Australian Retail Profit Lags Sales as Hidden Operating Costs Bite Margins

Australian retail sales rose 2.8 per cent in the 2024-25 financial year, but operating profit before tax grew just 1.5 per cent to $38.8 billion as margin pressure intensified.

Data from KPMG’s Retail Health Index shows that gap widening further into 2026, forcing boards to rethink conventional cost cutting.

Retailers confronting squeezed margins often reduce store staff hours and trim marketing budgets. Advisory firm Olvera Advisors found these immediate cuts routinely fail to stop profitability leaks, which sit deeper in inventory management, returns handling and supplier contracts.

Holding Costs and Inventory Drag

Aged stock sitting in warehouses past 90 days creates an unmeasured drag on working capital. Benchmarking from APQC puts median inventory carrying costs at 10 per cent of value each year. A business holding $5 million in aged stock absorbs $500,000 annually in holding expenses before accounting for final clearance markdowns.

Supplier renegotiations also remain narrowly focused on unit pricing rather than structural terms. Data from the Payment Times Reporting Regulator shows average retail payment terms at 31 days, though the 95th percentile extends to 77 days. Rebate structures frequently remain poorly tracked at the executive level, echoing findings from the Australian Competition and Consumer Commission’s supermarket inquiry.

The Multi-Channel Fulfilment Trap

E-commerce fulfilment and customer returns represent another growing source of unallocated operational losses. Total costs for a single product return average roughly $47 on an $80 basket, factoring in $20.78 for two-way freight, $10 in handling and an average $16 markdown. For a merchant processing one million orders annually, each single percentage point in return rate drains approximately $470,000.

Similar accounting oversights previously hit Australia’s largest conglomerates. Woolworths paid $217.4 million for an 80 per cent stake in marketplace MyDeal in 2022 before shutting it in 2025 at a cash cost between $90 million and $100 million, alongside a $45 million impairment charge. Rival Wesfarmers similarly wound down its Catch marketplace after channel-level operating costs outpaced unit economics.

Retail operators now face pressure from commercial lenders to present granular reporting on stock ageing past 90 days, net channel profitability and full-year return costs ahead of the next seasonal markdown cycle.