What Coles’ $1 pasta tells us about inflation as the supermarket giant’s net profit rises

Supplier requests for price increases remain about five times pre-COVID-19 levels, with some suppliers requesting price increases for a second and even third time as their cost bases increase.

Cain says that Coles is working with its supplier base to protect consumers where possible. The prices of 1,168 products have been frozen until the end of January, and those of another 500 products are expected to fall.

change of habits

But unlike three months ago, Coles is now feeling the impact of the downturn on its shelves. Where its total supermarket comparable sales increased by 2.6% over the year (and 3.7% in the fourth quarter), sales of its range of $1 pasta packs are growing at double-digit rates.

There has also been a subtle shift from fresh fruits and vegetables to canned and frozen options, with customers turning away from more expensive cuts of meat. Cain says a good example is the switch from ground beef to cheaper varieties of chicken and pork.

Cain wants to be clear: These are not big moves, and in general, Coles is experiencing a return to pre-COVID-19 shopping trends, where customers shop more often with smaller baskets in the big malls where Coles has a bigger presence than Woolworths.

And he points out that consumer spending in the overall economy is strong. Indeed, one of his warnings about the prospects for supermarket sales is that people are increasingly turning to eating out, reversing the pandemic-era trend of dining at home. The fact that Coles sales rose at a rate less than inflation in the fourth quarter speaks to this change.

But with providers clearly looking to recoup cost increases and Coles facing a variety of inflationary pressures, the potential for inflation to continue changing customer behavior is very real.

These early signs of trading lower could also give the Reserve Bank pause. The big danger for Governor Philip Lowe is that inflation expectations become embedded, leading to a situation where consumers feel they must push for higher and higher wages and businesses must keep raising prices.

The combination of flooding and supply-side inflation means it’s hard to tell if customers’ belt-tightening is temporary or more long-term, but Lowe and, of course, Cain will be watching closely.

Costs reduction

Cain is also monitoring attitudes toward gasoline prices. The Morrison government’s excise tax cut is due to expire at the end of September, and fuel volumes at Coles Express’ gasoline and convenience business are likely to take a hit, as is overall spending. Cain says customers often fill up to a budget when fuel prices are high (spending, say, $20 or $50 instead of filling up their tank) and this behavior may return.

Cain’s strategy of building so-called “Coles-exclusive” sales over the past five years (most of which are private-label products) toward a target of 40 percent of total sales should help in this inflationary environment. Coles-only sales increased 4 percent to $11.4 billion in 2022, to about 32 percent of total sales.

Coles’ plan to cut $1 billion from business costs by fiscal 2024 remains intact; another $230 million from initiatives flowed in in 2022, with the biggest savings coming from changes to customer service processes that reduced wages and led to better logistics and better handling of waste and theft.

Finally, Cain’s big automation push is also still going strong; he says the plan to open four major facilities in 2023 and 2024 is arguably more ambitious than any other retailer in the world.

But while these facilities should be open as scheduled, Coles will spend another $270 million to get them up and running, in part due to delays and inflation from COVID-19, and in part due to changes to the original plans they have in mind. account for the fact that Coles e-commerce sales are 2.7 times higher than before COVID-19.

Landing those four sites on time and on budget (now increased) will be no mean feat.

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