Why the cost-of-trading and cost-of-living crises are two sides of the same coin

The cost-of-trading and cost-of-living crises are two sides of the same coin. And it is becoming increasingly apparent that the government, retail industry and consumers will all need to play a part in easing the current economic circumstances.

The trying macroeconomic conditions are not just driving an increase in costs but also a loss of confidence. 

According to the National Retail Association (NRA), 77 per cent of Australian businesses project their overheads to worsen through the year and any spikes in sales from calendar-based events are likely to be lost soon after they’re earned. 

While there is no immediate cure for the tumultuous state of retail, NRA co-CEO Rob Godwin believes there is an opportunity to create momentary relief – primarily around skyrocketing rents, energy costs and insurance premiums.

Is this a crisis of confidence?

The nationwide drop in consumer spending due to the rising cost of essential goods and services has created a prevailing narrative of greedy price-gouging retailers. But it’s only half the story.

“What retailers are facing at the moment is soft demand from consumers,” Godwin told Inside Retail.

But at the same time, “all these fixed costs are going up more than the actual sales,” he said. “It’s a double negative.” 

The inflationary trading conditions that are putting pressure on retailers to increase prices to compensate for their bottom line are consequently reducing consumers’ buying power and in turn their confidence.

“Their dollar isn’t going as far as it did last year, therefore, they’re contracting in their spend because their wages aren’t going up like for like,” said Godwin.

Both retailers and consumers are waiting for fiscal easing and they are expecting it to come from the top down.

What is the government’s role?

All eyes are on the Federal Government as the retail industry looks to see if the May Budget can relieve some of the excess pressure on Australian businesses.

“We employ one in 10 people in the country,” Godwin said. This makes retail, a $420 billion industry, the biggest employer of young people in Australia.

Government intervention in the cost-of-trading crisis is not just a worthwhile decision to generate political capital going into the election but essential to support a pillar of the economy.

“What we are advocating very much for is government support in some fiscal policies to assist retailers and consumers education of retailers as well,” stated Godwin.

“We have to send confidence to retailers to weather this trading storm and I do think they will. I think they’re resilient, but they need help and then guidance, support and education,” he added.

The NRA is lobbying the government to support the retail industry, “the lifeblood of our economy”, to ensure that Australia’s second-largest employer isn’t at permanent risk.

But how did we get here?

While most retailers are focused on the fastest exit out of this crisis, it is worth analysing the combined efforts of all parties; legislators, retailers and consumers.

Godwin acknowledges the fatal assumption many retailers made post-pandemic – that the year-on-year growth would be ongoing. They didn’t account for consumers diverting their discretionary spending to overseas travel.

“[Consumers] changed their buying patterns which meant that for most physical goods retail perspective, we over anticipated demand,” said Godwin.

“What we also have done is we’ve become way too reliant on discounting and looking at the revenue generation versus the profitability – that’s where retailers are guilty,” he added.

Meanwhile, the government has been simplistic in its attempts to ease the cost of trading and stimulate spending.

“I think where the government’s contributing to this is only having one mechanism to control consumer interest rates,” he said.

“We’re a bit simplistic in it just being interest rates all the time, we should be looking at monetary policy alongside interest rates.” 

The convenience of shopping with giant online retailers has also shifted consumer behaviour and expectations.

“There is now a global marketplace where you have got the Temus and the Sheins of the world where they are bypassing a lot of the import duties… It’s all about the price,” said Godwin.

For Godwin, it took all three parties to get to the current situation, whether by complicity or complacency, and it will take the same trifecta to create a better working marketplace.

“It’s partly retailers, it’s partly government, it’s partly the change of consumer awareness of where to buy products… these headwinds have combined to be a very tough environment,” Godwin elaborated.

“So I think collectively though, the retail industry, government and also consumers are sticking their hand back in their pockets. They can get out of this but it does take a collective effort.”

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