Australia’s struggling retail sector has been given a glimmer of hope, with rolling sales encouraging shoppers to spend — but economists warn that it may come with the price of another interest rate hike by the Reserve Bank.
The recent jump in retail spending, boosted by clothing and footwear retailers offering big discounts and earlier-than-usual sales seasons, has increased expectations of an interest rate hike in August as the entire retail sector navigates a cost-of-living crunch.
Official figures released by the Australian Bureau of Statistics last week showed retail spending rose by 0.6 per cent in May, while spending only increased by 1.7 per cent for the year.
Most of the increase was in clothing and footwear, with customers being enticed to spend their cash with retailers offering big discounts and longer — or more frequent — sales.
It’s a trend that has paid off for APG and Co — the company behind Saba, Jag and the brand worn by the Australian Olympic team, Sportscraft.
“Discounting absolutely draws the customer in,” CEO Elisha Hopkinson told The Business.
“You can see that across the market, people are not spending more overall. And so it’s definitely a competitive game out there of who’s doing the best job.”
Ms Hopkinson said that while it was unsurprising that customers were being cautious with their spending given cost-of-living pressures, people were willing to spend when they were able to justify purchases.
“When there’s not a market event, such as Mother’s Day or a change of season getting colder, or an end-of-season sale period, we have had to use discounts a little bit more to entice customers to come into stores,” she said.
Customers were also being more discerning with what they buy, she added.
“They’re absolutely being more careful with their money, and they are purchasing lower-price-point items,” Ms Hopkinson said.
“It may be a T-shirt versus a knit, and so our job really is to just make sure that we can outfit our customers … so they’re spending more with us as they leave the store.”
Sales supporting ‘quite weak’ sector
While bigger discounts and earlier sales seasons may have encouraged people to spend, the retail sector is still doing it tough.
“When we take that step back, it’s quite clear that the retail sector overall remains quite weak, and that many households need these discounts and these incentives in order to go out and spend like they used to,” Indeed economist Callam Pickering told The Business.
He said that households were also buying fewer goods and services than they used to, because they were having to spend more on their essentials — like rent, electricity and groceries.
“Retail volumes per capita have now fallen for seven consecutive quarters, and then about 5.7 per cent from their peak,” he said.
“When people are pulling back, they’re pulling back on discretionary spending, [and] probably having a little less fun than they used to with their hard-earned cash.
“But it’s something that’s likely to continue going forward, because households continue to grapple with those cost-of-living pressures.”
Although discounts may have benefited customers, it isn’t enough to relieve the pressure facing retailers, who are some of the country’s largest employers.
“What we’re seeing in the industry right now is this collision between a cost-of-living crisis, but also a cost-of-doing-business crisis,” Paul Zahra from the Australian Retailers Association told The Business.
“Whilst household budgets are under extreme pressure, consumers are still responding very well to sales periods.
“It is exceptionally tough to be a retailer at the moment, and whilst we’re seeing some slight uptake in those categories that are being discounted heavily, revenue may be a little bit better than what we normally would expect, but of course, profit may be another question altogether.”
‘Nasty’ inflation makes rate hike ‘quite possible’
The monthly consumer price index increased to 4 per cent in the 12 months to May, according to figures released by the ABS at the end of June.
The main contributors to the price increase over the year to May were housing, food and non-alcoholic beverages, transport, and alcohol and tobacco.
Comparatively, the price increase recorded for clothing and footwear over the year to May was among the lowest, at 2.8 per cent.
However, Mr Pickering said the Reserve Bank would focus more on inflation at its next board meeting in August than the uptick in retail spending.
“The retail sector being quite weak is something that the RBA is certainly going to be looking at, but I think in the current environment, they’re probably going to be more focused upon the recent inflation figures, which were a little bit nasty,” he said.
“I think they’re probably going to put less weight upon recent retail figures compared to other measures of economic activity and inflation.”
Even so, he said that consumers had already pared back their spending substantially on discretionary, or non-essential, items.
Instead, Mr Pickering noted that it was cost increases in essentials that people could not cut back their spending on — such as housing, energy and food — that were weighing on inflation, and therefore on the mind of the central bank when contemplating interest rates.
“I think it’s quite possible we could be dealing with a rate hike in August. I think that’s certainly on the cards based on just how nasty the recent inflation figures were,” he said.
“It certainly appears as though inflation is going to be well above the RBA’s expectations by midyear, and certainly inflation hasn’t come down as quickly as the RBA might have hoped.
“It’d be very brave, but it would depend on what happens with the monthly inflation, and the quarterly inflation as well, at the end of the month.”
‘We just have to get better at what we do’
While discounting may be delivering sales success stories for retailers, Mr Pickering warns that it is unsustainable for long periods of time.
“The discount model is something that supports spending in the near term and makes things look good for the retail sector for a very brief period,” Mr Pickering said.
“But it’s certainly not something that is sustainable, long-term, from a retail perspective, as spending remains quite weak.
“It’s going to weigh heavily upon retailers across the nation.”
Back at Sportscraft, Saba and Jag’s head office, the recent uptick in sales has given APG and Co confidence in the face of economic uncertainty.
“Absolutely, we’ve had to become sharper as a team and clearer with what we’re trying to achieve, and we have seen that pay off,” Ms Hopkinson said.
“We can see it in the market, people are not spending more overall, and costs are going up, so we just have to get better at what we do as a retailer, and that’s what we’re focused on.
“Sportscraft has been around 110 years, and we want to be around [for] another 110.”
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