The retail sector has made its peace with a hard truth: Growth through expansion is off the table for most, and the year will be won or lost in operations – forecast accuracy, tighter ranges, supplier stability, inventory discipline.
The numbers back it. Sales across Australian retail rose 2.8 per cent in 2024-25, but operating profit before tax rose only 1.5 per cent, to $38.8 billion – profit grew at a little over half the rate of revenue, and KPMG’s Retail Health Index shows the gap widening into 2026.
So the consensus is right about where the battle is. What it misses is where the margin is actually hiding, and why the fastest movers often end up worse off than those who move deliberately.
The instinct is to cut the obvious
Retail boards under margin pressure react the same way: Revenue softens, margin shrinks, and the first move is to cut headcount and marketing. They are the easiest lines for finance to defend to the board. It’s understandable. It also misses the bigger picture.
Cutting frontline hours protects the quarter’s P&L while eroding conversion, just as price-sensitive customers are drawn to discount online retailers on value alone. Cutting marketing spend saves cash but strips away demand visibility when knowing what customers want matters most. Neither cut addresses where the money is actually leaking.
Where the margin is actually leaking
That leakage sits deeper in the operating model, and in our experience it’s largely unmeasured at board level. Four places we keep finding it.
Aged stock: Inventory sitting more than 90 days does double damage: it ties up working capital needed for the next buy, and guarantees a deeper markdown later than if caught early. APQC’s cross-industry benchmarking puts median inventory carrying cost at 10 per cent of value a year – 5 million dollars of aged stock costs half a million a year to hold, before a dollar of markdown. Far fewer retailers can tell a board what’s ageing past 90 days by line than can quote their overall turn.
Supplier terms: Nearly every renegotiation stops at unit price. Payment terms, rebates and order-quantity flexibility are usually left on the table – not because suppliers won’t discuss them, but because nobody asked. The Payment Times Reporting Regulator puts average retail payment terms at 31 days, but at the 95th percentile they stretch to 77 days, against 64 industry-wide. The ACCC’s supermarket inquiry found rebate arrangements “opaque, complex and not well understood by many suppliers” – a fair sign the board pack doesn’t carry the number either.
Channel-level profitability: Many retailers report profit by category or brand with real precision, but not by fulfilment channel. Marketplace and buy-online-pick-up-in-store volume can look healthy on gross margin and be underwater once commissions, fulfilment and returns are properly allocated. Woolworths paid $217.4 million for 80 per cent of MyDeal in 2022 and closed it in 2025 at $90 to $100 million in cash costs plus roughly $45 million in impairment; Wesfarmers wound down Catch over the same period. Both had full visibility of their own numbers and still got it wrong.
Returns: Returns are the leakage most often filed under customer service, and where the numbers are weakest – no Australian order-level series is published by anyone. The more useful exercise is to build the number: Freight both ways (about $20.78), plus $10 handling, plus a markdown of around $16 on an $80 basket – roughly $47 a return. For a retailer processing a million orders a year, every point of return rate is 10,000 returns and about $470,000 of cost. Easy-returns availability has fallen from 97 per cent in 2018 to 58 per cent.
Where to start looking
None of these four is unusual. They’re structural, board-visible once someone looks, and fixable without touching the staff who drive conversion or the marketing that drives demand.
A board can ask its next pack for three numbers: Inventory ageing past 90 days by category, gross-to-net profit by fulfilment channel, and the total cost of returns over the past year. If the third isn’t readily available, that’s the answer in itself.
That’s the distinction that matters: Not cost versus no cost, but cost versus the cost of doing business. The retailers who come through this year in the best shape will be the ones with the discipline to tell the two apart before the next markdown cycle makes the decision for them.
About the author: Damien Hodgkinson is a principal at Olvera Advisors, a Sydney-based restructuring, turnaround and advisory firm working with retail boards, owners and lenders on margin recovery, working capital and operating model diagnostics. He has advised mid-market and listed retail businesses through periods of margin pressure and operational transformation.
