Strong Sales for Supermarkets in March; Australia to embrace softer restrictions soon

Government and the National Cabinet are due to meet on 8 May 2020. After the meeting, information would be available regarding the baseline removal of restrictions.

It is likely to spark some demand in the system, as a lot of non-essential work is pending for households. The trajectory of new cases has been on a lower end over the past month, and it may be the right time to open up the economy.

A longer lockdown is likely to hurt the economy more. Meanwhile, a gradual resumption of economic activity would enable the country to start recovering from the contraction in economic activities. Online demand is likely to be higher as vulnerable citizens may not have similar ambitions post COVID-19.

For the week ended 17 April 2020, the CommBank Card insights suggested that spending was down 18% compared to the same period of previous year. Spending was up in household furnishing and equipment against the same period last year.

Recently, the Australian Bureau of Statistics (ABS) released the preliminary retail sales numbers. In March, Australians grappled supermarkets furiously, as hunting for essentials like toilet papers intensified, leading to rationing of certain items in the stores.

The ABS’ prelim retail sales print noted that March 2020 witnessed strongest ever increase in sales, surpassing the record of June 2000 – when shopping was preponed in the wake of GST implementation.

An 8.2% jump in retail sales reading for March was the strongest since the data started publishing. Although the exact numbers will be released on 6 May 2020, the prelim numbers confirm that chaos in supermarkets was paramount.

A precipitate shock like this to supermarkets may have stretched the capacity of stores, including employees and supply chains.

It was understood that customers were inclined towards supermarkets, specialised food and liquor retailing. Essential products like pasta, rice and toilet paper saw the turnover doubling, while items related to home and offices also witnessed strong growth.

Although there were increases in essentials, social distancing and public health measures led to strong falls in:

• Restaurants, cafés and takeaway food services.
• Clothing, footwear and personal accessory retailing.

More recently, ABS released the inflation print, which reflects that CPI rose 0.3% in March 2020 against a 0.7% rise in December 2019. Over the past twelve months to March 2020, the CPI index rose by 2.2% against 1.8% in December 2019.

In March quarter, among the most significant movers in CPI – vegetables were up 9.1%, tobacco was up 2%, pharmaceuticals were up 5.1% and secondary education was up 3.4%. On the other side, strong falls were recorded in automotive fuel, down by 6%, domestic holiday travel and accommodation was down by 3.1% while international holiday travel and accommodation was down by 3%.

During the quarter, drought condition in the country took the prices of groceries to higher levels, including fruits, dairy, cereal products, grain, vegetables and fruits. Bushfires also contributed to rising costs of transport of perishable goods, and strong export demand combined with subdued supply also pushed the prices to higher levels.

A strong demand for essentials along with rising pricing may have translated to higher sales for supermarket businesses.

Related: Lockdown Helping Supermarkets Generate Record Sales

Coles Group Limited (ASX:COL)

In the third quarter ended 29 March 2020, sales revenue was $9.2 billion, up 12.9% from the previous corresponding period. In January and February, prior to COVID-19, supermarkets performed strongly with comparable sales growth of 13.1% for the third quarter.

Liquor sales were impacted by COVID-19, and sales were also impacted due to bushfire smog and floods earlier. It recorded a comparable sales growth of 7.2% for the quarter. Fuel sales were also impacted due to COVID-19, after peaking around 70mL/week.

Coles introduced over 260 own brand products, entered into agreement to acquire Jewel Fine Foods, and opened three new supermarkets. In supermarkets, online sales were temporarily suspended with deliveries available to most vulnerable citizens.

On outlook, the supermarket giant noted that initial weeks of Q4 have been broadly in line with pre-COVID (early Q3). Easter trading was not the same when compared to the previous years.

In Q4, the company is expecting higher cost base, largely related to COVID-19 driven expenses. Liquor sales were higher, but margin pressure would continue to persist. Fuel sales were also trending lower as a result of COVID-19. It expects gross operating capex between $750 million and $850 million in FY20.

On 5 May 2020, COL settled at $15.470, a decline of 0.194% from the previous close.

Metcash Limited (ASX:MTS)

In April, the company announced its plans of capital raising. It has completed a $300 million placement to institutional shareholders, while $30 million worth of share purchase plan is ongoing.

Metcash also obtained additional liquidity from its lenders with a short-term facility of $180 million, which combined with capital raising is expected to provide a proforma headroom of $852 million against historical average gross debt level.

On trading update, the company noted that food sales continued to improve with a significant uplift in March and early April due to COVID-19 restrictions, but the benefit of higher sales was offset by costs.

MTS noted that FY21 would have lower sales due to the cessation of Drakes South Australia supply contract and no renewal by 7-Eleven of the supply agreement, and the company would emphasise on cost to offset the impact of lower earnings.

In Liquor, sales growth improved in the first five months to March 2020 of 2H20 but was impacted by COVID-19 restrictions in NZ and on-premises businesses in Australia. Higher retail sales allowed to offset the impact of NZ sales and on-premises sales.

For the five months to March 2020 in 2H20, hardware sales declined by 1.3% compared to 4.2% in 1H20. In March, there was an increase in demand across trade and DIY segments, which continued to early April. Second half hardware sales reflect the slowdown in construction activity.

On 5 May 2020, MTS closed the day’s trade at $2.450, down by 0.81% from the previous close.