New Zealand Retail Recovery: Navigating Caution with Defensive Plays

The New Zealand retail sector faces a paradox: consumer confidence has stabilized near multi-year lows, yet certain segments are showing resilience. Recent ANZ-Roy Morgan data reveals a cautious outlook for retailers, with stagnation in major purchase sentiment undermining broader recovery hopes. However, this environment offers opportunities for investors to capitalize on defensive retail plays—specifically home improvement and discount retailers—that are weathering the storm better than their peers.

Consumer Confidence: A Fragile Foundation

The ANZ-Roy Morgan Consumer Confidence Index for New Zealand dipped to 96.0 in January 2025, marking a 4-point decline from December's 100.2—a symbolic high not seen since mid-2023. The key culprit? A 15-point plunge in households' willingness to buy major household items, a critical gauge of retail demand.

This volatility underscores a persistent divide between current economic pessimism and future optimism. While inflation expectations remain stable at 3.9%, the drop in major purchase sentiment signals that households are prioritizing caution over discretionary spending. Retailers reliant on big-ticket items—such as appliances or furniture—are particularly vulnerable.

The Retail Sector: A Mixed Picture

The stagnation in confidence has created a bifurcated retail landscape:

1. Discount Retailers Thrive:
   Companies offering affordable, everyday essentials or flexible payment plans are outperforming. For instance, discount chains like The Warehouse Group (NZX: TPG) have reported stronger sales in lower-cost categories. Their focus on price-sensitive shoppers aligns with the ANZ-Roy Morgan data, which shows that households are “buying less, but more often” in staple goods.

2. Home Improvement Defies the Downturn:
   While major purchases falter, demand for home maintenance and upgrades remains robust. The ANZ-Roy Morgan report notes that house price inflation expectations rose to 3.7% in December 2024, suggesting households are investing in existing properties rather than buying new. This bodes well for retailers like Bunnings Warehouse (part of Wesfarmers, ASX: WES), which caters to DIY projects and small-scale renovations.

3. Weakness in Discretionary Retail:
   Luxury or non-essential retailers face headwinds. The “good time to buy” indicator for major items has oscillated between -16% and -38% since late 2023, reflecting a reluctance to commit to large expenses. This sector's recovery hinges on a sustained confidence rebound that appears elusive.

Regional Disparities Complicate the Outlook

The ANZ-Roy Morgan data also highlights stark regional divides. Wellington, for instance, has consistently lagged in confidence, with households there showing lower inflation expectations and reduced purchasing intent. Investors should favor retailers with strong regional diversification or those targeting resilient urban centers like Auckland, where demand for essentials and home improvement remains steady.

Investment Strategy: Play Defense, Avoid Speculation

The data suggests that selective, defensive plays are the safest bets:

• Underweight Discretionary Retail: Avoid stocks tied to luxury goods or big-ticket items until confidence improves meaningfully.
• Overweight Discount and Home Improvement Sectors:
• The Warehouse Group (TPG): Leverages its omnichannel presence and affordable product mix.
• Bunnings (WES): Benefits from DIY trends and the shift toward home maintenance over new purchases.

• Countdown (part of Foodstuffs NZ): Strong in essential groceries, a sector with inelastic demand.

• Monitor Inflation and Policy Shifts: Stable inflation expectations (now at 3.9%) are a positive, but any uptick could pressure retailers. Watch for RBNZ policy moves and their impact on consumer borrowing costs.

Conclusion: A Sector of Two Halves

New Zealand's retail recovery is uneven, driven by cautious consumers and regional imbalances. While the overall sector faces headwinds, defensive players in discount retail and home improvement are positioned to outperform. Investors should prioritize companies with resilient cash flows, price-sensitive offerings, and geographic diversity. The ANZ-Roy Morgan data underscores a need for patience—and selective bets—in this challenging environment.

Final Takeaway: Focus on defensive retail stocks with strong everyday demand. Avoid speculating on a broad recovery until confidence consistently exceeds 100—a level last seen briefly in late 2024.