Retailers confident in face of deteriorating conditions

Operating conditions in the retail industry are the weakest across all industries, and continue to deteriorate, but retailers remain upbeat ahead of Christmas, according to Deloitte’s retail forecast report for the September quarter.

Real retail turnover grew 2.4 per cent year on year in the quarter, according to the report, which will create a tailwind for spending activities into 2019.

Weakness in housing over the quarter was offset by strong employment growth, leading Deloitte to forecast a tailwind for spending activities and stronger retail spending in 2019-2020, driving 2.9 per cent growth.

However, weak wage growth and falling house prices had a negative impact on consumer sentiment in the quarter, which is likely to drag down retail spending in the short term.

“For some consumers, it’s meant more spending on the credit card, for some it’s redrawing equity, and for others it’s putting less away for a rainy day,” Deloitte access economics partner David Dumbens said.

“But, with Sydney and Melbourne house prices now falling, consumers are running on empty and there will be some tricky transitions for next year.”

Food retailers enjoyed the benefits of population growth over the period, whereas department stores continued to struggle. Retail spending is expected to swing toward food, clothing, smaller items and services as consumers increasingly divert their dollars towards necessities and away from big-ticket purchases.

In an effort to keep the business of the price-conscious consumer, the report noted, retailers have largely absorbed increased import costs for goods, which have drifted higher since 2010, by suppressing profit margins in order to keep final retail prices as steady as possible.

Average profit margin fell to 4.3 per cent between 2015-16, from 4.8 per cent in 2014-15, coinciding with an 11 per cent fall in the value of the Australian dollar.

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