A rocky road ahead for retail as cost and labour pressures grow

Some analysts claim the retail sector is facing its worst economic outlook in 15 years, and if we take stock of the current business and consumer challenges, it’s easy to understand why. Rising inflation, staff shortages, interest rate hikes, ongoing supply chain issues and dwindling confidence. There’s been no let up to the disruption since Covid hit; things have only intensified since the war in Ukraine and many small businesses in particular are struggling to keep their heads above water.

If you look at how sales are tracking, you might imagine the sector is going through a purple patch of prosperity. For consecutive months, spending has been at record levels, with $33.9 billion spent in stores and online in April – a 9.6% increase on the prior year. However, this isn’t always a reflection of true retail performance. Prices have increased across the economy, in particular for food and groceries – so naturally, sales will be elevated. But business costs have also increased – in many areas at a far higher rate.

It’s unlikely we’ll see retail spending maintain these levels as the rising cost of living begins to take hold on family budgets. A generation of homeowners are experiencing their first interest rate hikes, so there’ll be some natural belt tightening. When we rein in our spending, some of the first things we cut are discretionary purchases – a dinner out, a pair of sunglasses, party outfits, jewellery or favourite accessory. The things we love but must live without. Consumer confidence has slumped steadily since late April when the ABS released higher than expected inflation figures, and with more interest rate hikes on the cards over the coming months, we could see spending start to taper off.

What’s cushioning some of the blow is the $256 billion worth of savings people are sitting on, however it’s starting to erode. The household savings ratio was 11.4% in the March quarter and it’s trending down from the peak of Covid and the lockdowns when people bunkered down and saved instead of traveling. As household savings reduce, the pressure will grow even further on family budgets.

There’s a lot of commentary about the rising cost of living, but the rising cost of business is just as severe. Rents are rising, fuel and energy costs are increasing, supply chain logistics are more challenging which all adds to the cost crunch. On top of this financial stress, COVID deferred payments are now being called in. Skills and labour shortages are also preventing businesses from trading at their full potential and the situation is not improving. A majority of our members say labour shortages have gotten worse over the past three months and 84% say it’s getting harder to find and recruit new team members. We are in the tightest labour market in more than 50 years and without the usual numbers of overseas workers and students, these gaps won’t be filled using traditional recruitment methods. It’s why we are continuing to advocate to the federal government to allow employment income to be exempt from the age pension income test. This would mobilise a willing and able cohort of workers and allow pensioners to supplement their income and work more hours to help alleviate the staffing challenge many are facing.

The federal government has inherited an economy with plenty of challenges, and if we don’t get the policy settings right on immigration, employment, skills and industrial relations, we risk further conflating our problems. The government is planning an employment summit before its first budget later this year, which will be crucial to mapping out a reform agenda. We need to see measures that deliver a simplified industrial relations system, skills and training measures that are geared towards hard to fill roles and reduced red tape for migrants to also help fill those positions. Take hairdressers as an example – an occupation that has been on the National Skills Commission shortage list for about 20 years! It is high time we prioritise these roles, and others across retail and hospitality where a shortage of labour is being most acutely felt.

Retailers are resilient but there’s no doubt the road ahead is a rocky one. We have a new government with a golden opportunity to embrace some fresh policies, to not only get us through this challenging economic period, but to set us up for a new era of prosperity.

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