The honeymoon is over. Is your brand prepared for what comes next?

The post-Covid bump is in the rear vision mirror. Retailers that have prepared for the inevitable course correction will be best placed for what comes next. Simon Porter explains.

The Australian economy has proven remarkably resilient. We’ve endured fires, floods and pandemics. Fractured supply chains and soaring inflation. Despite the doom and gloom predictions and strain on the family budget for the average Australian, we’ve held up pretty well.

The longtail impact of Covid stimulus and historically low interest rates has been longer than most predicted. But, to paraphrase the CEO of Wesfarmers, Rob Scott , the ‘Pandemic honeymoon’ really does seem to be coming to an end.

The signs are everywhere. Firstly, CEOs, not just Scott but also Anthony Heraghty at Super Retail Group have been talking up their fitness to survive any softening of conditions. When multiple retail groups are bracing for impact publicly, we should take note.

Secondly, recessionary bellwether retail verticals have underlying stress. Take consumer electronics where sales are softening concerningly. Alongside this, there are some big inventories being carried. The combination will lead to a price fight and margin erosion.

Thirdly, at the top end of town, luxury retail is chugging along just nicely with its core consumers which proves the point. Societal inequity means there is a significant proportion of our population immune to financial distress. Look a little deeper and the middle-to-mainstream shoppers are no longer spending in luxury but instead focused on covering their mortgage.

Interest rates may now be normalising against historical averages but it’s an eye-watering squeeze if your mortgage of $600k is now costing you $14k extra in interest per year. That will ultimately impact where you spend your hard-earned cash. It is this middle cohort of consumers who will drive what happens next.

End-of-year sales may be strong, but they will also have the effect of emptying out the last of the savings people squirreled away during Covid lockdowns. The new financial year will be challenging.

The rubber hits the road

If July is when the rubber hits the road, what can we expect over the next 12 months in retail?

The retailers that have prepared will continue to prosper. This is where Wesfarmers’ investments in productivity enhancement will prove sound. On the other hand, retailers that have failed to reinvest will be in trouble.

The middle-to-mainstream shoppers are going to drive a race toward value as they feel increasing mortgage pain. Which is no bad thing for some of Australia’s best homegrown retailers.

Bunnings and Chemist Warehouse are in verticals that should come through any downturn unscathed. While JB Hi-Fi is in a vertical under pressure, the brand is remarkably robust. This strength allied with loyal customers will pay dividends.

Shopping like the Germans

Even in the good times, Australian consumers are value-driven, more so than in comparable markets like the US and UK.

Australian consumers actually have a lot more in common with German shoppers, not only in value-seeking traits but also in slower uptake and scepticism of e-commerce.

There has been a notable rebound of shoppers from e-commerce back into physical retail post-Covid. We can expect this to continue. The strength of a physical retail footprint is going to be important in the next 12 months. Super Retail Group’s investment in upgrading its store experience with Rebel Sports could well prove inspired.

The spending danger zones

Pressure is developing on fashion, international travel and eating out while pet, DIY and grocery are expected to remain strong, albeit with more value-seekers and price battles to come.

The retailers set to benefit most from the ‘lipstick effect’ of the downturn could well be food delivery. Getting a delivery from your local eatery has tipped over into habit for many moving from a luxury to a must-have discretionary spend. As Australia’s clear number one, Uber Eats is well positioned. Despite the travails of MilkRun and Voly, Uber Eats is poised to come out strong as it extends its fast-delivery retail proposition into new verticals.

Whilst the post-Covid honeymoon may be coming to an end, retailers that have prepared well, those in luxury or value-driven should come out of the next 12-to-18 months in good shape.

Simon Porter is the Head of Retail at media agency Hatched.

This article was first published in Inside Retail on 6th June.