‘Supermarkets will do well’ as grocery prices rise

Food inflation looks set to bolster profits at Australian supermarket chains as analysts predict shoppers will have to brace for more price rises.

Consumer price index figures released last week put inflation at 6.1 per cent for the year, with food and non-alcoholic beverage prices jumping 5.9 per cent since the June 2021 quarter.

The figures prompted stock watchers to reaffirm predictions that retailers selling household staples will perform more strongly than those offering discretionary goods, such as electronics, over the next year.

“It is generally accepted that supermarkets will do well in FY23 with consensus factoring in 7 per cent and 13 per cent [earnings before interest and tax] growth for Coles Food and Woolworths Food,” Citi analyst Adrian Lemme said in a note to clients.

Citi’s team says the inflationary environment will be a net positive for grocery operators, in part because more budget-conscious shoppers will be “trading down” from dining out and instead buying food to eat at home.

Morningstar agrees, noting that while Coles and Woolworths are overvalued against the group’s “fair value” metrics, rising food prices will be a positive for profits.

“Higher prices combined with steady demand are likely to underpin top-line growth for supermarkets, despite some offset from consumers switching to cheaper products,” analyst Johannes Faul said last week.

June retail figures from the Australian Bureau of Statistics show spending rose slightly from May’s record levels, but at 0.2 per cent growth it appears consumers may be slowing down their spending.

Grocery suppliers have been warning that rising energy, fuel and ingredient costs will continue to flow through to price tags, with more increases possible.

Before the CPI read-out this week, Australian Food and Grocery Council chief Tanya Barden said manufacturers and supermarket retailers were feeling the effects of rising prices.

“I know that businesses are going for second and third-round increases because of this continuous impact of input inflation,” she told a CEDA panel event.

Jarden analysts predict more price increases before Christmas.

“We expect the June exit run rate for core grocery inflation to be 4 to 5 per cent, with another round of price increases coming in September,” its equities team said in a note.

Supermarket giants Coles and Woolworths have acknowledged the impact of rising prices on consumers and businesses, and have been focused on lowering or freezing prices of home-brand items.

“While we’re working to continue to provide our customers with great value, it’s important we also support our suppliers in covering their increasing production costs,” a Woolworths spokesperson said last week.

Despite this focus, some own-brand products have not managed to escape price rises. Both supermarkets increased the price of their home-brand milk lines this month after a surge in the farm-gate milk price.

Woolworths shares gained 0.4 per cent last week, while Coles was 0.9 per cent higher.


Extracted from The Sydney Morning Herald

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