We have become a nation of shopaholics, but can this last?

Pundits and analysts have had to reconcile recent retail exuberance with the storms many, including the national treasurer, are predicting.

This week’s Consumer Price Index figures showed that new housing and fuel are the biggest contributors to the inflationary environment, but the price of goods is also rising faster than services, up 2, 6% for the quarter.

The CPI figures may have been lower than expected, but they still clearly depict the cost of living pressures Australians are feeling.

Categories that have benefited enormously from COVID lockdowns, such as home furnishings and appliances, are seeing some of the biggest price increases.

Jarden retail analyst Ben Gilbert says spending in recent months has been driven by more favorable economic conditions.

“The last quarter or so of trading has been very strong. This is due to pent-up demand, the strength of the housing market and significant price increases [for products]. You wrap it all up and spending has remained pretty resilient,” he said.

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However, these trends will not last forever.

“We are going to have a few more months of falling property prices. Then you’re going to get people to get their utility bills and you run the risk of the government removing the fuel excise reduction,” Gilbert said.

Oscar Oberg, portfolio manager at Wilson Asset Management, agrees there is some weakness ahead for the sector. But investor expectations have been low and consumer stocks sold off towards the end of last year, meaning companies have room to surprise.

“We think this could be a pretty good time for retail given that stock prices have corrected significantly and are predicting a very negative outcome, so you need to put that into context,” he said.

Consumer electronics companies such as JB Hi-Fi and Harvey Norman had been clear winners during the shutdowns, when Australians rushed to buy home office equipment and entertainment products. Now it’s a matter of seeing which companies haven’t benefited from the coronavirus lockdowns, Oberg says.

“Now it’s about those businesses that are exposed to ‘outing’ clothing – dresses, suits, jackets and that kind of retail.”

“I would say companies like Universal Store [could benefit] – where they are exposed to the clothes of 18-30 year olds. Also Lovisa is a fast fashion jewelry retailer that is doing well and is a global business.

Old habits die hard

Australians have been feeling the pressure of the cost of living for months. Gasoline prices have been an issue since before the last federal election, when the then Morrison government temporarily reduced fuel excise duties.

Mortgage holders heard warnings of interest rate hikes earlier in 2022, with the Reserve Bank of Australia taking its first step towards a hike in June.

Some consumers have retained the habit of shopping online or on social media after doing so for the first time during the pandemic. Credit:Getty

All the while, strong retail numbers continued to trickle in. Figures from the Australian Bureau of Statistics showed spending hit record highs in May at $34.2 billion – a figure that remained flat in June.

Gilbert says it will take some time for economic challenges to trickle down to consumer mindsets.

“It takes a little longer for people to limit their spending right now. It will probably just take people a while to realize [of these rising costs],” he said.

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McKinsey & Company also tracked how Australians emerged from lockdowns. Although there are precautions about the return of the COVID-19 disruptions, the researchers found that people were planning to spend in ways they might not have been able to before.

A McKinsey report on consumer behavior this week showed a rebound in consumer intent to spend on areas such as clothing, flights and out-of-home entertainment over the next two to three months.

McKinsey & Company associate partner Abe Levavi said shoppers were showing a tendency to maintain the online shopping habits they had built during the shutdowns.

There is also room for the “omnichannel” trend, where customers connect with businesses online and in-store, often planning their purchases online first.

“We looked at customers buying directly from social media. Pre-pandemic that’s up 15%, which is a pretty big number. Eight to five percent of customers who make these purchases directly from social media say they intend to continue doing so,” he said.

Slowdown indices

Shares of online market Kogan.com jumped more than 45% on Thursday after the company released a trading update, but its numbers showed the strong growth it had during the pandemic was slowing.

Kogan confirmed that he expects gross sales to be flat compared to last year, with growth of 0.1%, while profits are 9.4% lower.

Shares of Kogan surged this week but earnings fell.

Shares of Kogan surged this week but earnings fell. Credit:Pierre Braig

Other signs of a slowdown also emerged in Australia and overseas this week. ABS retail figures did not show an overall decline in June compared to May, but some categories fell. Spending at retail stores fell 3.7% after a strong rise, while household goods sales fell 0.3%.

Meanwhile, US retail giant Walmart has issued a profit warning, with chief executive Doug McMillon saying “rising levels of food and fuel inflation are affecting how customers spend”.

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Tough conditions signal discounts are ahead as the company seeks to liquidate inventory – which is having a knock-on effect on profits.

Morningstar analysts saw Walmart’s trade update as a signal of what’s to come.

“We see the warning signs that we see in the United States, like everyone else, and we think the writing is on the wall,” Morningstar’s Johannes Faul said in a video update this week.

“The momentum we see is receding and that spells trouble for earnings in the consumer discretionary market.”

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