After a bumper March quarter fuelled by panic hoarding, sales growth at Coles and Woolworths is expected to remain elevated for more than a year as consumers eat more at home.
Analysts say the coronavirus pandemic is likely to have a long-lasting impact on consumer shopping patterns. Even when pantry stuffing eases and stage-3 restrictions are lifted, cautious consumers are likely to cook more at home, order more online and keep their pantries better stocked.
Woolworths and Coles, and to a lesser extent Metcash's IGA retailers, will be the major beneficiaries of these trends, taking market share from the cafe and restaurant sector and doubling the size of their online businesses.
Evan and Partners analyst Phil Kimber estimates that about $8.8 billion in sales from the $47 billion cafe, restaurants and takeaway food service sector will shift to the $114 billion supermarket and grocery sector.
This will boost supermarket and grocery sales growth by at least 1.9 per cent in 2021, if 25 per cent of cafes, restaurant and takeaway sales shift to the supermarket channel, and by 3.9 per cent if 50 per cent of sales switch to supermarkets.
In March alone, Mr Kimber believes underlying supermarket sales rose 40 per cent (up from 4.5 per cent in January and February) due to pantry filling and another 5 per cent from channel switch. This could boost March quarter sales by 20 per cent.
While the initial panic hoarding is starting to moderate "it is becoming evident that retailers’ sales remain very strong as lockdown / social distancing measures [are] driving a material shift from out-of-home consumption to in-home consumption," he said.
"We expect grocery players will continue to benefit from the shift from out-of-home consumption to in-home consumption over the remainder of 2020 and well into 2021 (due to lockdowns and health concerns)."
On Monday, the major grocery chains started controlling the number of customers entering and exiting stores to help shoppers practise social distancing in the run up to Easter.
Coles, which owns Liquorland, Vintage Cellars and First Choice, and Woolworths, which owns Dan Murphy's and BWS, and wholesaler Metcash are also set to take market share in the packaged liquor market, even when hotels and bars reopen.
Mr Kimber estimated a 35 per cent switch from on-premise liquor would add about 8 per cent to liquor store sales.
"Whilst liquor is more discretionary than food so switching from out-of-home to in-home consumption will probably be lower, the respective size difference means liquor retailer (and thus liquor wholesaler) sales are likely to be more positively impacted by channel shift in percentage terms," he said.
Macquarie analysts believe consumers are likely to keep their pantries better stocked in future after experiencing shortages of essentials such as toilet paper, tissues, pasta, and rice in recent weeks.
"Holding more product at home is likely to be a key change with destocking by consumers post-crisis unlikely, in our view," they said.
"The average household held approximately one week’s worth of food 30 years ago; however, this had fallen sharply over the past few decades. The stock shortages in supermarkets over the past few weeks are likely to be remembered for some time."
Impact on profits uncertain
The impact of the shift in consumer shopping habits on supermarket profits is more difficult to estimate.
Analysts believe Coles and Woolworths' gross margins are likely to fatten as the market becomes more rational, with fewer promotions and less deflation as prices rise due to cost of goods increases.
However, operating costs will also rise as retailers employ more staff in-store, including security guards and cleaners, in distribution centres and online to meet demand.
"We see the material benefit to top line continuing past this year, however, increased labour, a shift to online, and higher stock movements are likely to partially offset revenue growth," Macquarie analysts said.
Margins will also be diluted slightly by the shift to less-profitable online retailing.
Online shopping accounted for about 4 per cent of grocery sales before the pandemic but reached about 9 per cent before both Woolworths and Coles were forced to suspend online orders for all but vulnerable shoppers to stabilise stock levels, Macquarie analysts said.
"We believe increased health concerns may result in sustained increase of online sales orders post the virus," they said.
This will potentially dilute margins in the short term because online margins are estimated to be around 0.5 per cent, well below Woolworths' food margin of around 7 per cent and Coles' food margin of around 5.6 per cent.
Macquarie analysts believe Coles and Woolworths' online margins could reach 2.5 per cent through efficiency gains as their businesses reach scale.
Online grocery penetration could reach almost 14 per cent by 2023, they said.
Australian Competition and Consumer Commission chairman Rod Sims said last week the competition regulator did not want the crisis to lead to reduced competition in the food and grocery sector to the detriment of consumers and independent businesses.