Christmas – Bah Humbug!

Last Updated on Saturday, 10 December, 2022 at 11:09 am by Andre Camilleri

Silvan Mifsud

The Central Bank of Malta issues monthly economic updates which includes useful business and consumer confidence indicators in Malta.

I have taken such indicators from 2016 onwards and mapped out the indicator results for the Retail Trade Confidence Indicator and the Consumer Confidence Indicator in Malta, as can be seen in the graph.

One can see that prior to the pandemic, the consumer and retail trade confidence indicators moved very much hand in hand. With the arrival of the pandemic the retail trade confidence indicator became much more negative than the consumer confidence indicator. This is likely due to the fact, that many retail operators where pessimistic as they saw that the various closures and drop in tourism is effecting badly their business, whilst consumers kept receiving their wages as government increased its expense to support jobs and the general economy.

Now in 2022, the situation has reversed. On one hand, retail trade operators, feel more confident as the pandemic restriction are all but a past memory, therefore expecting better business activity over the coming months. On the other hand, consumers in turn are very pessimistic as they are facing issues with a increasing cost of living, mainly due to issues relating to Ukraine and Russia war. By October 2022, consumer confidence dropped to a negative level, worse than during the pandemic. This strong decline in sentiment was largely driven by the fact that expectations of major purchases for the coming months turned negative for the first time since June 2021, coupled with a weaker assessment of the financial situation in the previous 12 months. Consumer expectations about their financial situation as well as those of the general economic situation in 12 months ahead, also became more negative.

We have already seen the first signs of incongruence between the expectations retail operators had and the actual sales performance  registered in general during the Black Friday sales, which is likely due to the difference between the expectations and confidence of such retail operators and the pessimism and lack of confidence that consumers are experiencing.

This could lead to having retail operators reporting less than expected sales performance levels during the present Christmas shopping season, as the lack of consumer confidence could mean that they retract on certain spending, especially discretionary spending.

In the current circumstance it would be wise for retail operators to adjust their expectations and take note of the following:-

  • Focus on your cashflow. It is vital to keep cashflow as stable as possible. Be a hawk on your cashflow and any extended credit.
  • Know your actual costs and profits. Now more than ever you need correct and updated timely financial reporting, so that you are aware  of the actual costs of each product you are selling and profits being made and how the general costs are eating away at your profits. You will need to have access to revenue, costs, margins and profits not just in an aggregate way but also sub-divided per business unit and possible also how these relate to each customer type of category.
  • Innovation is key. Think out of the box in your proposition. This could include offering more value by packaging things together or offering new financing options to make it easier for clients to buy your products or services.
  • Is your capital structure strong enough to sustain your business in this period? So it is high time to review your capital structure: your mix of equity, reserves, bank loans, overdrafts and supplier credit.
  • Get your head out of the engine room. Now more than ever you need to pay extra attention t control increased costs from suppliers and labour costs and analyse trends in demand for your products/services.
  • Be strategic. Do not fall to the common pitfall that you apply a universal axe and pursue an across-the-board cut of expenditures.

Whilst hoping that retail operators have a good Christmas period of business, they need to be prepared to survive, if this Christmas period and coming months provide a sales performance, that is below their present expectations.

Silvan Mifsud is director of Advisory at EMCS Tax & Advisory

- Advertisement -