Last week, Dollarama, a Canadian retailer, surprised the market by making a takeover offer, at a 112% premium, for The Reject Shop. While the acquisition price looks ‘full’, it is a cheap entry to access good floor space in shopping centres. The lack of new space, increasing competition for quality sites, a lower Australian dollar and a relatively strong Australian consumer could all contribute to further foreign acquisitions of Australian retail. A changing landscape could impact the margins enjoyed by incumbents across most retail segments.

The ACCC Supermarkets Inquiry report has 20 recommendations. None of these recommendations step change earnings, but the report does highlight three things. Firstly, supermarkets will have more margin volatility in fresh produce; secondly, it provides a reminder that price inflation does lift the industry profit pool; thirdly it will be difficult for Coles and Woolworths to grow market share given limits on new stores and elevated gross margins in some categories.

Woolworths has said that each of its businesses must “stand on its own two feet”. For Big W, perhaps it could be cut off at the knees at some point. While an exit is hard to execute, in some form, we expect it may occur over the next 18 months. For the retail industry it will be highly disruptive given the floor space needs to generate more sales and gross profit. A mix of other retailers could generate as much as $2.3 billion, or 50%, more in sales than the prevailing level.  While in the short-run, it may benefit a retailer like Kmart, the medium-term risk is all major retailers with geographic overlap lose some sales, namely Coles, Woolworths, Kmart and Target.

Most retailers have highlighted how much tougher their NZ operations have been over the past year. The magnitude of the interest rate pain combined with lower levels of household savings has created a much tougher backdrop. However, conditions are improving and rate cuts have been significant with more to come. NZ retail sales should recover over 2025, more so in the second-half. We have pulled together a chart pack that provides a perspective on the NZ economic outlook, retail sales forecasts and financial performance of major retailers in that market. We include both ASX-listed retailers and NZ-centric retailers.

Coles reported 1H25 EBIT up 5% with a stronger lift in its Supermarkets division of 7%. The company had solid sales trends, which partly reflected a benefit from Woolworths DC strikes. Underlying sales and EBIT growth in the Supermarket business is closer to 3%-4%. Cost savings and DC efficiencies are offsetting natural cost inflation, not boosting margins. Over the next 18 months, Coles will benefit from the unwind of transition costs that will lead to double-digit EPS growth.

Woolworths reported sales up 4%, but EBIT down 14% in 1H25. We expect the company will have a challenging 2H25e as well. Management is starting to address its challenges. CEO, Amanda Bardwell, said that the company will assess the shape of its business portfolio. Each business unit must have reasonable prospects on a 3-5 year view. Overhead costs are being cut and there is a tougher stance on the low returning Big W and NZ divisions.

Super Retail Group reported 1H25 sales up 4%, but EBIT down 7%. The typically resilient Supercheap Auto division had a 6% decline in EBIT. The increasingly competitive sales backdrop for Auto makes it challenging to see much earnings recovery over the next 18 months. Elevated competition will continue to be a headwind in Supercheap Auto and we expect flat like-for-like sales for 2H25e and FY26e. Elsewhere, sales trends are improving and mid single-digit sales growth is likely for Rebel, BCF and Macpac in 2H25e.

Endeavour’s share price has dropped 10% in the past quarter. Our take is the share market is concerned about the outlook for liquor industry demand and the transition to a new CEO. We address the liquor industry outlook in this report and find that the weakness in sales is more a function of the COVID-19 spike in demand than a structural concern. We expect retail liquor sales to improve meaningfully by June 2025 and support better earnings for Endeavour. 

Super Retail Group’s trading update for the first 16 weeks highlights a slight softening of sales trends and some increased pressure on gross profit margins. The increased competition in the auto market is of note given Supercheap Auto accounts for over half the group’s earnings and close to two-thirds of valuation. Repco is becoming more competitive in retail and Bunnings will expand in auto in the next six months. 

Coles reported 1Q25 supermarket sales trends slightly ahead of Woolworths. The bigger debate is whether Coles has achieved the result with less price investment. The short answer is yes, but not in a way that will protect Coles sales or margins in future. Overall growth is weak for both retailers with broadening competition for groceries in Australia. Coles decision to build another Witron DC in Victoria is logical but the cost increase suggest the return on capital may be lower than the first two DCs it built.