Supermarkets Behemoths Remain In Focus

Australia | 11:02 AM

Supplier surveys and consumer spending data have analysts divided over supermarket valuations and where the best value lays across the consumer sector.

• Discretionary and staples stocks have re-rated, is it too fast, too soon?
• Market share gains in the supermarket segment shift, sales remain stable
• Stock positioning is more nuanced on a bearish economic cycle
• Woolworths cops a couple of downgrades

By Danielle Ecuyer

Multiple macro headwinds have not put off investors

The battle between Australia's supermarket giants has become a focal point not only for investors, but also across the political news cycle.

The post-covid inflationary environment and the rise of populism have placed large Australian companies under increased scrutiny, with Coles Group ((COL)) and Woolworths Group ((WOW)) navigating a backdrop of ACCC intervention, higher input costs and an increasingly competitive retail landscape.

Think Amazon partnering with Harris Farm for fresh food deliveries.

Layer on three interest rate rises, the war in the Middle East and an unfavourable Federal Budget in terms of the wealth effect for Australians, and it is not hard to build a bearish, or at best cautious, narrative around the Australian consumer.

Retailers, both discretionary and staples, including both supermarket heavyweights, are battling for a share of an increasingly pressured consumer wallet.

As highlighted by Macquarie, 2026 has been a "volatile" year thus far for both consumers and investors.

From an investor's perspective, the Consumer Staples index has outperformed the ASX200 by around 12%.

Traditionally, investors gravitate towards defensive sectors during a tightening cycle, with supermarkets typically proving more resilient as consumers shift spending towards home-based consumption while trading down to more value-oriented offerings.

Macquarie notes that following the initial, and now increasingly uncertain, resolution to the Middle East conflict, consumer discretionary stocks recovered and were trading at a relative underperformance of around -3%.

With both Consumer Staples and Consumer Discretionary screening as expensive, while the domestic economy remains out of the woods and a cyclical slowdown is still expected, Macquarie believes investors should adopt a more selective and nuanced approach.

The broker is forecasting household spending growth to slow to 1.5% y/y.

The discretionary sector has not yet felt the full impact of weakening conditions, expected to emerge over the six months to the end of 2026.

Recent surveys shine light on consumer spending behaviour 

Focusing on the supermarkets, several brokers use supplier surveys and consumer spending trackers to identify changes in market share and spending behaviour before they emerge in reported earnings.

UBS' fortieth supermarket supplier survey for June, covering 44 Australian fast-moving consumer goods suppliers across 26 categories, has historically shown a circa 65% correlation with like-for-like sales growth for Woolworths and Coles since commencing in 2007 (72% pre-covid), making it a valuable leading indicator of trading conditions.

The latest survey suggests June quarter trading favoured Woolworths, with the retailer recording the strongest improvement in market share.

UBS notes Woolworths is now viewed as best placed to gain market share over the next six months, overtaking Coles, while IGA is expected to lose share and Aldi is likely to continue making modest gains.

Traditionally, market share movements occur between Coles and Woolworths.

Sector growth expectations remain unchanged at 2%, implying slightly negative volume growth. While retail price inflation expectations have eased to 2.6% from 3.3% in January, cost of goods sold inflation expectations have risen to 4.9% from 3.3%.

Around 68% of suppliers expect it will become more difficult to pass on higher input costs over the next year, representing an ongoing headwind for supplier margins.

Price trust remains a key battleground. UBS notes Woolworths is working to rebuild consumer confidence through its Everyday Low Prices campaign, although Coles continues to lead on price perception.

Macquarie's June quarter high-frequency consumer data also point to resilient grocery spending despite mounting pressure on household budgets.

As consumers become more cautious heading into FY27, this broker expects households to continue shifting expenditure towards home-based consumption, providing a supportive backdrop for the supermarket sector.

Outside food retailing, pharmacy spending has remained robust, supported by structural growth in health and beauty products, including GLP-1-related categories, supplements and cosmetics.

Chemist Warehouse, owned by Sigma Healthcare ((SIG)), is expected to remain the standout performer given its significant exposure to front-of-store products.

In contrast, furniture retailers, hardware and alcohol are expected to remain under pressure, while electronics has proven more resilient than anticipated.

Jarden's online tracker also points to healthy consumer engagement during the EOFY sales period.

Web traffic across this broker's 53 tracked brands rose 22% year-on-year in June, with footwear, apparel and electronics recording the strongest gains. Amazon, Kmart ((WES))) and Adairs ((ADH)) were among the biggest beneficiaries of increased online traffic.