Consumer markets outlook for December trade

On the global stage, Australia has demonstrated higher consumer confidence than in other advanced economies, though we’re still sensitive to what’s happening internationally. Economies worldwide are adjusting to US trade policies and tariffs, while in Australia the direct impact on Christmas prices is expected to be lower than initially forecast.¹

What we are seeing is a series of indirect effects, with a rise in imports from China, which may be diverting goods from its US markets, along with higher spending on these goods, in part because of their lower prices. While the data is mixed, this could lead to a substituting of goods from other countries for Chinese goods. If this trend materialises, it could have a deflationary effect.

The high-level data gives Australian retailers cause for optimism as we head into December, but there’s need to dive into the nuances to understand the drivers. Household discretionary spending is up by 1.4% in the June quarter, which is both more than expected and the strongest rise in three years, while retail sales grew by 4.6% in June (the strongest increase in two years), and have a forecast growth of 3.9% in FY26.²

But with unpredictable consumer patterns, retailers are waiting at the cross-roads to see which fork in the road consumers will take. With income growth expected to slow over the next 12 months and the impact of the income tax bracket forecast to shave 1.3% off household income³, an acceleration in retail spending will depend on whether households reduce their willingness to save.⁴

Taking a look at the annual change in real household spending, it is clear at a glance that over 65s have been increasing their spending, with all younger demographics reining it in. But there’s much more to consider than this snapshot, and, it might be explained by Gen Z and cottage cheese.

It’s been almost a decade since Gen Z was typecast as the “smashed avo” generation – a trope that criticised them for spending on overpriced café brunches and coffee instead of saving for their first home. In 2025, while the data shows the under 30s have slowed their spending less than the 30 to 44 year olds, that may be because they’ve given up on the idea of home and car ownership.⁵ 

The Gen Z cottage cheese meme is more empowering than smashed avos. It speaks to Gen Z’s influence, which was witnessed last year as they transformed the once unfashionable diet-food of cottage cheese into a celebrated high-protein healthy must-have to be added to everything from lasagne to ice-cream.⁶

While the surge in cottage cheese sales was sparked and driven by Gen Z, they were not the only demographic caught up in the frenzy that saw it fly off supermarket shelves. 

Gen Z have firmly established their influence on the retail market, and it’s much bigger than a high-protein health snack.

Gen Z are an important part of the story in the revival of in-store retail, which is a new trend after more than a decade of e-commerce growth dominating this space.

Retail stores are fulfilling a deep-seated need for interaction, becoming important social and community hubs, particularly for Gen Z, who spent critical years isolated through COVID. And we know Gen Z play in packs – visiting the stores that entice them, where they’ll snap and post images. 

This creates a vital sales channel, with 74% of Gen Z and Millennials shopping through social media, and nearly half engaging in such purchases on a weekly basis.

It’s a multi-channel story. To capture the imagination and influence of Gen Z in the physical realm, retail is evolving from a transactional space to a community hub that builds emotional connection and photo-worthy experiences. 

Retailers and consumer businesses should not overlook the opportunity to engage with various generations by attracting them to physical stores. Consumers across different age groups value the in-person experience and see physical stores as vital connection points between businesses and customers. Many prefer visiting stores to receive customer service and assistance that is unavailable online.

Physical stores build brand connection and just over half of Australian consumers say they are more loyal to a business that has both online and physical spaces. People enjoy being able to see, touch and try on products before buying, along with the instant gratification of an immediate purchase.

This also delivers bottom-line benefits for retailers, reducing return rates which are as high as 15% for online purchases down to 5% for purchases made in-store.⁷

By global comparison, in-store retail sales in Australia have held their ground more successfully. Online sales account for only 15% of our total retail sales, compared to 27% in the UK and 20% in the US. This has been attributed to the challenges of Australia’s vast distances and dispersed population.⁸

There are two challenges for retailers in the push for more physical stores and the rejuvenation of existing spaces. 

The first is the strong demand and low supply of retail space that looks set to drive commercial rents higher.⁹ There is a further block to supply with local planning laws restricting development of new competing retail centres¹⁰, despite retail floor space per capita being significantly lower in Australia (1sqm) than in other markets (for example in the US it is 5sqm per capita).¹¹

While online growth has been moderate in Australia post-COVID, with mall space severely limited, will we reach a point where online transaction growth is the only way to continually achieve growth in retail sales?

There’s also the issue of consumers feeling the pinch. Financial pressures and economic challenges are top of mind, with 74% identifying rising costs as a major concern, and 55% feeling financially insecure.¹²

This is significantly impacting purchasing decisions, with value for money coming into focus, evidenced by sharp rises in online purchases during sales events. Click Frenzy – which centralises sales deals from a suite of suppliers - saw a 16.6% surge in annual growth from 2023 to 2024 in its sales events, followed by a jump in both Black Friday (11.4%) and Cyber Monday (7.9%) growth, and a more modest end of financial year sale increase (2.8%)^.13

This focus on value is also driving renewed popularity in the second-hand sales market, with the key trade occurring on online shopping platforms. In previous years, second-hand goods purchases increased in popularity as shoppers valued sustainability. However, in 2024 more than two-thirds of shoppers thought sustainable products were beyond the reach of their budget, with a quarter buying second-hand goods just to save money.¹⁴

Rather than seeing this active second-hand market as a threat to consumer spending – it is instead expected to boost household’s discretionary income because of the gains made from these sales. It can also make the upfront purchase price less daunting for those who plan from the outset to sell it on.

Consumers’ search for value is also spilling over into choices around how we spend our leisure time. While Australians continue to prioritise holidays, they are choosing more affordable ones and spending less on meals, tours and entertainment while they’re away.¹⁵

The data hints at a trend of Australians investing in themselves, not only with holidays, but also in recreation and self-care. Consumers are committed to enhancing their well-being, with 50% planning to consume more fresh produce and 30% aiming to reduce alcohol intake.¹⁶

Recreational goods account for the largest growth in retail sales with 11.1% year on year growth as of June 2025, with the stand out supplies in this sector being camping, fishing and outdoor recreational goods. This supports the idea that we’re investing in more affordable outdoor lifestyle holidays.

In line with wellness and self-care, the research shows Australians are spending 4.5% less on alcohol across the year, while the pharmacy and cosmetics subgroup is the second highest growth area with 9.5% year on year growth. While this might suggest a trend in health and wellness, when coupled with further findings that one third of the cosmetic and pharmaceutical spend is on products like type 2 diabetes medication GLP-1 being used for weight loss, we question if the market is more preoccupied with looking healthier than being healthier.¹⁷ And despite Australians planning to be healthier, takeaway food has seen a 6% year on year growth and while takeaway alcohol sales have fallen, there’s a rise in liquor purchases in cafes and restaurants.

Gen Z has made a stand out step away from alcohol, with 20% now reporting they drink alcohol infrequently (less than once a month), up from 13.6% in 2001. And those who have never consumed a full glass of alcohol in that age group has more than doubled from 7.5% to 16.3% over the same timeframe. They attribute this to a desire for more inclusive social activities, rising costs, and a greater awareness of health risks and mental health impacts.¹⁸

This brings us back to the fork in the road. Consumers may consider the longer-term gift to self to be their savings instead of retail spending, and this is what they’ll weigh up over the coming 12 months as real income growth slows. It is not a zero-sum game between saving and retail spend, with a 1% drop in saving seen to improve retail spend as much as 2.5%, if staples spending stays the same.¹⁹ This is the wait and see.