As Panic Buying Slows, Will Supermarkets Keep Up? - Milford Asset

As Panic Buying Slows, Will Supermarkets Keep Up?

Greg Cassidy

Portfolio Manager

Greg is a Portfolio Manager based in the Sydney office focussing on Australian equities. Prior to joining Milford in October 2016, Greg spent over a decade as a Senior Analyst at Tribeca Investment Partners in Sydney following two years at AMP Henderson. During his career, Greg has covered many sectors including resources, energy, banks, utilities, steels and building materials. Greg has a Bachelor of Economics (Hons) from the University of Sydney, a Postgraduate Diploma in Applied Finance and Investment from the Securities Institute of Australia and is a CFA Charterholder.

We all remember the chaotic scenes at supermarkets in March as shoppers rushed to stock up as the pandemic led to lockdowns globally. Panic buying resulted in very high sales for supermarkets and empty shelves for many goods. This led us (and others) to question if supermarket sales would decline as customers ran down their supplies. Interestingly, sales have continued to be higher than this time last year and have the potential to accelerate leading into Christmas.

COVID-19 has changed the way people are spending their money. We are travelling less, and we are eating out less. Even in places where community cases have all but disappeared, we are not back to normal in our spending habits. Consequently, we are still seeing higher spending levels in supermarkets. This March Australian supermarket sales were up 25% on March 2019, and they have remained higher than last year with the latest data point showing an 11% increase in August.*

Whilst restrictions are slowly being removed, most of us remain cautious and unfortunately, this is creating tough times for the café and restaurant industry. We expect supermarkets will continue to see strong growth for the remainder of 2020, particularly in the lead up to Christmas as ongoing restrictions will see more people celebrate at home.

Another interesting trend has been the acceleration of online delivery. Woolworths saw 6.3% of their June quarter Australian Food sales come from online up from 4.0-4.5% in the previous quarters. In their NZ business, Countdown, it rose to 11.9% for that quarter, up from 7.9% in the March quarter. Woolworths think that 20% could be reached for their supermarkets but expect a higher rate for other areas like fashion and liquor.

We are also shopping more locally, preferring to be nearer to home and avoiding large shopping centres when we can. This is helping Metcash, the owner of the network that supplies IGA stores who reported supermarket (ex tobacco) sales up 13.8% for the three months to July. This is a major change for them as they have struggled to grow for many years.

So, how can an investor participate? The three largest players listed on the ASX are Woolworths, Coles and Metcash who each have other areas to their businesses like liquor (growing even stronger than supermarkets) providing even more growth. These three names have improving earnings and pay a current dividend yield of 3 to 4% which is impressive for defensive businesses during a pandemic.

We believe some supermarkets will continue to be great investments as our behaviour in COVID-19 world changes. Revenue is growing strongly and in some cases, profit margins are rising. How long we must live in a COVID-19 environment is unclear, but until we see a safe and effective vaccine distributed globally, we believe people will continue to remain cautious and spend more time at home. Supermarkets have been incredibly flexible to this change in behaviour responding well to managing their supply chains, adapting to the demand of online shopping as well as being able to quickly implement social distancing in their stores and training staff accordingly.

Disclaimer: This blog has been prepared by Milford Australia Pty Ltd ABN 65 169 262 971 (AFSL 461253). You should not rely on any information in the blog in making any investment decision.

It is for general information only and does not take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. Past performance is not a guarantee of future performance.

* Source – Australian Bureau of Statistics and Morgan Stanley