Coles has pointed to price rises in baked goods, some vegetables and processed foods as inflation continues to bite and suppliers request price increases to cover their rising costs.
The supermarket giant announced a $1.04 billion annual profit on Wednesday, and said global problems such as the war in Ukraine and natural disasters like the NSW floods had caused ingredients like wheat and soft vegetables to rise in cost.
Processed food items are also likely to rise to cover the rising cost of labour, freight and packaging.
The supermarket giant announced a $1.04 billion annual profit on Wednesday, and recently announced a price freeze on 1,168 products until early next year.
Coles CEO Steven Cain flagged price drops in another 500 products, including iceberg lettuce which recently hit notorious highs of $12 a head.
Cain said consumer spending had remained strong but many customers had shifted to frozen or canned, rather than fresh fruits and vegetables, as well as a preference for cheaper cuts of meat.
Cain said a neat example was a shift from beef mince to cheaper chicken and pork varieties.
It’s also notable that Coles $1 pasta has never been more popular.
While many consumers were choosing lower-cost or generic-brand products to save money on their weekly shop, Coles said it had no intention to cut back on more expensive or premium brands in store as a result.
Why are prices rising?
Floods in NSW particularly affected prices for soft vegetables such as tomatoes, capsicums and broccoli, which were partly offset by lower prices for bananas and grapes.
Packaged-grocery prices are also rising as “various supply chain costs” bite, including wages, packaging, freight and raw ingredients.
“With Australian families facing increased pressure on household budgets, our commitment to delivering trusted value remains more important than ever,” said Cain, who was awarded an $890,000 cash bonus for the 2022 financial year.
Cain said the availability of local produce was “steadily improving” after recent floods in NSW, while the “international supply chain remains more volatile” amid ongoing disruptions and the Ukraine war.
Supplier price-increase requests are still about five times pre-COVID levels, with some suppliers now asking to lift prices for the second, and even third, time as their cost bases rise.
However, despite higher prices, demand among shoppers remained strong, with sales volumes holding up and evidence of customers moving to cheaper goods evident only among the poorest of Coles’ customers.
But, unlike three months ago, Coles is now seeing the impacts of trading being down on its shelves.
Where Coles’ total like-for-like supermarket sales rose 2.6 per cent across the year (and 3.7 per cent in the fourth quarter), sales of $1 pasta packs were growing at double-digit rates.
Cain emphasised that these were not huge moves and that, generally, Coles was seeing a return to pre-COVID shopping trends, where customers shopped more frequently, with smaller basket sizes, at the big shopping centres where Coles had a greater presence than Woolworths.
Cain also pointed out that consumer spending across the broader economy was strong.
Indeed, one of his caveats about the outlook for supermarket sales was that people were increasingly returning to eating out, reversing the COVID-era trend of dining at home.
The fact that Coles sales grew by less than inflation in the fourth quarter spoke to this shift.
But with suppliers clearly looking to recoup cost increases and Coles facing a range of inflationary pressures itself, the potential for inflation to keep shifting customer behaviour was very real.
These early signs of trading being down might also give the Reserve Bank (RBA) pause.
The big danger for RBA governor Philip Lowe is that inflation expectations become embedded, which leads to a situation where consumers feel they need to push for ever-higher wages, and businesses need to keep pushing prices higher.
The combination of floods and supply-side inflation means it’s hard to tell whether customer belt tightening is temporary or more permanent, but Lowe, and of course Cain, will be watching closely.
Cain was also monitoring attitudes to petrol prices, with the former government’s excise cut due to expire at the end of September.
Fuel volumes in the Coles Express petrol and convenience business will likely be affected, as will general spending.
Cain said customers often filled up to a budget when fuel prices were high - spending, for example, $20 or $50 rather than filling their tank - and it was possible this behaviour would return.
Cain’s strategy of building so-called “exclusive to Coles” sales over the past five years (the bulk of which are home brand products), towards a target of 40 per cent of total sales, should help in this inflationary environment.
Exclusive-to-Coles sales rose 4 per cent to $11.4 billion in 2022, to about 32 per cent of total sales.