Deloitte Access Economics’ latest Retail Forecasts report – Year of the Tourist – notes that domestic retail sales demand remains sluggish, but the explosion of international tourism into Australia (led by China) is giving our retail sector a big boost.
Spending by domestic and international tourists contributed to around 43% of the growth seen in retail spending last year. The strong growth seen in tourism over recent years is expected to continue during 2017, providing a significant support for Australian retailers.
Retail is a major part of the tourism market. During the 2015-16 financial year, tourist expenditure (including domestic and international tourists) totalled around $130 billion. Retail spending accounted for around 39.7% of this expenditure, including $36.1 billion (27.7%) on food retailing and $15.6 billion (12.0%) on non-food retailing.
However, as more tourists arrive onshore, more international retailers want to come along for the ride. International tourism is luring international brands into the Australian retail market. As at January 2017, 39 of the top 250 retailers globally operated in Australia. This has risen from 30 just three years ago.
One effect of international retailer interest has been increased demand for prime CBD retail assets. The value of retail building approvals has been rising steadily over the past couple of years, at an annual rate of 11% over 2015 and 2016. Investor demand for retail assets has risen as low interest rates reduce the cost of funding. Prime retail assets are in high demand, as international retailers flock to Australia. Major fashion houses from overseas have shown their willingness to pay more for prominent, attractive flagship store leases.
The entrance of international retailers is also adding pressure to profits. The last six months of data for retail profits has shown the lowest results in almost five years. Intense competition mixed with slow spending growth are important contributors to this result.
Indeed, the strong contribution of growth by tourists has as much to do with the sluggish speed of local retail spending as it does with explosive tourism growth. Domestic spending on retail is struggling against record low wage growth, high levels of household debt, and uncertainty over interest rates and house prices.
Overall, real (inflation-adjusted) retail sales growth was 2.0% for the year to December 2016. We expect a steady improvement in retail sales through 2017 which is forecast to grow by 2.4% for the year to December 2017, then by 2.7% over 2018.
David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.