INFLATION HAS ALREADY HIT 8PC AT SUPERMARKETS

17/10/22; AFR

Food inflation is rising at a faster rate than expected across fresh and dry grocery foods, with multiple price rises by suppliers this year being passed on to shoppers, supporting sales growth at supermarket giants Coles Group and Woolworths throughout 2023.

A key finding in the UBS consumer team’s latest supermarkets research is that the rate of food price rises has stepped up markedly again in the September quarter, with fresh food up 9 per cent, and dry goods up 7.7 per cent. Woolworths’ food inflation rate is slightly higher than Coles.

“This is a reminder that food inflation is an ongoing point of pressure on the entire value chain, suppliers and retailers, that is being passed to consumers,” UBS head of consumer research Shaun Cousins said.

Coles’ overall inflation was sitting at 8 per cent at the end of September quarter, up from 5.5 per cent in the last quarter of 2022, according to UBS. Woolworths’ overall inflation was 8.3 per cent year-on-year, and up from 5.6 per cent in the June quarter of 2022.

Mr Cousins said with the upcoming quarterly sales results from Coles on October 26 and Woolworths on November 3, real, like-for-like sales will decline for both, stripping out the impact of inflation. But that will reflect surging grocery sales in the first quarter of 2022 due to COVID-19 lockdowns, rather than consumers baulking at the latest higher prices.

“It’ll be the first time in a while we’ve seen Woolworths’ online sales moderate as they’ve been tremendously successful in the same quarter last year,” Mr Cousins said. “Woolworths’ online investments over multiple years really came to the fore and positioned the company to continue to gain market share.”

Mr Cousins flagged that with shoppers heading back to malls, Coles should do well, with the lack of online investment – which has previously hurt it – becoming less of a headwind.

Yet the challenge for Coles remains that its rival has a well-refurbished store network, as well as an online advantage, while overall strategy execution remains better at Woolworths, he said. The largest grocery retailer in Australia also has a strong loyalty program.

“In coming quarters, investors will be able to see more clearly from Coles’ results how much these factors have weighed on sales over the past few years, or was it down to Coles’ execution,” Mr Cousins said.

UBS has a “neutral” rating on both big chains, with Coles trading at a one-year forward P/E multiple of 20.4 times earnings and Woolworths at 24.2 times. Wholesaler Metcash’s one-year forward P/E multiple is 12.7 times earnings.

Value-conscious consumers are likely to look to discount chain Aldi, Mr Cousins added. However, he warned supply chain challenges remain a headwind for the entire sector. This would particularly be the case for Aldi, since more of its products are exposed to international supply lines.

UBS has a “buy” on Metcash and its independent operators IGA, which is holding its investor day in Adelaide on Monday and Tuesday. This will be the first time new CEO Doug Jones will set his full agenda for the retailer.

“The independents invested in price and invested in their stores, so we think there’s a prospect of Metcash keeping more of the market share they’ve gained during COVID than expected,” he said.

MST Marquee head of consumer research Craig Woolford also has a “buy” on Metcash, saying the company has improved its business over the past three years, with its independent retailers more profitable.

Mr Woolford expects the focus of the investor day to be about initiatives that drive sales, while updating the company’s IT and distribution centres is likely to be important. He will also look for initiatives to drive more store refurbishments.

Longer-term, Mr Woolford said Metcash will need to outline its plans to develop private label, any consideration of expansion into food service or pharmacy, and how the business will compete online.

Metcash supports over 1600 stores including the IGA and Foodland brands. It also operates the Independent Hardware Group, and has a majority stake in Total Tools. It is the second‑largest player in the market supplying independent liquor stores including Cellarbrations, the Bottle‑O, IGA Liquor and Porters Liquor.