Retailers face a shift to value purchases, margin squeezes, and rising business costs in the second half of 2022, according to Deloitte Access Economics’ latest quarterly Retail Forecasts report (Q2 2022).
Deloitte Access Economics partner, David Rumbens, said the growth outlook was positive, but it still presented a number of challenges for retailers.
“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,” he said.
“For households, the price pinch is near unavoidable, with CPI price growth for non-discretionary goods and services up 6.6%, more than double that of discretionary which was up 2.7%.
"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% over the year, driven by a 4.5% increase in retail food prices. And the cost of inputs is unlikely to taper anytime soon as producer prices were 16% greater than pre-pandemic levels in March. This means retailers are likely to feel the brunt of rising costs for a while.”
Retail spending had surged at the end of 2021 and followed that with a further 1.2% gain in real turnover in the March quarter 2022, according to the report.
That saw real retail spending rise 6.2% ahead of its pre-COVID trend (the level of spending which was expected if COVID disruptions had not occurred).
Hospitality was also benefiting from pent-up demand for social interaction, while colder weather was likely to support wardrobe updates after consumers have spent the past two winters in lockdowns (benefiting apparel and department stores).
Double digit sales growth was also expected for apparel, catered food and department stores over 2022 (compared with locked-down 2021), driving a very healthy real retail sales performance of 5.5% growth in the 2022 calendar year.
Mr Rumbens said retail price growth was forecast to peak at 5.5% over the year to December 2022 (with food retail prices up 7.6% over the same period).
The majority of retail turnover growth for H2 2022 and into 2023 and 2024 would be driven by prices rather than sales volumes.
Retail sales volume growth may average only 1.1% over 2023 to 2025, compared to 1.9% per annum for retail price growth.
“For now though, businesses may need to look for ways to lower costs and reduce disruptions to operations to avoid losing competitiveness,” Mr Rumbens said.
“This could involve diversifying and building more resilient supply chains, or shifting to a more vertically integrated structure to better control supply chain visibility. With wage pressures high, businesses may need to maximise staff retention as much as possible through investment in the likes of training, talent pipelines and automation.
“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.”