Retail sector to bounce back in 2024 faster than expected

“We had a couple of years when we had either no immigration growth or negative immigration growth. We have now got 600,000 permanent migrants coming back in the country, and we have holiday and temporary visas. This is really softening the blow.”

Mr Stewart added that consumer businesses will be dragged along heading towards 2030, when Australia’s population of 26.5 million will potentially expand by another 4.5 million people.

Between the June and September quarters, the KPMG Retail Health Index rose 0.18 of an index point, but still remained negative. Despite the improvement over the previous quarter it still suggests the overall health of the retail sector remains poor, said Mr Stewart, who is head of KPMG’s consumer and retail practice.

“Retailers are still worried about this Christmas trade,” he said. “Over the last two years consumers have been price takers rather than price makers, creating a margin bubble that was unsustainably good for many retailers.

“That bubble may not have burst yet, but it’s certainly under pressure and cost out and capex constraints are the name of the game, as retail CEOs seek to protect their promised results for shareholders.”

Adjusted for inflation, retail sales volumes rose 0.2 per cent in July-September, the first quarter of rising activity levels since the third quarter of 2022. Consumers are spending proportionally less on food and groceries, suggesting the “nice to haves” are now being left out of the household shop, he said.

Some surging supply chain costs have reverted, such as global container freight rates, but operating costs such as labour and energy are still squeezing margins. Mr Stewart said retailers must find operational efficiencies.

“As price discounting returns to the market this means more margin squeeze,” he said.

Categories such as homewares, household goods and leisure equipment are hurting more than most given the pull forward of spending during the pandemic buying new TVs, furniture, BBQs, surfboards and bikes over the past two years.

Mr Stewart said given there was little discounting over the past few years and consumers were cashed up and willing to pay full price, margins went up for many retailers – but that is now over.

“I think that’s come to an end of it, we’re going to move back into a more typical sort of discounting cycle that existed before 2020. I think that’s an interesting trend, almost normalisation of behaviour if you like, between retailers and consumers,” he said.