Consumers in hibernation as spending pressures bite

As economic headwinds batter the nation’s retail landscape, Australia’s hardest-hit consumers are likely to bunker down into their own metaphorical spending hibernation.??

?Post-pandemic served as the calm before the storm. Low interest rates, strong wage growth, healthy employment levels and the unprecedented freedom spending phenomenon fostered robust retail activity and record-breaking sales.?

?Retail was bustling – akin to a vibrant summer’s day - but the shine couldn’t last forever.??

?Like a biting cold front, inflation, interest rate hikes and cost-of-living pressures quickly took hold and changed the landscape.??

?The data reflects this sentiment. Most categories are recording significant softening now compared to 2022, according to the Australian Bureau of Statistics, as households across Australia are saddled with mounting bills and expenses.??

Interest rate hikes, once a distant shiver, have arrived like an unwelcome blizzard.?

As borrowing becomes costlier, mortgage repayments increase and essentials become more expensive, consumers retreat into a state of hibernation.??

The era of easy-going shopping fades, replaced by a more measured and deliberate approach.?

The days of carefree splurging on indulgences give way to meticulous budgeting on essentials and the search for value in every purchase.?

Meanwhile, cost-of-living pressures pile up like layers of frost on a winter morning.??

The rising costs of housing, utilities, and everyday essentials squeeze the disposable income of consumers. Families are confronted with tough choices, making sacrifices in one area to afford the necessities in another. The luxuries once enjoyed are now rationed, as consumers tighten their belts and brace themselves for the storm.?

It hits Australians differently, creating a larger divide in consumer markets.?

At the eye of the storm are most Australians - the unemployed, low-income earners, renters and those paying a variable-interest rate mortgage. They’re bearing the brunt of the pressure – and are most likely to have already cut their discretionary spending substantially.??

At the other end of the spectrum, are Australians who are sheltered from the havoc-typically those who own their home outright. Whilst conscious of the change in the economy, they continue to spend, taking advantage of the sales and getting more for their money.??

When the Australian Retailers Association and Roy Morgan undertook research on this year’s End of Financial Year sales, we found that despite 400,000 fewer Australians planning to shop – the overall spend was higher than 2022.??

It demonstrates that interest rate rises are disproportionately affecting consumers.?

?However, the list of those affected is still set to grow – with some 800,000 Australians tipped to roll off fixed interest rates this year – becoming embroiled in this cost-of-living crisis.??

Retailers, who already grappling with a cost-of-doing-business crisis, will be forced to contend with a more conservative and discerning consumer base. Retailers must adapt to this new reality- competing on price, delivering more promotions and a renewed focus on value-driven products, whilst trying to deliver an exceptional customer experience.??

Just as nature endures the cold in anticipation of a blossoming spring, consumers and retailers can find solace in the eventual return of brighter days.??

Now is a time for retailers to prepare for innovation and reinvention, reimagining their strategies and embracing sustainability, personalisation, digital transformation and creativity.??

In times of crisis, innovation becomes the lifeblood of survival.?

And it isn’t all bad news for consumers. When sales are in decline, retailers will have to sharpen their pencils.?

As spending continues to soften, competition amongst retailers will increase. This will prompt retailers to pull out all the stops to entice customers.?

?For those who can justify spending, there will be plenty of sales and promotional campaigns as retailers fight for a shrinking pool of discretionary income.??

Just how long the cost-of-living crisis persists remains to be seen.??

?Much of the pressure is coming from inflation and interest rate rises.?The latest CPI data indicated that inflation is back on a downward trajectory – but the pressure on businesses and consumers continues to intensify.?

The longer the cost-of-living crisis goes on, more consumers will retreat to spending hibernations.??

?But once the frost begins to thaw and economic conditions improve, consumer hibernation will gradually give way to a newfound sense of optimism.?

?On the other side of this cost-of-living crisis, we hope that pent-up demand, bolstered by increased consumer confidence, will ignite a resurgence in retail activity.??

The industry, tempered by the challenges of the winter, has the potential to emerge stronger and better equipped to meet the evolving needs and expectations of consumers.?

Consumers and retailers alike received a lifeline from the Reserve Bank of Australia this month, with the decision to hold interest rates at 4.1% in July.??

Hopefully this marks the beginning of a downward trajectory for interest rates, so that we can see financial pressures quelled and spending habits reawaken.??

Winter has come so let's hope that summer is a new beginning.?

This article was originally published in the Australian Financial Review on Tuesday 11th July, 2023.