This article is from the Australian Property Journal archive
ALTHOUGH 2023 was a year to forget for retailers, Australia’s retail recession is finally over and the combined stage 3 tax cuts and forecast lower interest rates are expected stimulate consumer spending.
According to Deloitte Access Economics’ Retail Forecasts, cost of living pressures saw consumers tighten their purse strings in 2023 resulting in four consecutive quarters (Dec-22 to Sep-23 inclusive) of negative growth – the longest period of consecutive decline on record.
It comes as households which had amassed over $250 billion in savings during the pandemic exhausted their savings as cost-of-living spiralled out of control. The savings ratio is now sitting at only 1% compared to 24% during the peak of covid.
Although the last quarter of 2023 showed a small improvement. Real retail turnover grew 0.3% over the quarter, the first positive quarter in a year. However, in per capita terms, real turnover fell again by 0.1% (the sixth consecutive fall since September 2022), confirming that consumers were still hesitant to spend at the end of 2023.
“Retailers have really struggled over the past year. 2023 was the worst year for retail sales growth in a generation, and retailers had to offer significant discounts to get customers in the door,” said Deloitte Access Economics partner and principal report author, David Rumbens.
“The aggressive discounting in the December quarter drove sales, but heavily ate into margins. Data released this week by the ABS shows that profits in the retail sector are up by just 1.4% over the year – a fall in real terms – with profits particularly falling away at the end of the year, down 10.9% in the December quarter,” he added.
Rumbens said the good news is that the retail recession is finally over but it doesn’t mark the end of hard times for retailers.
“This year, 2024, is expected to be a tale of two economies, with the first half seeing a continuation of 2023, where consumers remain cautious and spending subdued. The second half however may be more favourable.
“Households are still feeling the brunt of higher interest rates and elevated, albeit moderating, inflation. The January retail sales data released last week points to consumer caution. The sector only grew 1.1% in nominal terms over the year to January 2024. This really highlights the weakness of 2023, and the fact that the recovery has not really kicked into gear yet,” he continued. “We expect consumer caution to continue into the first half of this year, with retailers expected to continue discounting to entice shoppers into their stores.”
Rumbens expects the updated stage 3 income tax cuts that will come into effect from July 1st will easing cost of living pressures for most taxpayers, which should stimulate retail spending, particularly on discretionary goods.
“The second half of 2024, however, is expected to be a turning point for the Australian economy. Real wage growth and disinflation are expected to continue, the updated stage three tax cuts will loosen purse strings, and interest rate cuts are likely,”
Sales volumes across the retail sector are only forecast to grow 0.9% across the 2024 calendar year, which is not expected to be enough to bring retail sales volumes back to their 2022 levels. Conditions for retailers are expected to improve further in 2025 with real turnover forecast to grow by 2.2%.
Retail prices are expected to moderate in 2024, growing by 1.5%. This will be driven mainly by food retailers, who are still subject to manufacturing and agricultural supply chain pressures. Non-food retailers are expected to continue strong discounting in 2024 are only forecast to lift their prices 0.5%.
According to the report, 2025, is expected to build on the strength of the second half of 2024. Real retail turnover is expected to increase by 0.9% and 2.2% in 2024 and 2025, respectively.
Furthermore population growth is expected to prop up growth in sales volumes in the first half of 2024, while increases in per capita spending are expected in the second half. Subsequently, volumes are expected to grow by 1.1% in 2024, ticking up to 1.7% in 2025.
The positive retail forecast coincides with recent predictions by CBRE that shopping centre investment activity will pick up by 50%, after hitting a cyclical low in 2023.
CBRE’s latest Australian Shopping Centres research report, shopping centre investment activity is anticipated to grow by circa 50% between 2023 and 2025, climbing from $4.2 billion to an estimated $6.3 billion.
CBRE predicts retail sales to grow by $500 billion by the end of the decade, supported by population growth, jobs growth and income growth.
“Future supply of shopping centre developments is expected to be less than half of the historical average over 2024-2028 and we anticipate further vacancy rate compression as city centre performance improves,” said Sameer Chopra, Pacific head of research at CBRE.
E-commerce on the other hand is expected to see continued growth in the next few years, forecast between 13% to 15% from 2024 to 2027.
In response to ongoing e-commerce penetration, shopping centres have successfully become more defensive assets, with 94% of centres now having at least two daily needs supermarkets, for around 11% of gross lettable area.
“Retail categories that relate to looking good, feeling good and travelling well have taken an extra 20% share of wallet over the past two decade,” added Chopra.
“Our data also shows that occupancy cost ratios (OCRs) have declined over the past five years. For categories such as women’s fashion, café/restaurant and mini-majors, OCRs are 15% lower today than in 2019, due to re-based rents and higher retail sales.”
