Metcash’s 18-week AGM trading update highlighted a slowdown in sales. For the first 7 weeks, group sales were up 4.7% and the next 11 weeks, to the end of August 2025, sales dropped 1.2%. The biggest contributors to the slowdown were declining tobacco sales (-34%) and annualising Superior Foods acquisition (now trending at 2.7% growth). Metcash’s underlying results show sales trends slightly lower than industry growth other than liquor. Hardware sales trends remain sluggish, albeit improving over recent months.

Woolworths has had a rough FY25 for a range of reasons. However, looking forward, we are more interested in the company’s strategic direction under CEO Amanda Bardwell. We expect more details in coming months that may lead to further “simplification” or cost savings and decisive action on underperforming businesses like Big W, HealthyLife and Marketplus. Woolworths is also likely to double-down on its core proposition as “the fresh food people”. In this report, we assess the extent of any potential strategic shift by Woolworths and the implications for the broader industry. As Woolworths recovers, others will feel the impact.

Coles reported overall sales growth of 3.4% for 3Q25. The solid result was driven by its online growth, which has mixed fortunes given the lower margins online. Liquor sales remain soft and there will be rebranding costs over the next 12 months dragging on profit margins. Declines in tobacco sales are also an earnings headwind. We lower our EPS slightly by -0.8% in FY25e and -1.1% in FY26e.

Metcash provided a trading update indicating 1H25e underlying NPAT will be between $132-$135 million. The key driver has been the decline in sales and negative operating leverage in Metcash’s IHG hardware stores. Tough conditions are likely to prevail in 2H25e as well, albeit we are at a low point in the building cycle, providing scope for margin recovery at some point.

Metcash reported FY24 EBIT down 1% and, adjusted for acquisitions, it was a similar result in both the first and second-half. The company is actively managing costs to offset weak sales trends and this thematic is likely to be a feature again in FY25e. Metcash’s performance relative to market growth remains impressive and is the primary reason for our positive stance on the stock.

Tobacco may be somewhat inconspicuous in supermarkets but it has a meaningful impact on sales and margin outcomes given demand has dropped significantly in the past year. Metcash faces the biggest headwind given tobacco could account for 15% of group sales. The drop in tobacco is partly driven by the rise of illicit tobacco and vaping.