We have produced a chart pack with category forecasts for the Australian liquor industry reset (see PDF report). This liquor outlook provides two insights – 1) The weakness in sales is more a function of the COVID-19 spike in demand than a structural concern. 2) The recalibration of liquor demand differs across categories, with wine and RTDs likely to see better demand from affordability and drinking preference. The data includes actual consumption trends for Australian households to the end of FY23.

Australian retail has had a challenging 12 months. We expect we are past the worst for this sales cycle with a gradual improvement in growth over the next 12 months. We forecast retail sales growth of 2.9% in FY25e, up from 1.8% in FY24e. The sectors likely to see the strongest recovery are household goods, supermarkets and online. Some categories are still vulnerable to a correction in volumes such as liquor, cafes & restaurants and fashion. While there is an upswing, it will be mild and leave growth rates below trend for the next three years in our view given the low household savings rate and decelerating population growth.

The Australian Federal Budget is positive for retail given income tax cuts. However, there are very few other initiatives that shift the outlook for consumer spending. Power price relief helps, but it is at the margin. The tax cuts add 1.6% to household income in FY25e. However, evidence from past tax cuts shows it takes time for them to benefit spending. Treasury forecasts a 1% acceleration in consumer spending for FY25e compared with FY24e. We take the same view on retail spending and expect a 1% improvement in growth for FY25e, a modest upswing. We are near the low point of the retail cycle and tax cuts will help lift growth. Even so, sales growth is likely to be slower than cost growth.

Australia’s population growth tends to be higher than other developed countries, supported by higher net migration. In Issue 8 of The Retail Mosaic, we analyse the impact net migration has on retail spending, which categories tend to benefit most and which retailers are best located for migration growth. We find that migrants tend to spend more on food and fashion. Retailers that are best located include Super Retail Group’s Macpac and Rebel Sport. JB Hi-Fi and Bunnings also have store locations that provide a greater contribution from population growth.

Australian GDP fell by 1.9% in the September 2021 quarter, but the national accounts provide a more positive take on the consumer. Wages grew, savings lifted and, even with lockdowns, some areas of retail saw growth like food and online. The statistic that raises the most significant debate is savings. Household savings were 18% of income and households have saved more than $365 billion since the start of 2020. Such significant savings makes us more confident of a soft landing in retail over the next 12 months.

Australian National Accounts for the June 2021 quarter show some normalisation compared with the lockdown impacts on income and spending a year ago. Two-year CAGR household income growth is 5% which compares with retail sales CAGR growth of 6% for the June quarter. Australians have also saved $243 billion since the start of 2020. This elevated level of savings will be the first bucket of money used for holidays when borders reopen. Any slowdown in retail spending is likely to be more modest than people expect.