A Bleak or Brilliant Future?

Since the start of the pandemic, sales have been influenced by changed lifestyles, restrictions on physical shopping, and economic factors such as temporary income support.

In the future, sales will be influenced by population growth, the extent to which changed lifestyle changes are permanent, any new changes in lifestyles, and future economic factors.

Working from home is an important lifestyle change, which saves money and time associated with travelling to work. It also tends to shift spending on food away from cafes and restaurants towards home prepared meals for breakfast and lunch especially.

Less travelling domestically and overseas is likely to have been a more transient lifestyle change. Australian households will shift spending towards travel while inbound overseas tourism will gradually recover to some degree.

During the pandemic, households have saved a lot of money, estimated at $200 billion dollars. How this money will be used will have a significant impact on household spending generally and retail sales in particular.

Population growth has slowed from 1.5% to 0.5% as net migration declined to near-zero. Net migration will gradually increase, but the timing and rate is not clear at present. This factor will tend to suppress retail sales growth for some time, relative to pre- pandemic growth rates.

Income growth will be a major determinant on spending. Government income support has ceased and wages growth continues
to be very low – lower than the rate of price inflation in the June quarter and probably in the September quarter.

The price of non-discretionary items, such as motor fuel, which has increased significantly recently, will have an impact on discretionary spending. Price inflation has increased and consumers are expecting further increases. The cost of living is expected by consumers to be the issue of most concern in the future.

Interest rates will eventually rise from their record low which will reduce discretionary spending power for households with a mortgage. Currently more people prefer higher interest rates than lower interest rates – mostly, but not only, older people. Households with savings will tend to spend more as interest rates rise.

The trend in total retail sales between December 2014 and December 2019 was 3.1%. After initial stockpiling in March 2020 and a large decline during the lockdown of April 2020, sales lifted to well above trend.

Growth between June 2020 and June 2021 was 2.9%, consistent with the longer term trend, but sales were at a much higher level.

Sales returned to the long-term trend level in August 2021 and rose slightly in September. Sales will no doubt spike in October and November with the ending of lockdowns in Sydney and Melbourne. But what will happen after the initial response to ending restrictions?

What will happen to both the level and rate of growth?

Food retail sales encompasses supermarkets, specialised food stores and liquor stores.

Sales have boomed during periods of lockdown and have returned to just above trend during periods of least restrictions, such as in March 2021.

We expect a reversion to trend in coming months as lockdowns have ended and cafes and restaurants open with less limitations on numbers of patrons.

Slow population growth will also tend to reduce sales growth for a period.

Meal outsourcing includes cafes, restaurants and takeaway food.

Meal outsourcing retail has declined during the pandemic but is now expected to revert towards trend, as it did in the March to June 2021 period. Slower population growth means that it may take several months to converge to trend sustainably.

Household goods comprises furniture, floor coverings and housewares as well as electrical, electronics, hardware and gardening.

Sales have boomed during the pandemic, as people set up home offices, sought more home entertainment, and made home improvements. Much of this spending is for once-off items.

Sales have been reverting towards trend and this is expected to continue in the coming months, particularly as time spent at home wanes.

Spending on clothing and footwear tends to rebound after a period of lockdown and this is expected in the months ahead.

Department store sales also tend to rebound once restrictions are lifted. Sales are expected to revert to trend after a spike in October, November, and possibly December.

This includes pharmacies, recreational goods, newsagents, bookstores and a host of other categories.

This is one category where there has been little sign of reversion to trend throughout the course of the pandemic. No doubt many people have picked up their home entertainment, hobbies, and other home activities.

The pharmaceutical component has reverted towards trend.

Sales in this category may take a long time to revert to trend. The annual growth trend between 2014 and 2019 was 3.8%, while between June 2020 and June 2021 it was 6.8%.

Sales show signs of reverting to trend when there are no lockdowns.
It is expected that sales will return to trend over November and December.

Sales at liquor stores have remained well above trend throughout the pandemic, suggesting a longer-lasting trend away from pubs and perhaps restaurants. It is to be hoped that this does not signal an increase in total alcohol consumption.

This includes butchers, greengrocers, bakeries, delicatessens, and other nonsupermarket outlets.

