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THE FIRST quarter of 2017 has been one of the worst in recent memory for the retail industry with inflation adjusted growth of just 1.2 per cent, as shoppers continue their reluctance to open their wallets.
A report compiled by financial analyst group Deloitte Access Economics confirms the difficulties faced by retailers in Australia and confirmed the "Amazon effect" was weighing on the sector along with rising housing costs and underemployment.
"The March quarter was a low point for retail spending, continuing what has clearly been a problematic 2016-17 for the retail sector," says Deloitte Access Economics partner and report author David Rumbens.
"The current challenges are also likely to remain in 2017-18, however we are forecasting that expected labour income growth will drive improved spending growth over the next few years," he says.
The report says full year nominal retail spending will reach 3 per cent for 2016-17 but will moderate to 2.6 per cent for 2017-18. The next financial year may see consumers buying more product but less revenue coming in because of discounting and competitive pricing.
And the reason for this discounting? The report says rising house prices and big mortgages are having a major impact.
"When people in Sydney and Melbourne start talking about moving overseas because housing is more affordable, you have a problem," Rumbens says.
"Of course the surge in house prices has provided significant support for retail over recent years, with the wealth effect underpinning a declining savings rate and stronger consumer confidence amongst homeowners.
""But many are also being left with eye-watering mortgages to chase the housing they might have more comfortably afforded just a couple of years ago. Servicing these higher debts will eat into retail spending capacity going forward, and also create macroeconomic risks about which the Reserve Bank is increasingly becoming more vocal."
While jobs growth is steady, the report points out that the rise in part-time positions is driving underemployment which in turn is hampering wages growth.
"Spare capacity in the economy is pushing down wage growth, which is in turn dragging down inflation," Rumbens says.
"Pumped up wealth from the housing market may be keeping consumer spending afloat, but it isn't enough to offset the impact of record low wage growth. And when wages aren't growing, it means CPI inflation is also subdued."
And as for the imminent arrival of US retail giant Amazon, Deloitte says it will have more of an impact on bigger retailers as the smaller ones will have a chance to use Amazon's platform to their own advantage.
"But the imminent arrival of US giant Amazon clearly presents a series of challenges for existing retailers in terms of heightened competition in both online and in-store sales," Rumbens says.
"An effective omni channel strategy, as well as strong brand equity and excellent customer service will be crucial to keeping shoppers where retailers want them. Prices will get squeezed as Amazon has so much scale to absorb very low margins in most of its products.
"The bigger the retailer, the more a threat Amazon's entry will be. But on the other hand, small players have a chance to thrive by leveraging Amazon's role as a consolidated marketplace."
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