2022. The majority of retail turnover growth for H2 2022 and into 2023 and 2024 will be driven by prices rather than sales volumes. Retail sales volume growth may average only 1.1 per cent over 2023 to 2025, compared to 1.9 per cent per annum for retail price growth.

“Overall, the cost-of-living squeeze, higher interest rates and preference for spending on services are expected to lead to a slowdown in retail momentum through the second half of 2022, which may then result in real per capita spend on retail falling over 2023 and 2024. That means the speed of return of net migration will become a significant driver of retail’s future growth prospects,” concludes Rubens.