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What’s looming post-Christmas for retailers?

What’s looming post-Christmas for retailers?

The bigger they are, the harder they fall.

We are told that there is record-breaking pre-Christmas spending, and the retail sector appears bigger than ever, outperforming all expectations to the surprise of many.

However for many retailers this defies their current lived experience, particularly in southern states with ongoing weather events.

This month, the Australian Retailer Association (ARA) scaled up its sales forecast by another $2.1 billion and nationally we’re expected to spend $66 billion prior to Christmas, $4 billion more than last year.

Maybe the Reserve Bank was right and households have been squirreling away their savings, which has enabled them to keep spending in the face of rising inflation and home loan interest rates.

But are those factors setting the sector up for a heavy tumble?

Even as it trumpeted its higher forecast, the ARA noted inflationary pressures are ever-present for consumers and business.

While shoppers are making hay right now, for many the sun will set in the new year and retailers sense an inflation storm is brewing.

Already in Europe and the US, ‘austerity shopping behaviours’ are being seen for the first time since the 1980s as people cut back on consumer products and discretionary spending.

In Australia, consumer sentiment lifted by 3% in December but it remains in record weak territory usually only seen during a recession. New data released by Roy Morgan in December showed an expected inflation rate of 6.5% annually over the next two years, its highest level since January 2011.

If these pressures grow into next year, as expected, consumers will refocus attention on value and retailers will need to get smarter when it comes to pricing their products.

Online-focused retailers may already be feeling the pinch from changing consumer habits – not necessarily through inflation but through COVID-19 restrictions easing this year, which led shoppers back to brick-and-mortar stores.

Well-known online furniture retailer Brosa became a casualty this month, with KordaMentha appointed as administrators. The administrators noted the company’s technology capabilities and that the business had tripled in size during the pandemic, but said it began to struggle as people started to buy furniture in person again.

Even in this age of business agility, the short-term cash flow pressures from a rapid change in consumer behaviour proved too much and the business is now on the market.

If your target consumer market becomes significantly constrained in terms of spending, how will the business respond?

Price positioning is a delicate act. Retailers seek to remain competitive but adopting a low price at any cost disregards a responsibility to themselves and their business, damaging the central tenet that the health of a retailer harbours on it setting prices that allow it to trade profitably.

The counterpoint is managing stock, and carrying excess for 12 months is not optimal for cashflow as it will increasingly hurt business as margins are constrained.

Part of the price considerations will be the economic health of customer demographics and retailers need to understand how their markets are placed.

An element of bravery may be necessary but higher rises might not necessarily drive consumers to competitors. While price is one consideration, another factor will be the strength of the relationship between a retailer and its clientele.

A big component in the strength of relationships is a retailer’s actions around environmental, social and governance transparency. Many businesses loudly espouse the virtues they wish people to perceive of them, however many also lack the evidence of their actions in applying those values.

Neglecting this area will also damage your recruitment prospects. Retailers are well aware of the difficulties in attracting new talent which was confirmed by the Australian Bureau of Statistics reporting  workforce participation is back at record high levels.

Instead, nurture a culture that makes the business an employer of choice and work fairly with people to retain their loyalty and services.

One element in retailers’ favour heading into 2023 is that their businesses are typically data rich. Customer insights of all shapes and sizes can be gleaned, from the types of products they buy and the volume of visits they make, to behaviours such as if they buy at the end of the season or only items that are on sale.

Data-driven insights might be one of the best ways to improve business operations, but it is critical that a business is capturing the right data. If done correctly, it allows a business to create a boutique offering for each individual customer, which demonstrates an understanding of customer’s wants and can encourage further spending.

Data will also help retailers understand the competitive landscape and recognise their position in the market, which is critical to meeting consumer expectations.

A strong pre-Christmas sales period has been welcome news and it should allow retailers to start the new year in the strongest possible position. But while peak retail season is all-consuming, business owners must look to what is coming.

The next 12 months may be rocky with financial pressures on consumers continuing to build, which will force retailers to be ever more agile amid continuing strains through supply chain, labour and competition.

Remaining competitive in 2023 will involve bravery in responding to a changing economic landscape, in keeping customers engaged, and in showing fiscal responsibility.

This article was first published by Ragtrader on 20 December 2022. Licensed by the Copyright Agency. You must not copy this work without permission.
This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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