After months of speculation and ongoing economic pressure, the Reserve Bank's decision to drop the Official Cash Rate (OCR) on 14 August came as a surprise to many.
As the first OCR cut in four years, the move has been met with relief across the country, with many banks immediately lowering their mortgage interest rates in reaction to the news. But as the New Zealand economy continues to struggle, what does this mean for our hard-hit retailers?
A difficult period for retailers
COVID-19 and New Zealand’s ongoing economic slowdown have created a perfect storm for retailers around the country. When inflation increases and household spending reduces, the retail sector is one of the first to feel the impact. According to Retail NZ’s April-June Retail Radar report, confidence is low among retailers, with tough economic conditions continuing to negatively impact retail sales. This is reflected in a 3.4% reduction in retail card transactions in the June quarter compared to the same time in 2023.
Our April 2024 BDO Business Wellbeing Index reflects these findings, showing just 43% of retail leaders were feeling positive about their business performance in the two weeks before being surveyed, and just 54% expected to feel positive in six months’ time – both measures a decrease on our October 2023 survey. External economic impacts and cash flow were unsurprisingly the biggest concerns for retail business leaders, with the country’s well-documented cost of living crisis resulting in decreased consumer spending.
Hope is on the horizon
While the country’s wider economic concerns still prevail, the OCR reduction will be a positive sign for many retailers and comes hot on the heels of the tax relief announced in the 2024 Budget. There is hope that consumers will start to feel more confident in the economy and be more willing and able to support local retail businesses, perhaps with a bit more money to spend on discretionary items. This will be particularly important for retailers as we move closer to the Christmas and summer spending season, typically the peak period for shopping in New Zealand.
Although the most recent OCR drop is modest, it’s tipped to be a sign of things to come, with the Reserve Bank predicting the rate will continue to drop below 4% by the end of 2024. This should provide a mindset shift for retail business leaders and provide a welcome uplift after some very challenging conditions.
Tips for retailers to survive and thrive
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Manage your cash flow. Cash flow is king for retailers, especially in tight economic conditions. Retailers need readily available finance to be able to buy forward stock in preparation for the summer spending season, and to attract and retain quality staff.
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Revisit your forecast. A three-way forecast - with a profit and loss, balance sheet, and cash flow statement all linked together - can help you stay on top of your financials.
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Prepare your stock inventory for summer. Look at what products you can offer as alternatives to customers who may be looking for cost savings and more affordable alternatives.
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Maintain high levels of customer care. A quality customer experience can make all the difference when it comes to customer attraction and retention. Look closely at your in-store and online experience to ensure you’re offering the best experience at every touchpoint.
The OCR reduction is a welcome relief for many in the retail sector, but New Zealand’s ongoing economic challenges mean businesses must stay focused on their finances in the months ahead. For assistance with your retail business, reach out to BDO’s specialist retail advisory team or read more of our retail insights here.