The Australian retail sector imports a significant portion of products from offshore, particularly in non-food categories. In most cases, these goods are purchased in a foreign currency, which means currency volatility can impact the cost of goods and retail profits. In Issue 9 of Price Watch, we analyse the impact that changes in the Australian dollar against the US dollar (AUD/USD) can have on retail prices and profitability. A fall in the AUD/USD typically impacts retail prices with a six-month lag.

As global trade tensions build and geopolitical risks rise, we think Australian retailers are going to need to diversify their supply chains. Australia imports ~86% of its non-food consumer goods and we estimate 57% of these imports come from China. The productivity of China has led to a concentration of sourcing that represents a real risk on a 5-10 year horizon as Chinese wage rates rise further, supply chains face further disruptions and trade tensions rise. Electronics is the most at-risk category entirely imported, with 56% of imports from China, followed by clothing and accessories at 94% imported, with 55% from China.

Australia is an open economy and over the past twenty years, its retailers have increasingly imported consumer goods. In Issue 4 of The Retail Mosaic, we explore the extent of imports by retail category, the significance of China in supplying goods and exposure various companies have to direct imports from China. China provides the most efficient source of production and for many companies represents more than 70% of their offshore sourcing. The risk is that any increase in costs, supply disruptions or trade tensions could impact sales and margins. The companies sourcing most of their goods from China are Wesfarmers, City Chic, Woolworths, Premier Investments and Super Retail Group.