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Deloitte Access Economics’ latest Retail Forecasts shows that retail spending has weathered the COVID-19 storm remarkably well to date. With restrictions easing and a measure of pent up demand unleashed, retailers experienced a 6.5% surge in spending volumes over the September quarter. That surge means that overall retail sales are currently sitting well above pre-COVID levels.
Retail’s strong performance is due in part to opportunity – consumers aren’t able to spend as much on travel and other services – as well as changing preferences – consumers are spending more on home-centric goods. This has resulted in retailers capturing a greater share of wallet. This increase in market share is likely to linger for some time as restrictions (and consumer reluctance) for travel remain a barrier to spending on transport and accommodation.
The good news continues for retailers heading into Christmas. Spending momentum picked up in October and November as Melbourne emerged from lockdown and household incomes benefit from stronger labour markets and ongoing stimulus measures. This positive momentum suggests retail sales volumes are expected to grow 2.6% in the 2020 calendar year.
Key drivers of the strong outlook into Christmas include improved labour market conditions; extension of JobKeeper for struggling businesses; and upbeat consumer confidence.
Consumer confidence is being supported by good news on fewer restrictions, state borders opening up, and developments on vaccines. Indeed, initial data from the major sales events (Black Friday and Cyber Monday) indicate a bumper sales period both in store and online. This is likely to support the December quarter retail spend, but with sales growth likely slowing in March as the post-lockdown rebound wears off and stimulus measures abate.
But not all retailers are benefiting from the boom in spending. Deloitte’s recent Retailers’ Christmas Survey indicated a clear polarisation in Christmas spend expectations, with the record number of retailers expecting sales above 5% tempered by a substantial number of retailers expecting sales to fall by more than 5%. While spending on food and household goods are well above pre-COVID levels, clothing, department stores and cafes are all lagging behind.
Chart – Do you expect Christmas sales to exceed the previous Christmas trading period?
Source: Deloitte Retailers’ Christmas Survey 2020
But, while many retailers are bounding into Christmas, viability is still at stake for some.
Retailers that underperform could end up closing up shop in the new year. Despite the difficult conditions for many retailers, the number of insolvencies in the sector has dropped significantly in 2020 so far. In 2019, nearly 500 retailers entered external administration by October, while in 2020 this dropped to around 300. This suggests that if 2020 were similar to last year, an additional 200 retailers (on top of the existing 300) would likely have entered external administration by now, and a further 150 would do so before the end of the year.
The Christmas period is critical in any year, but for businesses facing significant disruption to operating conditions and relying on stimulus measures and relief that is slowly fading, a miss in sales could be the straw that breaks the camel’s back.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.