What: The Australian market is increasingly difficult for department stores, as customers are either going for low prices or asking for great experiences, and Australian department stores often find themselves in the middle.

Why it is important: Conditions are ripe for a market concentration, from two players to one, as well for a massive closure of regional, non-profitable stores, in order to be able to focus on the flagships.

The Australian retail industry has seen an increase in spending since the pandemic, going from $26.5 to $27 billion a month to $34 to $35 billion a month. However, it saw a 3.9% decrease in spending between November and December 2022, with most industries experiencing a decrease in turnover during this time. Department store spending saw the largest drop, with a 14.3% decline in spending between the two months. Despite this, year-on-year spending increased by 7.5% from December 2021 to December 2022, but spending appears to be falling from the mid-year high where spending increased by 19.2% in August 2022.

The decrease in spending is believed to be due to a combination of cost of living pressures, price sensitivity, and the end of the lag effect after the easing of Covid-19 restrictions. November is typically a bigger month for retail than December, due to online sales events such as Black Friday and Quick Frenzy. The decrease can also be attributed to the long lead times for deliveries, as Christmas shopping is mostly done in November.

The retail sector will face challenges in 2023, with rising inflation, energy costs, and interest rates affecting consumer spending. Consumers are expected to be more sensitive to price in 2023 and focused on servicing debts, fuel prices, and food. Only 2 options are viable: low price and high turnover, or high price, high profit and more exclusive experiences.

This is why experiential offerings and sustainability are high on the agenda for Australian department stores in the future. The future of traditional department stores is expected to be a smaller model, focused on flagship stores and CBD locations, offering a more luxurious, premium, and prestigious experience. This comes at a price: as one commentator puts it, you can not have a pianist in the cosmetics department, a champagne bar on level three and oysters on level four, when you have 60 stores, but this can be done when you have five.

Can Aussie department stores pivot ahead of a spending decline?