The broader economic slowdown has impacted the hospitality sector with consumer spending on food and in bars, restaurants and cafes slowing down as the impact of interest rate increases and cost of living pressures hit household budgets.
Spending in these sectors is to some extent flexible and in current economic conditions, being impacted by cost of living pressures as higher interest rates impact household cash flows.
According to Australian Bureau of Statistics’ data, spending on food is slowing. In trend terms, food spending rose by just 0.1% in July, which is well below the monthly growth rate of 0.8% a year ago. While food is an essential item, the large retail businesses have noted that consumers have switched to cheaper food options and away from the expensive, luxury items.
Spending in cafes, restaurants and takeaway food has been more resilient, but is nonetheless slowing. In trend terms in July, such spending rose by 0.5%, well down on the 1.5% monthly increases a year earlier.
“for food manufacturers, there have been cost pressures with a surge in many input costs…”
At this stage, the slower growth in spending has been cushioned by the resilience in labour market conditions. Spending would be even weaker if there was a material increase in unemployment or reductions in weekly working hours.
While the unemployment rate has increased from what was a 48 year low of 3.4% late in 2022, the increase to date has been to just 3.7%. It would be concerning for the outlook for consumer spending if the unemployment rate rose to 4.5% or more, which is some risk as the economy more generally comes off the boil.
For food manufacturers, there have been cost pressures with a surge in many input costs – wheat, vegetable oils, other grains, cocoa and even orange juice. This has been a critical part of the inflation surge of the last two years. For the meat industry, favourable conditions have seen a glut in production which is causing prices for lamb and beef to fall sharply.
With cost pressures rising and demand slowing, margins have been squeezed. In FY23, these pressures have been highlighted by a number of insolvencies in the sector, NCI received more than $9.3m in claims during the period, with an average value of more than $140,000.
For the wine industry, weakness in domestic consumption and the on-going tariff regime set by the Chinese authorities has had a clear negative effect on the sector. Wine prices are bucking the inflationary trend, with prices rising by less than 1% per annum for the past three years.
Overall, the economy and consumer spending will remain under pressure into 2024 with interest rates at a restrictive level and cost of living pressures continuing as the labour market softens. Only when there is a sustained rise in real wages and a clear easing in cash flow pressures, perhaps with the start of an interest rate cutting cycle in mid to late 2024, will consumer spending recover.