KPMG has released its new report, the Australia’s Retail Health Index (RHI), which indicates the retail sector will be unlikely to return to pre-pandemic levels until late 2025.
The inaugural KPMG Retail Health Index offers a perspective on the current and future health of Australia’s retail sector from the viewpoint of the businesses themselves, by using data on retail sales volume, producer prices, retail sector wage prices and consumer sentiment.
The RHI peaked, surprisingly in December 2020 at +3.0. It fell to a low of -3.3 in December 2022, rising to just -2.1 in June 2023 and KPMG is predicting a slow holiday period for discretionary retailers amid cost of living increases.
“The continued weak sales volume will likely blunt the holiday shopping season highs of prior years and put more serious pressure on discretionary retailers”, said KPMG Head of Retail, Lisa Bora.
“Retailers who are looking for an end of year boost through online sales events in October and November should be prepared for some variations in traditional sales peaks this year. Stockturn and inventory management will be key to navigating a more turbulent Christmas period.”
When considering the four variables, (retail sales volumes, PPI, the retail sector wage price index (WPI), and the Westpac–Melbourne Institute’s consumer sentiment index), KPMG found all four variables are operating on a negative contribution basis. It predicts a slow recovery path ahead, with the RHI not set to return to its long-term trajectory before September 2025, meaning many retailers will potentially be operating in challenging conditions for the next couple of years.
The KPMG RHI predicts that retail leaders will be employing five key strategies in the immediate future to help support their businesses on the road to recovery. Core vs non-core will be squarely in focus, inventory and margin management will have no room for error, online will remain an important channel to market and customer experience will define those retailers who are more trusted than others when the times are tough for consumers, labour costs and capacity remains a challenge that has become a new normal and needs to be accounted for, and retailers should focus on creating operational efficiency across the board.
Retail Turnaround and Restructuring Services Partner, James Stewart believes that the next two years will be tough, but easier on retailers with a strong balance sheet.
“In difficult retail trading conditions, you typically see those retailers with the strongest balance sheets come out on top, as cashflow becomes the focus when sales and margins get tight,” he said.
“Highly leveraged businesses run the risk of tripping debt covenants or struggle to fund their strategic investments. If retailers with little to no debt keep their foot to the floor, they can ultimately drive a long-term competitive advantage.”
KPMG is set to release quarterly updates of Australia’s Retail Health Index.