Amazon recently sent a letter to a number vendors on its first-party (1P) platform informing them they would move to third-party (3P). What’s the change and why?  Under 1P, Amazon takes the inventory and price risk. Under 3P, the vendor (brand owner) takes these risks. Australian retail profit margins are generally higher than five years ago with gross margins better than feared. In our view, a key reason is that online retailers are less aggressive on price. Amazon’s shift is a good example of the shift in mindset. We expect retailers to sustain higher gross margins. The problem is their sales growth may remain underwhelming relative to operating cost growth.

Australian retail sales rose 4.0% in August 2024 year-on-year. This was an acceleration on the 2.6% growth in July with online outperforming at 12.0% growth. Dining-out slowed, but supermarkets were strong.  Afterpay Day, Father’s Day and better weather supported liquor, recreational goods and clothing spend. Pharmacy continues its strong sales growth. We expect sales growth to be softer in the next two months ahead of Black Friday promotions in November.

The ACCC’s interim report into Australian supermarkets has not produced any alarming concerns for Coles and Woolworths yet. However, it is too early to draw conclusions either way. The interim report is a very preliminary summary of the issues the ACCC will explore.  The ACCC is yet to process much of its data and there will be further submissions and interrogation over the next two months. We expect the risk to Coles and Woolworths is largely around their ability to expand gross margins to offset cost pressures. Beyond that, we expect the ACCC to conclude that the supermarkets do hold market power but are still largely competitive.

This chart pack provides subscribers with insights about the retail operating environment and outlook for wages, floor space and profit margins. The chart pack has been compiled post the FY24 reporting season across the retail market providing fresh insights about the sector.

Sigma Healthcare reported underlying EBIT growth of 20% in 1H25, while Chemist Warehouse reported standalone 2H24 EBIT growth of 37%. Chemist Warehouse EBIT for the comparable trading period is 14x larger than Sigma. This cements our view that the merger is the key driver of Sigma’s share price.

Premier Investments reported FY24 Retail EBIT down 9% to $326 million. Gross margins finished higher with a second-half increase of 94bp. Cost management during FY24 helped offset the operational leverage of lower sales. The delayed strategic review allows the board to focus on the Myer merger proposal. 

The proposed date for ACCC’s findings on the Chemist Warehouse-Sigma merger is 24 October 2024.  The timeline slipped with further details provided by Chemist Warehouse and Sigma. It is not a guaranteed approval given the combined entity will be a very large operator in the pharmacy market. While some see store divestments appeasing the ACCC, we are less convinced. The first issue listed by the ACCC is the vertical integration caused by the acquisition.

We have produced a chart pack of retailer performance vs market (see PDF report). This market share report provides two insights – 1) Performance of key ASX-listed retailers compared with market growth. 2) Market structure and individual retailer performance over time. The data includes actual six-monthly growth in industry sales to end of June 2024.

Premier Investments has provided a trading update stating FY24e sales will be $1.60 billion and Retail EBIT (pre AASB-16) at $326 million. The result suggests 2H24 sales fell by 2% with EBIT down 15%. Weak sales trends are likely across the board, with Peter Alexander sales per store and Smiggle soft too. The weaker 2H24 EBIT margin decline is a function of operating cost growth exceeding sales growth in our view.

Australia’s national accounts showed that retail continued to miss out on spending growth in the June 2024 quarter. Total consumer spending rose 5.2%, while retail spending only increased by 1.8%. Households have continued to use some of their stored-up savings to maintain spending habits. The good news for retail is the reset, or mean reversion lower of retail spending, has now largely played out. We expect improved income growth and a better share of wallet for retail to result in slightly stronger retail sales growth in FY25e.