Coles will 'keep a lid on rising prices', says managing director Steven Cain

Sue Mitchell
October 31, 2018
AFR
Coles managing director Steven Cain plans to “keep a lid” on food prices, saying the retailer will only grant supplier requests for price rises when they are justified by rising costs.
Mr Cain, who took the helm from John Durkan in September, has indicated Australia’s second-largest food retailer will continue to take a tough stance on suppliers seeking to raise prices, despite growing calls for a royal commission into the major supermarket chains’ treatment of suppliers.
“Our job is to keep a lid on rising prices,” Mr Cain, former managing director of Metcash’s supermarkets and convenience business, told The Australian Financial Review.
“We’re not going to change our strategy with regard to price increases.
“It’s been [the case] for quite some time that if suppliers can justify a price increase then we’ll accept it. There’s a team at Coles that does nothing else but look at commodity prices and work out what impact that should have on the cost of goods and that will continue going forward.
After playing hardball with suppliers for 10 years, Coles and Woolworths are under increasing pressure from suppliers to approve price rises as the drought pushes up the price of commodities including wheat and milk, compounding pressure from rising fuel and utility costs.
No more fat to cut
Australian Food & Grocery Council chief executive Tanya Barden told the Financial Review in October that suppliers had been cutting operating costs to offset rising energy, labour and transport costs but could no longer afford to absorb the latest pressures.
“There’s not really any more fat to cut,” Ms Barden said.
Mr Cain said food prices rose 3 to 4 per cent a year before Coles was acquired by Wesfarmers in 2007 and cracked down on supplier-driven inflation.
“Before Coles came along, suppliers were in the land of 3 to 4 per cent price increases on an annual cycle – that just doesn’t happen any more,” he said.
“What it has forced everyone to be is more efficient in Australia and it’s made the supply base more innovative because to grow you have to innovate and value add with your products. In my opinion it’s been a very positive thing.
“Coles has brought down prices by 10 per cent but if you work out the gap between 3 and 4 per cent [annual inflation] and the deflation that’s happened the actual number could be nearer to 30 per cent.”
Price cuts had reduced the cost of the weekly grocery shop for consumers and limited the impact of discounters such as Aldi and Costco.
Key value items
Mr Cain said Coles would continue to cut prices as part of the retailer’s shift towards everyday low pricing and away from promotional discounting.
“We aim to be better value going forward but it needs to be engineered in,” he said.
In a report last month, UBS said Woolworths was modestly cheaper than Coles on key value items after sinking $1 billion into prices over the last two years.
Coles outpaced Woolworths for the first time in almost two years in the September quarter, with same-store sales rising 5.1 per cent, buoyed by the Little Shop campaign and free plastic bags.
Woolworths will release first-quarter sales on Thursday. Analysts believe Woolworths’ same-store food sales in Australia grew between 1.3 per cent and 1.5 per cent, a slowdown from 3.1 per cent in the June quarter and 4.9 per cent in the year-ago period.
But Woolworths is expected to regain the lead in the December or March quarters. Citigroup, for example, expects Woolworths’ same-store food sales to rise 2.7 per cent in the December quarter and Coles’ same-store sales to rise 2.6 per cent.
“First quarter 2019 was a hiccup for Woolworths and its sales outperformance will resume in the second quarter,” Deutsche Bank analysts said.