Coles squeezed by food price fall

The biggest year-on-year food prices decline since 2014 is pressuring the supermarket giant’s margins.

The fourth quarter of 2016 also saw a marked slowdown in same store sales growth for Coles. Picture: Stuart McEvoy/The Australian.

Coles has borne witness to the unprecedented slide in shelf prices currently pressuring the $90 billion food and grocery sector, after the nation’s second-biggest supermarket chain this morning posted its biggest year-on-year decline in food prices since 2014.

The fourth quarter of 2016 also saw a marked slowdown in same store sales growth for Coles, with like for like sales growth dropping by nearly half to 2.8 per cent against very strong growth in the third quarter of just under 5 per cent.

Unveiling its latest results as part of Wesfarmers’ full-year results, Coles said it recorded 2.4 per cent deflation in the fourth quarter, or a near $200 million reduction in food prices for the quarter relative to the fourth quarter of 2015.

It was the biggest year-on-year fall in prices since the first quarter of 2014. The slide in food prices places extra pressure on retailers such as Coles as they scramble to eke out more earnings, and cover growing costs, from shrinking shelf prices.

“It is likely that market forecasts for Coles will be reduced following this result,’’ said Credit Suisse analyst Grant Saligari.

“The main story in the result was a significant slowdown in second half profit growth in the Coles division. This is likely to be the main variable for the market in framing forecasts.’’

Coles said this morning that its full-year revenue was 2.7 per cent higher at $39.242 billion as pre-tax earnings for the supermarket chain rose 4.3 per cent to $1.86 billion.

Coles’ results reflected that indeed retreating prices and a general market-wide drop in sales of food and groceries had affected its trading during the fourth quarter.

For the fourth quarter, food and liquor sales increased a total of 3.5 per cent to $7.8 billion, Coles reported. However like for like food and liquor sales increased just 2.8 per cent, while like for like food sales grew 2.9 per cent.

This was against like for like sales growth of 4.9 per cent in the third quarter.

‘’Food and liquor comparable sales growth are still high enough at Coles to generate operating leverage and deliver market share gains,’’ Macquarie Research said in a note to clients this morning.

“Therefore it is likely that Coles has made further price investment over the half to maintain price leadership.”

It was the smallest growth in quarterly comparable sales for Coles since the third quarter of 2012. However, still proving its worth to the Wesfarmers conglomerate (WES), Coles has now recorded 33 consecutive quarters of comparable store sales growth.

If Woolworths undershoots its quarterly sales growth again tomorrow, which analysts expect, Coles will have outperformed Woolworths for 28 straight quarters.

All retailers are under pressure at the moment. Earlier this month, it was revealed Australian retail sales only managed a tiny 0.1 per cent gain in June, according to the ABS, missing the 0.4 per cent expected. Food retailing declined 0.6 per cent in the month.

Meanwhile, Coles sad its online platform posted a 25 per cent rise in transactions. Its troubled liquor arm, under the chains Liquorland, Vintage Cellars and First Choice, achieved positive comparable sales growth for the year.