Australian retail sales rose 4.0% in December 2024, with some notable outliers across segments. Electronics was up 11%, furniture up 8% and pharmacy up 7%. On the other hand, department stores, supermarkets, liquor and recreational goods were all very soft. Some of the shifts reflect the baseline with December compound annual growth rates actually slower than November for all categories other than hardware and liquor.

The link provides a presentation associated with a webinar we held. The webinar addressed our retail sales forecasts for 2025. In the presentation, we answered some of the big questions on everyone’s minds, the impact of interest rate cuts, how elections impact spending and the outlook for retail sales across categories.

Australian retail sales growth finished 2024 better than where it started, and the good news is we are likely to see a stronger growth rate for 2025. We forecast 3.6% retail sales growth this year, up from 2.6% in 2024. We see a stronger recovery in non-food retail, particularly household goods. While a good year, much of the support to spending comes from tax cuts and rate cuts, making it hard to see further gains beyond June 2026. Moreover, geopolitical risks (both positive and negative) feel larger this year. Both retailers and investors should have contingency plans.

We have initiated coverage of Guzman y Gomez (GyG), a fast-food retailer offering Mexican-style cuisine that has exhibited strong like-for-like growth in recent years with a targeted store rollout in the Australian market.  Accelerating store openings combined with margin expansion are the key elements to this growth story. GyG’s Australian store productivity is industry leading and the scope to add more drive-thru stores is substantial. Moreover, fixed cost leverage and higher franchise royalty rates will support a doubling of EBITDA margins over the next four years. 

Premier Investments’ trading update highlights negative operating leverage to soft sales trends.  Premier Retail expects sales to fall 2% with EBIT down 21% at the mid-point of guidance.  The surprise in this result is the inability to cut costs given weak sales. Perhaps there are fewer variable costs that can be cut without damaging sales.

City Chic’s trading update for 1H25e shows an improvement in sales compared with six months ago, but ongoing challenges in the US and operating losses. We expect better profit margins in 2H25e given cost savings and more full-priced sales. However, we are more cautious on the sales outlook. Fundamentally, City Chic has stabilised its business, but the prospect for decent profit margins is still some way off. 

Australian retail sales rose 4.1% in November 2024. In non-food retail, sales were up 4.0%, while the CAGR growth over five years was 7.3%. November benefited from a bigger Black Friday event but also from warmer, drier weather. Supermarkets, liquor, fashion and cafes/restaurants all had much stronger growth. The sales trends have improved in recent months, which may be a little stronger than true trends because of favourable weather and the heavier discounts enticing shoppers. We expect some softness in the March 2025 quarter.

Australian retailers have had a good Christmas. Even with a bigger Black Friday, consumers were in the mood to spend at Christmas and a late surge in sales is likely to lead to good growth. Sales trends are likely to be at least 1% better than the September quarter. In addition to good sales, few retailers are complaining about margins. While sales growth has been good, margins are already high and cost growth is elevated.

Woolworths is having a challenging time in its core supermarket business. The recent distribution centre strike will impact sales and earnings in 2Q25e, but should dissipate. More fundamentally, the company’s price investment is unlikely to deliver a decent return and online sales are margin dilutive. Across the industry, the drop in supermarket inflation gives us cause for concern about the industry’s sales and margin outlook over the next two years. While a short-term winner from the strikes, broader industry sales weakness will make it hard for Coles to deliver decent sales growth in 2025.

We have produced a chart pack showing the growth trends for online retail in Australia. It is in double-digit growth again after a pause in the 2023 calendar year. The growth is strongest for those with the biggest presence online – supermarkets, Amazon, Temu and Shein are all growing rapidly. While online is growing fast, it is happening with a stronger emphasis on profitability than five years ago. We expect retailers with a stronger online presence to have faster sales growth. However, the medium-term risk remains margin dilution for incumbent bricks & mortar retailers as the online sales may not be incremental.