Upcoming quarterly sales for Coles, Woolworths and Endeavour Group will show a continuation of recent themes. Coles Supermarkets winning, receding inflation and weak liquor volumes. We forecast 1Q26e comp sales of 4.2% for Coles and 1.6% for Woolworths. This gap is approaching a level where Coles could also win 2Q26e, an outcome that would intensify the scrutiny on Woolworths Board and management. We forecast Coles Liquor comps at -0.3% and Woolworths at -0.6%. Liquor retail is still in the doldrums, but pubs are back in growth suggesting broader liquor consumption concerns are easing.

Australian inflation for the June 2025 quarter has dropped further to 2.1%. In retail categories, the rate of price inflation has remained largely unchanged overall. However, there are a number of sub-sector distinctions of note. Packaged grocery inflation ticked up in the June quarter and electronics deflation eased. Hardware prices are now in decline, pharmacy prices have flat-lined and sporting goods are in deflation too.  The direction of retail inflation is likely to be lower over the next 12 months, helping affordability, but hurting retail sales growth. The benefit of lower inflation on interest rates is positive for retail outlook, but we view the magnitude of the impact as over-hyped. We expect retail sales growth to improve to 3.9% for FY26e, up from 3.3% in FY25.

The Fair Work Commission has announced a minimum wage increase of 3.5% for FY26e. With a further 0.5% increase in superannuation payments, retail wage rate growth will be 4.0% in FY26e. This will be challenging for most retailers to offset given sales growth is likely to be 2%-3%. The retailers with the biggest challenge include Woolworths, Coles, Accent Group and Bapcor.

Australian inflation for the March 2025 quarter was 2.4% continuing a trend of decelerating inflation in the past year. Lower petrol prices and energy bill subsidies are helping. In retail, there was pick up in supermarket inflation, largely for meat and fresh produce. For non-food retail, there was deflation in a range of categories such as electronics, hardware, sporting goods and footwear, which may signal some margin pressure. With some input cost pressures and a lower Australian dollar, retail inflation is more likely to tick up from here. The trimmed mean inflation of 2.9% is instructive for the upcoming wage decision by the Fair Work Commission and may see retail wage rate growth of 3.3% to 3.7% for FY26e in our view.

The upcoming 3Q25e sales results for Coles, Woolworths and Endeavour Group are likely to show Coles in front in both supermarkets and liquor. The shift of Easter timing will distort growth rates. We forecast Coles Supermarket comparable sales at 3.0% and Woolworths at 2.6%. For Coles Liquor, we forecast 2.6% and Endeavour Retail at -0.3%. All figures are Easter-adjusted. We will be interested in any step change in inflation for produce and meat given recent weather disruptions. Overall industry sales growth rates remain lacklustre, particularly relative to cost growth

The Federal Budget for FY26e provides some added support for households given tax cuts, healthcare cost reductions and energy bill relief. The total benefit amounts to $3.6 billion for FY26e on our estimates, a 0.2% boost to incomes. This pales into insignificance compared with the FY25e tax cuts that lifted income by 1.6%. While some retailers worry about an election year, the economic setting for retail looks good and retail spending is likely to strengthen slightly over the next 12 months.

Australian inflation for the December 2024 quarter shows an easing of inflation across retail categories as well as the underlying rate of inflation across the economy. The drop in inflation in food retail is a headwind to sales growth that is likely to persist in 2025 in our view. In non-food retail we have seen a drop in inflation in hardware, electronics and clothing. A further easing of inflation may not eventuate given the lower Australian dollar. Financial markets are increasingly pricing a 25bp rate cut for February 2025, which will be supportive of retail. The bigger issue for us is the overall rate cutting cycle may be shallow and therefore offer only mild stimulus to retail sales. We see lower interest rates boosting retail sales by 0.5% to 1.5%.

Australian inflation data for the September 2024 quarter shows that inflation is coming down. Living cost pressures are easing thanks to government support, lower petrol prices, as well as lower retail inflation. However, the challenge for retail is lower price inflation may result in lower revenue growth at a time when operating costs such as wages and rents remain elevated. In supermarkets, price inflation has been propped up by fruit, vegetable and tobacco prices. In non-food retail, there is deflation in electronics, furniture, sporting goods and footwear. Electronics, furniture and auto parts could see lower inflation in future if the outsized price inflation of the past five years partly unwinds. We expect lower retail price inflation to be a headwind for the retail sales recovery, even as volumes improve over the next year.

Australian inflation was 3.8% for the June 2024 quarter and retail product inflation was 2.1%. The more granular data shows that a number of retail categories are in deflation such as furniture, electronics and sporting goods. In supermarkets, packaged grocery inflation dropped, while fruit & veg prices increased. The broader news on inflation has been largely in line with RBA expectations. We expect interest rates will remain on hold till next year and movements in interest rates will have limited impact on retail spending.

Australian inflation stepped down further to 3.6% in the March 2024 quarter year on year. Our calculation of retail price inflation is at 2.0% for the quarter, flat on the prior quarter. Lower price inflation for retailer puts added pressure on driving volumes. While broader inflation is slowing, the pace of the slowdown indicates that rate cuts are more likely a 2025 event and risk is to the upside on the upcoming wage award decision for retailer wages.