Consumer Staples

Macquarie's top picks for the slowing Australian consumer

Tue 27 Jun 23, 2:25pm (AEST)
Aerial view of Melbourne city
Source: iStock

Key Points

  • Macquarie says the consumer is beginning to falter under the rising cost of living
  • The investment bank suggests there are significant headwinds emerging and a tougher environment has finally arrived
  • Macquarie says it prefers consumer staples like Coles and Endeavour Group over retail stocks

The Australian consumer has been remarkably resilient to high inflation and rising interest rates over the past year, but we may have finally reached the tipping point. Australians emerged from lockdowns cashed up and ready to spend, but that savings buffer might finally be gone if latest data is any indication.

While consumer confidence (based on the Westpac-Melbourne Institute Consumer Sentiment Index) rose slightly in June, this is off the back of a 7.9% plunge in May, and confidence around jobs has also started to fade – interesting given the otherwise still tight labour market. 

consumer confidence
Source: ANZ-Roy Morgan

Off the back of a drop in consumer spending in April, a number of big retailers have reported declining earnings, such as David Jones, Best & Less (ASX: BST), Treasury Wine (ASX: TWE), Retail Food Group (ASX: RFG) and Premier Investments (ASX: PMV).

In its latest research note on the Australian Consumer Sector, Macquarie Group argues that this points to a significant shift in consumer behaviour and that we are finally seeing the rising cost of living drag on spending. The investment bank suggests there are significant headwinds emerging and the tougher environment tipped for over a year has finally arrived.

The trends Macquarie sees in the current market

Discretionary spend is always one of the first areas for people to start their cuts in tough economic times. Macquarie notes it has been in contraction for almost a year now.

discretionary spend
Source: Macquarie

Economists have long tipped the impact of inflation and rising interest rates to be felt more by younger demographics who are more likely to experience mortgage and rental stress, with lower savings buffer. Older demographics were also anticipated to benefit from an income boost via rising interest rates. The data plays this out. Spending volumes have declined for those aged 18-54 years, while remaining above inflation levels for those aged 55 years and above.

The biggest slowdowns have been seen in electronics, hardware and furniture. Macquarie also notes that spending on consumer staples has largely remained stable with some slight growth to reflect inflation.

The search for value has also commenced in the consumer sector. For example, Wesfarmers noted that it has seen consumers trading down from higher-end stores into Kmart. This reflects the pattern David Jones has experienced with a slowdown in customer traffic and sales in homewares and big ticket purchases down.

Macquarie’s top picks in this environment

“In this environment, we prefer consumer staples Coles (ASX: COL) and Endeavour Group (ASX: EDV)) over consumer discretionary (JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN)),” wrote Macquarie analysts in their 23 June 2023 report.

Macquarie identifies the supermarkets as having the lowest risks in a consumer slowdown due to the lower likelihood that consumers will materially cut down on food staples. Based on Market Index’s broker consensus reports, Coles is largely viewed as a BUY by other brokers.

“COL is well-placed in the current environment with its value-positioning, which should drive market share gains,” wrote Macquarie analysts.

Source: Macquarie
1 year price chart for COL v S&P/ASX 200. Source: Market Index, 27 June 2023

Other companies it tips to OUTPERFORM as follows:

  • Endeavour Group (ASX: EDV), noting some pressure on its hotels business and risks created by changing gaming regulations.

1 year price chart for EDV v S&P/ASX 200. Source: Market Index, 27 June 2023
  • Treasury Wine Estates (ASX: TWE), which has some significant margin improvement for FY23-FY25 built into expectations.

1 year price chart for TWE v S&P/ASX 200. Source: Market Index, 27 June 2023

It has a NEUTRAL rating on Harvey Norman, Wesfarmers (ASX: WES), Dominos (ASX: DMP), Collins Food (ASX: CKF), Metcash (ASX: MTS) and Woolworths (ASX: WOW), while holding an UNDERPERFORM rating on JB Hi-Fi (ASX: JBH).

This article was first published for Livewire Markets on Tuesday, 27 June 2023.

Written By

Sara Allen

Content Editor

Sara is a Content Editor at Livewire Markets and Market Index. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and Macquarie Group. She also holds a degree in psychology which drives a continued fascination with how human behaviour drives and is driven by investments and market activity.

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