First, the optimistic lens. Australians are net exporters of travel dollars. Looking back to 2019, Australians spent $60 billion overseas, but international tourists spent just $40 billion here in Australia. During the pandemic, this net $20 billion of consumer spending has remained captive in Australia, propping up retail sectors like home improvement, electrical and leisure. Until such time as international travel rebounds to pre-pandemic levels, this domestic “stimulus” effect will continue.
Another major positive for retailers is record level household balance sheets. Australians have saved four times as much – as a share of earnings – over 2020 and 2021 compared to the previous ten years. This “private stimulus” will find its way into consumer spending during the year as consumer confidence levels gradually improve.
There are obvious challenges to the retail outlook, chief among them being inflation. Price inflation is already manifesting in fuel, with petrol nudging $2.20 per litre – up from $1.60 at the start of the year.
For retailers, this is a double-negative, adding significantly to transport costs and dampening consumer demand. The Economist Intelligence Unit expects fuel and freight cost inflation to persist well into 2022, placing upward pressure on retail prices and reducing discount-led activity.
Another downside issue is the very tight labour market, with alarming staff shortages across the retail sector. With more jobs than people to fill them, we should naturally expect to see higher wages over time. Analysts expect an increase of up to 3.5% over the coming 12 months.
Despite these concerns, I think the tailwinds are stronger than the headwinds, and that a generally positive consumer sentiment should grow through 2022.
Clearly an extended war in Ukraine or some other external shock (haven’t we had enough?) could dent that confidence, but on balance, at Grant Thornton we are retail doves, not hawks.
There are also crosswinds - factors which are changing the retail landscape right across the world, as we emerge from two years of significant behaviour change. Retailers which respond best to these challenges will be successful in 2022 and beyond. Those which don’t, sadly, may find themselves out of business.
During January my Grant Thornton colleague Kaitlin Hastie and I spent 10 days in the United States attending the NRF Big Show retail conference, as well as visiting a multitude of retail sites and supply chain operations. Whilst managing to avoid catching Covid-19, we observed several retail trends which we expect to impact Australia:
- Distinct customer channels no longer exist. Consumers now view store and online shopping as interchangeable, and demand a seamless and consistent shopping experience.
- Culture is more important than ever. Retail leaders from Target, Walmart, Ikea and Ralph Lauren (and many more) each shared how culture has underpinned their success throughout the pandemic.
- “Frenemy” retail – large retail brands are partnering with new (often digital) brands to reach new consumers. Nordstrom has embraced online fashion pureplay Asos. Kohl’s have deployed dozens of Sephora store-in-stores, and are affiliating with Amazon as order return locations. Target customers can now order a Starbucks coffee to be collected with their click-and-collect orders. This trend is already emerging in Australia, I was pleased to see a Roll’d pop-up Vietnamese kiosk in my local Coles supermarket this week.
- Local, local, local! The pandemic has shifted – perhaps permanently – the norms of attending office-based workplaces. US-based consumer research presented at NRF suggested that nobody expects to return to the office full-time. We are spending much more time at home, spending more time shopping locally. Large retailers like Target and Nordstrom, have already established small-format local stores which act purely as click-and-collect locations.
- Technology innovations continue at pace. We are now familiar with how logistics automation is driving human cost out of the supply chain, but there remains significant scope for smart use of tech to transform the in-store experience. More than 50% of store tasks can be automated, and we can expect to see more robots and digital devices replacing people in some roles.
- ESG (Environmental, Social and Governance) concerns have soared to the very top of consumer consciousness, and they are demanding more from retail brands than ever before. Failure to meet higher expectations on responsible sourcing, sustainable solutions or social responsibility will see retailers lose previously-loyal customers.
Of course, this is a general snapshot. What we know for certain is that opportunities abound for retailers which can adapt, innovate and evolve in this rapidly changing landscape.