Step into many retail stores, and you’re greeted by an oasis of abundance and good cheer. This positive vibe is part and parcel of the shopper experience. But for many retailers – beneath the surface of radiance and polished interiors, a crisis looms. That illuminous lighting – it’s not cheap to run. Especially when staff outnumber customers. But then again, the rising energy bill is easy to look past when you’re preoccupied by another leasing cost increase. Bey
Beyond the vibrant shopfronts and gleaming merchandise, a chorus of retailers is anxiously watching as Australia’s economic domino effect ripples through their businesses. Full effect of rate rises still to come The first domino has already toppled for consumers, representing the rising costs of necessities such as food, transport, healthcare and housing. The second domino is the drop in disposable income for families and individuals. As people allocate more of their income towards essentials, the well of discretionary spending quickly begins to parch. Even with the RBA in August pausing interest rates for the second consecutive month, with the Australian Bureau of Statistics citing housing costs as the number one living expense, financial stress is at an all-time high and likely to remain so until interest rates ease again. While the RBA move restores some consumer and business confidence – the truth is, we’re yet to see the full effects of consecutive interest rate rises and a slowdown in spending. These factors have a lag effect on retail – and it’ll be felt for the months to come. Dire outlook for small businesses Now, we stare down the collapse of the third – consumer demand. Discretionary retailers are already feeling the pain. The new consumer, if shopping, is trying to make that discretionary dollar go further, looking for value with price the main determinant. The fourth domino symbolises the plight of small businesses. Our research shows 41 per cent of SMB retailers are performing below or far below their FY23 financial forecasts and two-thirds of SMBs lack business confidence and are concerned or uncertain about the year ahead. Meanwhile, 32 per cent of SMBs stated that their costs have increased by more than 10 per cent, which is above the level of inflation – these are the findings of our ARA and American Express Small Retail Index study released last month. Many of these businesses could be forced to downsize and lay off staff. The most impacted may have to reduce their opening hours and days that they trade or worst still forced to shut shop. Small businesses may be the backbone of Australia’s economy, but there’s only so much burden they can carry. With retail crime strongly on the rise, this cost is adding to the pressures. We must also factor in the intense pace and demand of industrial relations reforms being driven at a Federal level which, whilst well intended, do come at a significant cost burden to manage and execute – both in terms of time and resource. For small business, this comes at a very difficult time. Price increases are inevitable Looking ahead, and the collateral damage to the economy is worrying. The next three dominoes are already beginning to fall. With a significant strain on business profits, the job market is left vulnerable. Staff face the daunting prospect of being laid off and finding employment becomes more challenging. Beyond that, the risk of government assistance programs becoming overwhelmed amplifies. And the final domino signifies a widening of social disparity – one in which the RBA’s approach is already alluding to. Mortgage holders are already feeling the squeeze. And that squeeze could tighten with uncertainty shrouding future rate increases. Renters won’t be immune either – with landlords already passing on the increased costs. As the cost-of-living rises, it will disproportionately affect vulnerable populations, exacerbating income inequality and social divisions. The recent announcement to boost JobSeeker and other income support payments whilst welcomed has been viewed by many as not going far enough. Those without mortgage or rental stress will continue business as usual, but the working class will battle through a perfect storm of rising housing, food, and utilities in a narrowing job market. While some are quick to blame business for these economic whirlwinds, businesses are caught between a rock and a hard place. What few understand is that many large retailers are working on extremely narrow profit margins – around 3 cents in the dollar for some. Retailers have held off and absorbed many of these increased costs, but that is an unsustainable business model, and it is inevitable that it will continue to affect pricing. Much like a family pays a rapidly increasing rent or mortgage, a business pays a rapidly increasing lease, and much like a family forks out on increasing utilities, so too does a business. Caught in a vicious cycle At the heart of a business is everyday people. People who need jobs to survive. As businesses grapple with increasing costs across the board, they’re faced with an ultimatum – increase prices or lay off staff. It’s understandable why many would choose the former. Many will be forced to do both. Much like Australians are in the midst of a cost-of-living crisis, they’re experiencing a cost-of-doing-business crisis. It appears we are caught in a viscous inflationary cycle. Business didn’t flick the first domino to start the chain, they’re merely at the mercy of the reaction. While data suggests that inflation has peaked, the ramifications on businesses and consumers certainly hasn’t. And we need to factor that into our decision making in the coming year.