Supermarkets wrestle immigration slump and online boom

Sue Mitchell

Oct 16, 2020

AFR

Supermarket retailers are reviewing plans for new supermarkets and convenience stores amid a once-in-a-century drop in net immigration and a step-change in online grocery sales during the pandemic.

Population growth has boosted food and grocery sales by about 1.5 per cent a year for the last decade, augmenting space growth of 2.5 to 3 per cent to lift annual industry sales by an average 4.7 per cent a year over the past 10 years.

However, population growth is forecast to drop to just 0.2 per cent in 2020-21 and 0.4 per cent in 2021-22, down from 1.2 per cent in 2019-20, according to the federal budget.

Restrictions and social distancing measures work.

A drop in population growth due to the pandemic has implications for retailers new store plans.  Bloomberg

Net overseas migration – which normally accounts for 60 per cent of population growth – is forecast to fall from 154,000 to minus 72,000 in 2021 and minus 22,000 in 2022 as border closures restrict the arrival of overseas students and permanent settlers.

Supermarket retailers are hoping the impact of lower population growth will be offset by other forces that emerged during the coronavirus pandemic, including more people working and eating at home, a renewed interest in scratch cooking and restrictions on cafes restaurants and clubs.

“The working from home phenomenon can’t be underestimated because it’s helping supermarkets in a lot of ways – we have more pets, we’re using more toiletries at home,” said Citigroup’s head of research, Craig Woolford. “The supermarkets are in a very unusual and somewhat privileged position.”

However, Goldman Sachs expects food industry sales growth to slow to about 3.3 per cent in 2021 and 3.6 per cent in 2022, before returning to longer term trend growth of around 4.5 per cent from 2024, while retail economics and planning consultancy Urbis expects industry growth to average around 3 per cent a year for the next 10 years.

After adjusting for about 1.5 per cent space growth, this implies that same-store sales growth is likely to be constrained to between 1.8 per cent and 2.1 per cent over the next two years, Goldman Sachs analyst Andrew McLennan said in a recent report. That’s below cost growth of 2.5 to 3 per cent a year, putting margins under pressure.

If retailers continue to open stores at the same rate as they have in the past, and population per store falls, there is a growing risk of cannibalising sales from mature stores, reducing store productivity and incremental returns.

The shift to online shopping, which accelerated during the pandemic, has exacerbated this risk. Citigroup said that if online continued to grow rapidly, store economics would inevitably be impacted unless retailers closed stores or curtailed plans for new store plans.

Coles and Woolworths said they took a long term view of new store expansion, given the fact that new stores took months or years to plan and most supermarket leases were for 10 years.

However, Coles and Woolworths are likely to tweak new store plans for the next year or two, opening stores in suburban areas where sales are growing the strongest and putting the brakes on CBD and Metro or convenience stores, where sales are falling.

“We’ve certainly had a few meetings, more to understand what are the pros and what are the cons of [lower population growth],” Coles chief executive Steven Cain told AFR Weekend.

“There will be some growth corridor towns that will be more impacted, because that’s where a lot of the immigration would normally have taken place, but equally we’re seeing an opportunity in local suburbs,” Mr Cain said.

“It’s more a rebalancing … our view would be there’s going to be a lot of property opportunities over the next 18 months because of vacant sites,” he said.

Coles chief executive Steven Cain hopes the fact more people are working and eating at home will offset the impact of weaker population growth.  Luis Enrique Ascui

“We’re viewing it as a medium term change and we’re probably thinking more about the opportunities, albeit we do recognise some towns will be impacted as will some CBD areas – those CBD stores have still not recovered.”

Sales in some Coles CBD stores had fallen 50 per cent during the pandemic while sales in some ‘neighbourhood’ stores had risen 50 per cent, offsetting the impact of lower overseas visitors, students and migrants.

“The 1 per cent [reduction in population growth] you can’t see at the moment, over three years you would begin to see it [but] it’s very isolated in its impact, it’s not everywhere, and what we have to do is understand where [we] will continue to grow and where do we put more Coles Locals, where do we need to be cautious,” Mr Cain said.

Coles opened eight supermarkets in 2020 but closed five and plans to open between 15 and 20 supermarkets in 2021, including five stores that were delayed in 2020 due to COVID-19.

Woolworths opened six supermarkets in 2020 and plans to open between 10 and 20 a year over the next three to five years. It also opened a net 21 Metro stores in CBD areas in 2020 and plans to open 15 to 30 a year over the next three to five years, according to its annual results presentation.

“We’ll continue to invest in new store openings where we see the customer demand to support it,” said Woolworths chief executive Brad Banducci.

“We have taken a fairly conservative approach with new space in recent years and that won’t fundamentally change.

“We have a good inner-city footprint with our Metro stores already, so there will be a larger emphasis on neighbourhood stores over the next little while.”

Woolworths is currently using many of its stores as fulfilment centres for online orders.

Speaking to investors at Citi’s annual investment conference this week, Mr Banducci did not rule out closing stores if online grocery penetration reached 20 per cent of total sales in the longer term.

Woolworths CEO Brad Banducci said the retailer would favour opening neighbourhood stores rather than Metro stores. Louise Kennerley

Urbis retail director Sue Say said consumers rediscovered their neighbourhoods during the pandemic and shopped more at local stores, cafes and supermarkets. But inner city and CBD areas had been hard hit by the drop in international students.

“When all restrictions are lifted, there will be a bounce back to other shopping behaviours but local will remain a key theme and supermarkets will tailor their offer to the particular needs of these local markets,” Ms Say said.

“This will partly be supported by some workers continuing to choose to work from home (albeit for a limited number of days per week).”

“Those smaller format metro type stores are going to be difficult in this short to medium recovery period because they are very focused on the city dweller, she said.

In the medium term, the reduction in permanent migrants from countries such as China and India would likely lead to slower population growth in previous growth corridors such as Melbourne’s western and south eastern suburbs, Sydney’s western suburbs and Brisbane’s middle suburbs.

“If [retailers] have stores where they’ve gone in early because they want a foothold and want to establish themselves as the population grows, they are going to have a longer establishment period until residential sales pick up,” Ms Say said.

While population growth will slow in the short-to-medium term, it is likely to exceed that in other developed countries in the longer term, underpinning food industry growth.

“We’re still very excited about the prospects for Australia,” said Mr Cain. “We think we’re a lucky country that’s fared better than almost anywhere else so far and we think long term the population will continue to grow faster than most other places because Australia is a great place to be.”