The debate about the minimum wage decision for FY27e is heating up and the backdrop of rising inflation is adding risk for retailers. We expect a retail award wage increase of 3.8% to 4.3% for FY27e, with a backdrop of the trimmed mean inflation at 3.7%-3.8%. The retailers with highest sensitivity to wage cost growth are Myer, Woolworths, Bapcor and Accent Group. All retailers have adapted to higher wage rate growth over the past three years by automating elements of their business and cutting hours. Further wage savings is likely to be limited to those retailers with larger formats and flexible labour, which includes Bunnings, JB Hi-Fi and Officeworks.

The Fair Work Commission has announced a minimum wage increase of 3.5% for FY26e. With a further 0.5% increase in superannuation payments, retail wage rate growth will be 4.0% in FY26e. This will be challenging for most retailers to offset given sales growth is likely to be 2%-3%. The retailers with the biggest challenge include Woolworths, Coles, Accent Group and Bapcor.

The Fair Work Commission’s decision to increase wages for FY24e by 5.75% will create a headwind for retailers. The magnitude of the pressure will depend on the sales run-rate and given we are already in decline in non-food categories, the squeeze from rising costs and falling sales could lower earnings in FY24e by 8%-14% for many non-food retailers. Our review of consensus expectations suggests the market is too low on cost growth for Bunnings, Super Retail Group and Premier Investments. We also note that the Fair Work Commission suggested that future pay rises are more likely to be above inflation, which adds to risks in FY25e.