Safety in supermarkets: Grocery giants the best bet as slowdown bites

The widely anticipated slowdown in consumer spending has finally begun, stock watchers from some of the biggest investment banks in Australia say, and supermarkets will outperform non-discretionary retailers over the coming months.

Analysing this week’s data showing a decline in retail sales in December, equity analysts said the major grocery retailers such as Woolworths and Coles are best placed to weather the storm caused by the Reserve Bank’s interest rate rises and a deeper weakening of the housing market.

“We expect those factors to favour supermarkets relative to non-food retail in the [second half of 2023], when we expect house price deflation to continue and real incomes to remain pressured,” Credit Suisse analyst Grant Saligari said in a note to clients this week.

Retail experts have long been predicting that essential retail categories such as groceries will win out over fashion and electronics when consumers tighten their belts. After months of strong spending across the country, several analysts say the tipping point is here.

“This set of [retail profit] results is likely a peak and earnings could fall meaningfully over the next 18 months as sales growth falls below cost growth,” MST Marquee’s Craig Woolford said, warning the retail slowdown was “imminent”.

Moody’s Analytics economist Sarah Tan it was clear consumers were already reigning in spending in department stores, which suffered a monthly fall in sales of 14.3 per cent in December.

“Elevated inflation, higher interest rates, and global economic uncertainty are the harbingers of difficult days to come for Australian households; we expect the trio to quell the consumption thirst and take retail sales lower in the coming months,” she said.

Macquarie’s equity team agrees that rising cost-of-living pressures and the number of households rolling off lower fixed-rate mortgages to the current higher interest rates will erode discretionary spending from this point on.

“We seek relative safety in staples, particularly Coles,” its research team said in a report this week.