Shoppers Prioritizing Food and Drink Over Nice-to-Haves

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza DMP screen as undervalued.

We expect mid-single-digit food sales growth in fiscal 2024 given industry tailwinds, including above-average population growth and a shift to more at-home meal preparation rather than eating out—a reversal of recent trends. However, the tailwind of grocery price inflation is easing, while wages and other costs for supermarkets are pushing higher—meaning likely lower operating margins.

Competition among Australian grocers is likely to intensify. Value-conscious grocery shoppers have adjusted by switching to private label products at narrow-moat Woolworths and no-moat Coles, or by frequenting discounter Aldi. Hard times also mean more shoplifting—an industrywide phenomenon. We expect the tailwind of grocery price inflation to moderate, while wages and other costs for supermarkets are pushing higher, resulting in softer operating margins. Further, we think a de-rating of defensive yield stocks is a risk, with wide-moat Endeavour screening as undervalued and least exposed.

We forecast hardware juggernaut Bunnings, owned by wide-moat Wesfarmers, to successfully navigate weak demand by introducing new product lines. But Wesfarmers shares are overvalued, perhaps buoyed by optimism over impending lithium sales for its new mine.

For more details, please see our “Industry Pulse: Australian Retailing 2023 Q3″ published Sept. 29, 2023.