Don’t underestimate the cost of consumer pain: Rob Scott

Wesfarmers chief executive Rob Scott said stricter industrial relations laws were making things harder for companies. Picture: Ross Swanborough

If there was one overriding theme in the comments made on Thursday by Wesfarmers chief executive Rob Scott releasing his group’s latest half-yearly results, it was the continued cost-of-living pressure weighing on Australian consumers.

While it is not a new message for the Albanese government, Scott’s comments were a reminder that despite this week’s modest piece of good news from the Reserve Bank in delivering its 25 basis point rate cut, cost of living will be front of mind when voters go to the polls in the next few months.

As one of the country’s largest private-sector employers, with key low-cost retail businesses Kmart, Target, Bunnings and Officeworks, Scott is highly sensitive to what consumers are feeling.

“Cost-of-living pressures and cost-of-doing-business pressures continued to significantly impact many households and businesses,” he said, announcing the results of the Perth-based conglomerate on Thursday.

“Australian consumer demand remains supported by low unemployment and continued population growth, but higher costs remain a challenge for many households and businesses.”

Scott said 2024 was really tough for Australian households and businesses.

“I would hope that 2025 has the potential to be a better year than 2024, but in order for things to get better we have to get inflation under control,” he told The Australian in an interview.

“We also need to be mindful of some of the geopolitical uncertainties that exist at the moment.”

While he said the Trump tariff regime did not have any direct impact on Wesfarmers, which sources a lot of its product from China, Scott said there were concerns that a tariff war could be another external source of inflationary pressures. The lower Australian dollar could also fuel inflation this year as importers like Wesfarmers have to pay more for their goods.

The search for value by Australian consumers was a clear tailwind for Wesfarmers in its latest market-pleasing results, where revenue rose 3.6 per cent to $23.5bn and net profit was up a higher-than-expected 2.9 per cent to $1.47bn, largely off the back of good performances by Kmart and Bunnings.

While this week’s cut in official rates will provide some assistance, particularly for those with big mortgages, in the scheme of things it won’t provide too much relief for overstretched households.

If anything, the fact that the RBA only cut by 25 basis points, with governor Michele Bullock going out of her way to hose down expectations of any further rate cuts soon, was another reflection of ongoing inflationary pressures in the economy.

To survive in this environment, with consumers and customers all looking for value, companies are under increasing pressure to hold down their own costs and improve their productivity.

In his interview with the Australian, Scott said he was proud of the fact that prices in Wesfarmers’ retail business had gone up by less than the increase in inflation.

He cited increased use of technology and digitisation and an increased focus on ecommerce as one of the tools in its productivity armoury.

“We’ve invested over $2bn in progressing our data and digital capabilities and overwhelmingly they’ve been really successful,” he said. “We’ve grown digital transactions per month by five times over the last five years.”

Things have advanced to the point, Scott says, where Wesfarmers is the largest nonfood “omnichannel” retailer in the country.

Another successful move has been the development of Kmart’s Anko-branded homeware products, which have proven popular with consumers and are also now being sold offshore including to US retail giant Walmart.

The Wesfarmers example highlights the relentless pressure on companies in the consumer space in Australia to hold down prices and look for more ways to do more with less, including more use of technology.

But externally, businesses in Australia are battling pressures beyond their control which add to costs.

While Scott is a diplomat, choosing his words carefully, he said stricter industrial relations laws were making things harder for companies at a time when they were already under pressure.

“I do worry that there is less flexibility in the workplace today,” he said. “There is (also) more onerous regulation and costs associated with compliance.

“If it continues, it will be bad for economic growth and wages.”

Just as business has had to focus on increasing productivity and becoming more efficient, he said, so should government.

“We need the same focus (as applies to business) on deregulation and the speed of decision making and approvals,” he said.

Scott and other members of the Business Council have talked long and hard about the need to take measures to counter the declining productivity in Australia. But the fact is there has been no move at all at the political level in recent years to improve productivity.

Less flexible industrial relations and increasing regulation and compliance costs across the board have become part of the landscape with no prospect of any real reform – despite, as Paul Keating would say – every galah in the pet shop talking about the need to improve productivity.

The other factor affecting prices in Australia, and adding to costs, has been the need to diversify supply chains.

China is the single largest supplier of consumer goods to Australia (China is Australia’s largest source of imports – to the tune of more than $100bn a year – as well as its largest export market), providing a wide range of products from clothing, electronics, furniture, toys and machinery.

Scott says Wesfarmers currently has about 1000 people in Asia working in sourcing, product design and technology roles.

The company has long had a big sourcing operation in China but like many other companies, it has also moved to diversify suppliers to other markets in Asia.

“We have seen some significant growth in sourcing from some ex-China markets – Vietnam, India and Bangladesh on the apparel side,” Scott said.

“Even Indonesia is picking up.”

Diversifying supply chains for Australian companies has been as much about spreading sourcing risks as it has been in holding down costs – aka not having too many eggs in the China basket.

In short, the Wesfarmers example shows the cost pressures on Australian businesses continue to increase at a time when Australian consumers are doing it tough.

Just how this plays out at the ballot box is something which the Albanese government will soon find out.