Shelf price slump now a headache for Coles

Coles has borne witness to the unprecedented slide in shelf prices pressuring the $90 billion food and grocery sector.

Wesfarmers chief executive Richard Goyder puts on a brave face as profits slide in tandem with shelf prices.

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

Fuelling spiralling prices in the June half was strong deflation across the fresh fruit and vegetable aisle where a favourable growing season, helped by good weather and access to water, caused a glut in many popular food items, including bananas that had slumped to record low prices.

Bananas, one of the highest selling items in a supermarket, dropped to as low as $1 a kilo at Coles, a long way from 10 years ago when cyclones wiped out Australia’s banana crop and sent prices rocketing to as high as $16 a kilo.

Beef prices have started to slow, although are still at record levels, while intense competition between Coles, Woolworths, Aldi and the independent chains has pushed down shelf prices in the final quarter of 2016.

Coles revealed that deflation had indeed accelerated in the three months to June to 2.4 per cent, against 2 per cent in the third quarter. That is believed to have had a knock-on effect on Coles’ earnings, shrinking margins by as much as 13 basis points in the second half compared to an estimated expansion of 4 basis points over the first half.

But Wesfarmers chief executive Richard Goyder said it was to be expected that Coles’ earnings growth as a percentage would decline over time as the retailer’s earnings base expanded.

“We still have solid earnings growth in Coles … and I think on every metric Coles is a strong business and has a very strong potential to be stronger in the years ahead,’’ Mr Goyder said. “We don’t get too fussed about quarter to quarter and half to half earnings in the business — we start with a customer focus and let everything else pan out.’’

As analysts expected, the fourth quarter of 2016 saw a marked slowdown in same-store sales growth for Coles, with like-for-like growth (the true test of sales strength) dropping by nearly half to 2.8 per cent against strong growth in the third quarter of just under 5 per cent. It was the smallest growth in quarterly comparable sales for Coles since the third quarter of 2012. However, Coles has now recorded 33 consecutive quarters of comparable store sales growth. Adjusting for deflation, and the timing of Easter, “real’’ growth in food and liquor sales for the quarter was 5.7 per cent.

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

Coles reported full-year revenue 2.7 per cent higher at $39.242bn as pre-tax earnings rose 4.3 per cent to $1.86bn. If Woolworths undershoots its quarterly sales growth tomorrow, Coles would have outperformed it for 28 straight quarters.