Supermarket giant Coles has said the higher cost of living is starting to bite for some customers.
During its full-year results presentation, chief executive Steven Cain said some shoppers are starting to buy fewer or cheaper products.
"Maybe up to 20 per cent of consumers … are obviously finding it tough," he said.
But many households with secure jobs and savings are still spending freely.
"What we've seen in the current quarter is, for the first time, we're seeing significant increases in transactions but we're also seeing reductions in baskets as well," Mr Cain added.
He explained there also may be a delayed impact once more households come off fixed-rate mortgages.
Suppliers request price increases
Coles said inflation in food items jumped to 4.3 per cent in the fourth quarter of the financial year, taking the yearly number to 1.7 per cent.
It noted that a number of suppliers requested price increases.
Bakery goods were impacted by higher wheat prices, while fresh fruit and vegetables were in short supply due to widespread and repeated flooding in south-east Queensland.
Iceberg lettuces made headlines earlier in the year, when prices rose to more than $10.
But the Coles boss said fresh food prices are starting to moderate and lettuces are back down to around $3.
"For those of you who like a complete burger or caesar salad, I'm delighted to announce the return of in abundance (as Curtis Stone would say) of the iceberg lettuce to Coles at around $3," Mr Cain said.
"We have locked the price of more than 1,100 products across supermarkets and online until at least the 31st of January 2023 and have begun lowering prices on an additional 500 products."
However, VanEck's head of investments Russel Chesler said Coles would generally be able to pass on price increases to maintain, and even increase, its profit margins.
"While inflation may moderate in the next few months, with a 70 per cent chance of La Nina expected to return and overall inflation remaining high, food inflation is unlikely to go away any time soon and will remain elevated," he warned.
"With continuing food inflation, supermarket margins are expected to remain at their current levels, or possibly widen further in the short term.
"Coles is a fortunate position of benefiting from inflation, at least in the short-term. Reflecting this, supermarket margins improved substantially to 26.3 per cent from 25.9 per cent a year earlier.
"Australian households are cashing up, and they want to spend and, importantly, they have to spend at supermarkets."
Coles profit edges up
Coles reported a full-year net profit after tax of $1.05 billion, up 4.3 per cent on the previous year.
Revenue was up 2 per cent, to $39.7 billion.
But inflationary pressures are also hitting the company, with higher wages, rent and capital costs.
COVID-19 related costs totalled $240 million for the year, up from $130 million last year, mostly due to staff absences.
Coles will pay out a fully franked final dividend of 30 cents per share, taking the total dividend per share to 63 cents for the year.
The company's shares fell 4.6 per cent to $17.84.
However, Mr Chesler is optimistic that the company will weather any economic downturn better than most.
"Coles could be an effective defensive stock for portfolios as we all need to buy food, irrespective of how the economy is doing," he concluded.