There is no sign of reversion to trend and this suggests a longer-lasting trend towards specialised food stores, as food preferences changed during the pandemic.

This category shows that it can return to trend – it did so in the March to May 2021 period. Sales are expected to lift strongly in the lead-up to Christmas and into 2022.

Sales in this category returned to trend plus some over the period October 2020 to June 2021. It seems likely that there will be a temporary lift to above trend, as consumers binge on takeaway food, before returning to trend in 2022.

The population growth rate has slumped from over 1.5% to less than 0.5% due to the pandemic-related slump in net migration. This has slowed the underlying growth in demand for retail goods and services.

Net migration will gradually increase during 2022, but may take some time to recover to the peaks of 2017 to 2019.

Wages growth has been plumbing new record lows since 2013.

Consumer price inflation has lifted and threatens to continue to rise faster than wages. Recent high price increases include beef & veal, tobacco, new dwelling purchase, domestic household services, child care and pre-school, medical & hospital services, motor vehicles and motor fuel. Some of these are temporary but high inflation threatens to continue for months if not years.

Declining real incomes will tend to reduce retail sales growth.

Only 22% of adults expect to have more money left over in 12 months time after meeting commitments. While this number is higher than in September 2020,
it is no higher than in April 2021.

For most people, there is no expectation of an increase and 16% expect a fall.

The cost of living is expected to be the top future concern, as it has been for the past few years. This suggests a degree of caution in spending. Having enough money to live on is the fifth highest future concern, ahead of the economic growth rate and unemployment.

Willingness to spend is quite high, although this is not as potent as in the past due to very low income growth.

Saving is still the top priority, despite strong saving over the past 18 months.

Intention to repay debt is close to a record low because interest rates are so low. When interest rates rise, this is likely to become a higher priority.

Willingness to spend on discretionary items

Since 2020, the allocation to spending has been broken down into household bill payment and other (discretionary) spending. The former has consistently been a higher priority than the latter.

Spending disposition segments

Profligate Spenders (10% of adults) have money left over after meeting commitments and will spend $650 per discretionary $1,000. This is a very attractive segment for consumer marketers of discretionary products and services.

Reluctant Spenders (44%) have money left over after meeting commitments but would not allocate any money to discretionary items. Their focus is primarily on saving. Frustrated Spenders (6%) have no money left over after meeting commitments, but would spend heavily if they did.

Frugal Spenders (40%) have no money left over after meeting commitments and even if they did, they would focus on saving, debt reduction, and household bills.

The top items for saving, for those who would save some of their discretionary funds, are precautionary saving and residential property to occupy. Investment, travel, and retirement are all priorities for significant numbers of adults.

The underlying growth rate of retail sales is expected to be 3% or less after a temporary spike in the last quarter of 2021.

This is due to low population and income growth. There is still a very high determination to build savings, despite recent high saving rates.

Some of the changes we have observed in retail spending during the pandemic are largely temporary. This includes a switching of food purchases from cafes, restaurants, and takeaway outlets to supermarkets, liquor stores, and specialised food stores.

The large increase in spending on home offices, home improvements and renovations is unlikely to be sustainable.

Some changes may be more abiding, at least for a while. This includes increased spending at specialised food outlets (such as butchers, greengrocers, bakeries, and delicatessens). This may be associated changed preferences in home food preparation developed during the pandemic. The increased spending on alcohol for consumption of licensed premises may also be “sticky”. There may also be continued higher spending on home entertainment, hobbies, and gardens from habits developed during the pandemic.

There have been suggestions of consumer “revenge” spending as lockdowns end, fuelled by the money saved during the pandemic.

Our assessment is that any such increase will be short-lived. Consumers still have a high determination to build savings, as a precaution, for residential property to occupy, for retirement and investment, and for travel.

Spending patterns will change if, as seems likely, high price inflation continues. A consequence of high price inflation will be higher interest rates, which will tend to reduce spending by recent first home buyers who have low equity in properties bought at record high prices. People with savings, on the other hand, will experience an increase in income and will spend more. The latter are mostly, but not only, people over the age of 45 who have paid off their mortgage. There are now more people who prefer higher interest rates than prefer lower rates. This analysis will be updated and extended in December.

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