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The sales increases are obviously welcome after impaired trading conditions, courtesy of Covid-19 in 2020 and 2021, but they will relieve few pressure points for retailers.
The key reason is that sharp increases in the cost of doing business are hitting bottom lines. Sales may be showing some green shoots for many retailers, but margins and earnings are being curbed, if not savaged.
Higher operating costs are evident in virtually every expense item, from increasing occupancy costs as Covid-19 concessions end, through to higher merchandise and financing costs, surging energy and transport expenses, and rising wages.
Moreover, the opportunities for retail management to moderate cost increases have been limited by continuing supply-chain challenges and limited availability of staff.
Half-year results have already reflected the impact of inflationary cost pressures, which seem set to increase significantly more in the months ahead.
Wage pressures
One of the major cost pressures will be in wages, with increases to flow from the Fair Work Commission (FWC) review of the minimum wage and the need to attract staff in a period of low unemployment. The incoming federal government has backed Prime Minister Anthony Albanese’s election campaign commitment to a 5.1 per cent increase in the wages of low-paid workers.
A formal government submission has been made to the FWC, which does not have to support an increase equivalent to the current inflation rate but appears certain to opt for a significant rise.
While there is concern among economists that a large increase in the minimum wage will cause a further jump in inflation, the FWC may see a lift close to 5.1 per cent as justifiable, given ongoing cost-of-living increases.
The commission might also be influenced by the public call from the Australian Retailers Association for an increase in the minimum wage in line with the underlying rate of inflation.
The Reserve Bank of Australia has forecast an underlying rate of inflation of 3.25 per cent.
Australia’s two largest employers, retailers Woolworths and Wesfarmers, along with Myer, echoed the ARA call for an increase in the minimum wage of 3.25 per cent.
One of the motivations for the retail heavyweights to break ranks with other industry groups and support a higher wage increase is the need to maintain consumer confidence and spending as household costs jump and higher interest rates cut into family budgets through rising mortgage repayments or rents.
The larger mass merchandise retailers can no doubt absorb a higher wages bill, notwithstanding that Covid measures and staff absences have already increased labour costs in the industry.
For many specialty chains and independent retailers, however, higher wage bills will be much harder to absorb, especially when they are also facing higher utility expenses, increased costs for stock and, in many cases, rising rent and occupancy costs.
Spending less down the road?
Meanwhile, consumers are expected to be spending less. Citibank forecasts the increased price of doing business in FY23 will coincide with a hit of up to $60 billion to consumers’ domestic retail spending capacity, due to the rise in interest rates, petrol prices, and travel expenses.
The bank points out, however, that high savings levels accumulated over the past two years may provide a buffer for FY23, making FY24 likely to be more challenging.
The April retail sales data confirmed that food retailing, clothing, and footwear, along with cafes, restaurants and takeaway food stores, underpinned a 0.9 per cent lift for the month. The results noted a 2.7 per cent fall in household goods sales and a 2.5 per cent fall for department stores, plus a 2.5 per cent drop in non-food online sales but a 1.7 per cent lift in online food purchases.
Retailers reporting sales for the third quarter of the current financial year have cited ongoing supply-chain issues, Covid mitigation costs, including staff absences, and inflationary pressures as brakes on earnings.
The next financial year looms as a potentially greater challenge in reining in operating costs and even in maintaining sales momentum.
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