Coles Warns Construction Woes May Hike Grocery Prices

Fiona Mackenzie, the group’s head of property, warns that skyrocketing construction costs are hindering Coles’ ambitions to build new supermarkets amid a population surge, potentially leading to higher grocery prices.

Addressing developers at a Melbourne industry lunch, Mackenzie highlighted the growing challenges. Driven by a departure from Victoria, her team identified several promising locations in southeast Queensland.

“We’ve seen strong population growth in Brisbane, but we’re struggling to build anything,” Mackenzie said. Many supermarket projects are based on deals made five to seven years ago, and soaring construction costs have rendered those deals unviable.

“We need to build great supermarkets, but the cost increases are a major hurdle,” she explained. The recent immigration surge has exacerbated the issue, with Coles falling behind its competitors in securing new sites.

“We’ve had a slow period, but we’re now starting to invest,” Mackenzie said.

Coles’ quarterly update underscores the problem. Between January and March, the company opened only two new supermarkets and closed one, barely growing its network to 851 stores. In contrast, Woolworths, with over 1000 supermarkets, showed similar minimal growth.

This issue is critical for Coles, as 30% of its business growth relies on new supermarket openings. These new spaces are necessary for them to increase the prices of staples like milk and eggs, which is risky in the current economic climate.

To overcome these obstacles, Coles is exploring various strategies, such as joint ventures with developers, capital partnerships, or outright asset acquisition to ensure project completion.

“There’s no one-size-fits-all solution. We evaluate each deal on its merits, adjusting our approach as needed to secure project delivery,” Mackenzie said.

She also acknowledged past shortcomings in partnering with developers, aiming to improve these relationships.

“We haven’t always been the best partners. We’ve been slow and indecisive, but we’re working hard to change that,” she admitted.

Mackenzie and Charter Hall Office CEO Carmel Hourigan noted the strong investor interest in convenience retail despite the challenges. Japanese investors see value in this sector for its reliable returns and minimal capital expenditure.

Mackenzie added that Coles is accelerating divestments to capitalize on this demand. The company is determined to overcome the current challenges and continue its growth trajectory.

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