The ingredients for retail demand have been favourable over the past 12 months however some Australian retailers may still be under pressure from the fall in the Australian dollar, but Citi analyst Craig Woolford remains optimistic on the outlook for retail spending for the year ahead.
In 2016, most retailers reported strong sales growth. The labour market is in better shape than it’s been in a few years, unemployment is expected to remain steady. Australian retail spending is being boosted by consumers willing to draw down on their savings, which have consistently fallen since June 2012,reflecting the ‘wealth effects’ from the increase in house prices since late 2014.
“We saw strong growth for FY16, although the pace of growth showed some slowdown in the second half of the year. The ingredients are still there for consumers to remain confident to spend– lower petrol prices, lower living costs and a resilient property market– which will certainly help discretionary spending,” says Craig.
The biggest challenge for retail in 2016 was the ability to pass through price rises triggered by the lower Australian dollar. Despite lower hedged FX rates, hardgoods retailers seemed to have reported strong sales growth assisted by the ability to pass-through price increases. This pass-through has also helped hardgoods retailers’ gross profit margins to remain steady. Softgoods, such as clothing, had a more challenging year with fewer retailers transitioning higher input costs to higher shelf prices.
Heading into 2017
Australian retail sales growth improved relative to the past six months but remain below trend. Non-food retail is facing stiffer headwinds as growth in housingrelated categories begins to moderate and cycle elevated levels. We expect housing-related categories will experience weaker sales growth over the next six months and risks are building towards a softer Christmas in 2016. Supermarket sales are likely to be boosted by input price inflation.