Supermarket chain Coles had good and bad news for households on Wednesday after posting a 4.3 per cent uplift in annual profits to $1.04 billion.
The bad first – Coles hiked prices 3.8 per cent in the six months to June, with essentials like baked goods and veggies being the hardest hit.
Tomatoes, capsicums and broccoli were among the price rises called out by Coles due to flooding in New South Wales, while global wheat prices were blamed for increased bakery prices.
Packaged groceries, those aisles outside the fresh produce section, also had price rises as suppliers sought to recover rising costs.
Some suppliers want their second or third round of price hikes, which will work against Coles’ move to freeze inflation on more than 1100 products until January – alongside 500 price drops.
The good news is that there appears to be some relief on the horizon.
Coles chief executive Steven Cain, who will receive an $890,000 bonus in September, said easing produce prices in the coming months would help cost-of-living pressures on households.
Farmers start to recover
Iceberg lettuces came into stores at lower prices this week as farmers recovered from floods.
“There is a lot of product going to be coming through in the next few months from the whole farming community and I think that will help produce pricing and meat pricing,” Mr Cain said.
“We could be over some of the worst of what’s going on from an Australian farming perspective.”
But packaged groceries are a different story: Prices have spiked by 4.3 per cent in the three months to June.
Coles’ prices rose less than the wider market, with June-quarter grocery inflation reaching 5.9 per cent, according to the ABS.
University of Queensland professor and retail expert Gary Mortimer said Mr Cain is right to expect lower prices in coming months, with livestock numbers replenishing and growing conditions improving.
‘‘We’re already seeing leafy veg prices starting to fall,’’ Professor Mortimer said.
But the outlook for imported products like canned fish from Thailand, as well as tomatoes and pasta from Italy, is more bleak, he said.
Prices and profits rise
Profits rose 4.3 per cent on the back of a 0.42 percentage point uplift in gross margins – while prices rose 1.7 per cent over the whole year.
Investors will receive a 30 cent per share dividend, estimated to be $403 million. Executives will get more than $3 million in cash bonuses for the past financial year.
Mr Cain acknowledged a view among analysts on Wednesday that price hikes will underpin fatter profit margins at large supermarkets.
Some analysts said rising supermarket prices will prop up earnings as sales increase and higher costs are passed on to shoppers.
But Mr Cain said there are ‘‘a lot of costs’’ coming into Coles, citing a recent Fair Work Commission minimum wage increase in particular.
‘‘We can either put the price increases through at the full gross margin percentage, we can pass on the absolute price increase in dollars, or we can maintain the pricing,’’ Mr Cain told analysts.
‘‘People shouldn’t assume that the … gross margin percentage is going to remain stable or increase as a result of those things.
‘‘The reason why our gross margin has been improving … is due to strategic programs around smarter selling and strategic sourcing.’’
Two types of customers
Professor Mortimer broadly agreed with this view, saying he has ‘‘seen no evidence’’ supermarkets are using inflation to increase their profits.
‘‘The major supermarkets are still highly price competitive,’’ he said.
What’s interesting, however, is that different types of customers and their reactions to inflation are having varying effects on Coles’ profits.
Coles commercial and express boss Leah Weckert said low-income customers are ‘‘trading down’’ to cheaper products with lower margins, while other customers are still consuming premium products where margins are much larger.
‘‘We’re almost seeing a bifurcation, for customers where budget is important it’s [trading down] starting to happen,’’ she said.
‘‘But for customers that have secure jobs and good incomes, they’re still continuing to enjoy eating out, buying premium foods in the store, and have less regard for what they’re spending on the grocery bill.’’
