Aus retail: make plans while the sun shines

Retail in Australia performed well above expectations during the COVID-19 pandemic but businesses must prepare for the sector to normalise. And that’s critical for the economy: the retail sector generates nearly $A320 billion in revenue and accounts for 4 per cent of gross domestic product and 11 per cent of employment.

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The strong retail performance throughout the pandemic was aided by government stimulus schemes and rent relief while garnering a larger share of consumer disposable income.

"The retail sector is in a great position to face into tougher conditions with an increased focus of efficiency and delivering a customer-centric experience.”

Underpinned by improving consumer confidence, the retail market is expected to record strong revenue growth in the 2021 financial year of 14 per cent. However, this will likely return to pre-COVID levels of around 2 per cent in 2022 as disposable income is increasingly spent on alternatives such as travel and entertainment.

The good news is the retail sector is in a great position to face into tougher conditions with an increased focus on efficiency and delivering a customer-centric experience. As COVID-related risks abate, companies will have significant balance sheet flexibility to support growth and, where applicable, distribute excess capital to investors.

Online operations

With some bricks and mortar retailers forced to close in 2020, online sales exploded and stock levels were quickly depleted – which means cash balances now sit at record levels.

Businesses with exposure to home and office improvements, groceries, electronics, fitness, clothing and footwear have experienced unprecedented and, in a lot of cases, unexpected growth due to the change in consumer preferences.

While it has been mainly good news for the sector, this kind of growth is not sustainable and those businesses with a clear strategy will be the big winners going forward.

Underpinning the current strong performance of the sector are ongoing restrictions in international travel, the re-opening of the domestic economy, positive consumer sentiment, income tax cuts and the resurgence of the housing market across Australia. 

However, there is an expectation the retail sector will moderate in 2022 as consumer spending redirects to those other discretionary sectors such as restaurants and travel. Meanwhile, the impact of ‘bought forward’ purchases to sustain work from home requirements etc will dissipate.

Setting up an online business – feet first

Improving consumer confidence and government incentives saw the clothing and footwear sectors benefit in 2020 both from a revenue and margin perspective, according to ANZ’s survey of Australia’s top 35 retailers.

However, smaller retailers are also seeing the same themes as large operations in the COVID-economy. This includes Melbourne-based company Archie’s Orthotic Thongs, run by former physiotherapist Daniel Jones.

When Jones walked away from his career to start a small business people told him he was making a mistake. But the move – to set up a business selling orthotic thongs - has paid off more than he could have imagined.

Jones has found success from the move by footwear manufacturers to make casual footwear that properly supports the wearers’ feet.

ANZ customer Archie’s experienced “good, strong” growth and is now stocked in more than 2,000 stores nationwide and online. And while online sales have been successful, Jones said he benefitted in waiting until the product was right.

“You can’t go online until the product is good quality and scalable. We started very small, keeping all our distribution in-house at first,” he explains. “We made sure our product was good enough to be online.”

The company is also flourishing at a time when many people working from home are embracing casual “lockdown wear” such as thongs (also known as flips flops or jandals) and slippers.

Click here to read the full Archie’s story.

ANZ spending data suggest the end in March of the government JobKeeper support package hasn’t had an immediate impact on sales however we know businesses are taking into consideration what the ‘new world’ looks like after the COVID-19 shock.


Overall, together with the ongoing uncertainty, we do see some short term challenges. Beyond the end of JobKeeper, retailers will face slowing demand and a difficulty in finding enough staff across the sector.

The strong sales performance last year inevitably has led to depleted inventories so demands on working capital will increase – with further pressure from the normalisation of payment terms. Capital expenditure too will increase in this return to more normal conditions with expectations for the median business capex to rise from 1.9 to 2.8 per cent of sales.

Capital management is another emerging issues: businesses have excess cash but debt has reduced across the industry during COVID. Those trends should reverse – at the same as shareholders are looking for increased dividends and/or share buybacks.

Fortunately though, the retail sector faces these challenges from a position of surprising strength.

Tim Suffield is Director of Client Insights and Solutions at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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