Bapcor has provided yet another soft trading update, which results in lower EBITDA for FY27e. We reduce our EBITDA forecasts by 7%-10% over the next three years. Bapcor had shown signs of sales stabilisation but industry-wide delays in vehicle servicing have led to weaker sales from April 2026 and will continue until fuel prices subside.

Price rises for raw materials have been significant over the past year. In Issue 1 of Price Watch, we analyse these input cost pressures. We look at shipping, sugar, vegetable oils, cotton and semiconductors. While observers see the cost pressures as transitory, the length and extent of the path back to normalisation will significantly impact retailer and manufacturer profits. We expect it will take another 9-18 months for prices to normalise. As a result, retail inflation will rise and there will be profit margin pressure on some, mainly manufacturers, that fail to fully pass through the cost increases.

Australian retail price inflation has been low for a long time. However, input and supply chain costs have increased substantially in the past year. What if we had 5% inflation in both food and non-food in 2022? This is a hypothetical question to raise the debate about the implications of higher retail prices. High price inflation is likely to boost retail earnings in the first 12 months. If we have 5% price inflation, the upside to earnings is 6%-12%.

The feedback from companies experiencing cost pressures is growing. The spike seen in both soft commodity prices and transport costs has persisted for longer and will lead to higher supermarket inflation in our view. The only remaining question is when, and by how much? We expect some evidence to show through in August-September 2021 given supplier feedback. Packaged grocery inflation is likely to be 1.5-2.0pp higher by early calendar 2022. Inflation is generally positive for supermarket retailers sales and earnings.