Retail Sector Australia

The procurement environment for the retail sector in 2025 is defined by volatility, complexity, and structural change across global commodities and macroeconomic conditions. The Cost of Goods Sold (COGS) remains directly exposed to fluctuations in energy, metals, and agricultural inputs, while regional economic trends and currency movements add further layers of risk. For procurement leaders, this combination highlights the pressing need for proactive and resilient strategies that balance immediate cost containment with long-term structural adaptation.

Energy markets remain at the centre of retail cost pressures. Crude oil prices have moderated to the mid-$60s per barrel after the surges of 2021–2022, yet geopolitical instability—ranging from conflict in Eastern Europe to OPEC+ production decisions—ensures that uncertainty persists. Natural gas prices remain highly regionalised, with Europe and Asia particularly vulnerable due to import dependence, while coal markets reflect diverging trajectories: steady decline in developed economies and strong demand across Asia. For retail, these energy dynamics have immediate implications for freight, logistics, and electricity costs. Effective mitigation increasingly depends on a combination of hedging mechanisms, efficiency initiatives, and investment in lower-carbon energy solutions that reduce long-term exposure.

Metals markets present a structurally bullish outlook. Copper remains elevated, supported by demand for electrification and renewable energy projects, alongside ongoing supply constraints in key producing regions. Steel and aluminium follow similar upward trajectories, shaped not only by industrial demand and infrastructure spending but also by tightening environmental regulations and shifting trade policies. For retailers, metals are embedded throughout the value chain—from store fixtures and durable goods to packaging and capital projects—meaning that sustained price inflation is unavoidable. Procurement leaders are therefore turning to long-term contracts, diversified supplier bases, and the integration of recycled materials as critical levers to stabilise costs and align with sustainability mandates.

Agricultural commodities represent perhaps the most unpredictable element of the procurement mix due to climate volatility. While staples such as wheat, rice, sugar, and edible oils have shown some short-term price moderation, their structural vulnerability to weather patterns, land-use constraints, and trade restrictions remains significant. Cocoa illustrates this fragility most acutely, as persistent supply challenges in West Africa drive extreme price volatility. Coffee too continues its upward trend under the dual influence of climate change and robust consumer demand. These inputs are central to grocery and packaged goods, meaning that volatility feeds directly into consumer pricing and retail margins. Retailers are increasingly compelled to diversify sourcing geographies, invest in traceability and sustainability programs, and even explore reformulation or ingredient substitution to maintain supply resilience while protecting COGS.

Regional dynamics add another layer of complexity. Europe, the UK, and Asia face disproportionate exposure to energy and metals-driven cost pressures, while the United States and Australia enjoy relatively greater resilience due to domestic supply advantages. Yet no region is immune from the interconnected challenges of climate change, geopolitical instability, and global supply chain fragility. Procurement teams must therefore approach regional supply strategies with an integrated risk lens that combines global diversification with localised resilience.

Overlaying these commodity and regional factors is the macroeconomic backdrop, which presents both opportunities and constraints. On the positive side, consumer confidence has strengthened to 98.5 points, supported by reduced interest rates (3.6% from 3.85%) and slightly lower mortgage costs (5.76%). This easing of financial pressure translates into greater disposable income and supports discretionary retail spending. Inflation has stabilised at 2.1%, while gasoline has fallen to 1.17 USD per litre, easing household cost burdens and lowering logistics expenses for retailers. These trends, taken together, point to healthier gross margins and a more supportive operating environment in the short term.

However, structural weaknesses temper this optimism. GDP growth remains subdued at 1.3%, well below the five-year average of 2.5%. The underlying economy lacks the momentum to sustain broad-based retail expansion, especially in high-value or aspirational categories. Stagnant wage growth further compounds the challenge. While lower inflation theoretically increases purchasing power, the absence of meaningful nominal wage growth means that improvements in real disposable income remain marginal. In practical terms, this suggests that recent gains in consumer sentiment may not translate into lasting retail demand. Instead, retailers are likely to face an environment in which consumers remain highly price-sensitive, competition intensifies, and margins are constrained.

Currency dynamics add a further headwind, particularly in Australia. The Australian Dollar continues to trade at 0.65–0.66 against the US Dollar, below its five-year average of 0.69. For retailers reliant on imported goods priced in USD, this weakness translates into higher input costs and tighter margins. While the domestic stock market remains structurally resilient and sales tax rates stable, these do not offset the fundamental currency-driven pressure on COGS. Mitigation requires a dual strategy: financial instruments such as forward contracts to lock in exchange rates and operational adjustments that include sourcing diversification, near-shoring, and a rebalancing toward non-USD trade partners. Retailers must also refine pricing and inventory strategies, selectively absorbing currency costs in competitive categories while passing through increases on differentiated product lines.

Taken together, these factors outline a retail sector navigating both supportive and adverse conditions. Commodity markets remain volatile, consumer demand is strengthening but fragile, and currency weakness continues to erode margins. Strategic success will hinge on procurement leaders adopting an integrated, proactive approach: combining hedging with long-term contracting, diversifying suppliers and geographies, embedding sustainability across the supply chain, and deploying financial tools to counteract currency risks. Retailers that execute on this model will be better positioned to stabilise costs, protect margins, and adapt to the structural shifts that are redefining global supply chains in 2025 and beyond.