The iceberg lettuce has become the accidental symbol of Australia’s great inflationary wave and given it is the best real-time barometer available on higher prices there could be some cause for hope.
After pushing above $12 through winter, Coles chief executive Steven Cain now points out the iceberg lettuce is selling in his supermarkets for $3 each.
For Cain there’s more at play than a retailer’s instinct on pitching a good deal, with inflation set to play a major part in how the supermarket performs in the coming year. Coles has earmarked as much as $1.4bn on spending with several big ticket investment projects set to enter their final push.
Cain says it’s too early to declare that we’ve passed peak food inflation just because lettuce prices have come down, although there are positive signs coming.
“We’re continuing to see some price increases through July, particularly due to volatile prices and various packaged food increases. So we’ll continue to see a bit of that coming through over the coming months. But we’re also expecting produce and meat prices are likely to moderate as we work our way through the year,” Cain says.
Inflation across Coles’ shelves during the June half hit a high of 3.8 per cent. It was a sharp contrast to the December half of the year where Coles saw an average drop of 0.2 per cent in prices – in other words it had deflation.
There has been a fivefold increase in supplier demands for higher shelf prices in recent months across thousands of items, with some suppliers coming back two to three times. However it’s a matter of give and take in negotiations, Cain says, with an agreement to push through higher prices on one product hopefully offset by a lower price on another.
Cain’s comments came as Coles reported a 4.3 per cent lift in annual net profit to $1.05bn. The result was generated on a 2 per cent lift in sales in a year marked by state-based lockdowns, staff shortages, supply crunches and Covid-19 costs.
Supermarket sales were up 2.2 per cent on the year, but one soft spot was the Coles Express petrol stations where sales were off 5 per cent due to lockdowns, wild weather in NSW and people holding back on their city commute. An uncertain outlook on inflation also meant Cain has continued to hold back from issuing earnings guidance given there are too many moving parts.
But he needs the inflationary pressures to start easing as this could be a big pain point on Coles’ massive smart warehouse bet.
Construction of several smart warehouses to support home delivery is well underway, with the first high-tech facility scheduled to be opened outside Brisbane next year. Victorian and NSW warehouses, which also include hundreds of robots for picking and packing, are due to follow.
The project, which was signed nearly four years ago, is pushing ahead in the midst of a supply-side shock and the tightest labour market in 50 years, with the costs already starting to push up. Some 75 per cent of the funds are earmarked to be spent by the end of June which means the coming months will be a peak period for spending.
Total capital costs for construction of the warehouses have increased to a little over $1.04bn from $950m. The robot leg of the project under a deal with British tech group Ocado is the one to watch with Coles now more-than-doubling its budget to $330m from as much as $150m previously.
Elsewhere, Cain is looking to deliver on his promise of $1bn of cost savings including a total of 450 net headcount cuts by the end of June. Around $230m of these savings have been so far achieved, but with labour costs rising overall he is swimming against the inflationary current to secure the rest.
A bigger blowout in capex costs could eat into Coles’ habit of paying a high proportion of its earnings in dividends. In recent years it has held its payout ratio at 80 per cent but a bigger-than-expected investment spend could start eating into this. Coles on Wednesday hiked its dividend 2cs to pay a full year dividend of 63c a share.
In the background Coles is busy overhauling its website and mobile app, so users will have the same experience regardless of the platform.
The aim under the high tech investment is for customer orders to be packed, picked and put on the back of a delivery truck with minimum human intervention.
The new warehouses will dramatically increase online capacity for Coles with the range of stock items available for home delivery doubling to 40,000 over time. The upshot is Cain is expecting a higher proportion of online sales than the current rate of $2.8bn. Even so, online sales are moving in the right direction. In the past year they represented 8 per cent of sales, from 5.8 per cent.
For Cain – whose compensation package during the year came in at $7.25m – there is a lot riding on the coming 12 months.
Boral key for Seven
Stokes’ challenge
For Ryan Stokes of Seven Group a lot needs to also go right with Boral over the next year to help pay down some of the debt that was built up in taking control of the building materials major.
Boral, as its results foreshadowed this week, was the soft spot for the Stokes family’s Seven Group, the listed investment vehicle that is highly leveraged to an economy that needs to keep delivering growth and for commodities prices to remain high.
Stokes’s collection of assets include WesTrac which operates the Australian franchise of Caterpillar, equipment hire group Coates, gas producer Beach Energy, Boral and television network Seven West Media.
For most of these companies conditions are booming, helped by an infrastructure spending spree and mining surge. Combined this backed an 8.3 per cent jump in Seven Group’s earnings to $987.1m for the year to end-June.
But a near doubling of debt to $4.4bn to help fund the incremental Boral acquisition leaves Seven exposed to rising rates – particularly as more than $2bn of group debt is due to mature within the next two years and much of this at the corporate level.
After early last year borrowing heavily to take control of Boral, Seven Group has a lot riding on the pivot back to Australia by the building materials player.
Seven has already benefited from the $3bn windfall as Boral sold off its global assets over the past year. This saw Seven’s initial $4.7bn outlay reduced to $2.6bn on the back of Boral’s capital return and some of this has been used to pay down debt, including refinancing costly bridging loans.
Boral this week revealed its top line growth was hampered by heavy flooding across NSW and Queensland this year, as well as Covid-19 shutdowns in the construction industry. Underlying full year earnings were down 18 per cent to $325m.
Surging energy prices also hit its earnings line by $50m although Boral has pledged to get sharper on passing on inflationary costs to its customers. New CEO Vik Bansal is set to take charge of Boral by December, a move that Stokes says will drive further improvement in performance. Stokes, who took control as Boral chairman mid-last year, will be in prime position to closely watch how Boral’s rebound is progressing.
Seven Group’s debt is expected to trend back to historical levels over the next 12-18 months, but Stokes acknowledged this is dependent on an improved performance by Boral.
Stokes describes his investment portfolio as aligning with companies that have leading market positions. He also points to their strong inflation hedges given they have limited fixed price contracts and the ability to quickly pass through costs as they rise.
Top line growth at WesTrac, which represents the engine room of group earnings, was dampened as supply chain pressures prompted the business to stock up on inventory over the past year. Even with some commodity prices pulling back in recent months, conditions remain strong. Coal mining remains resilient and iron ore volumes are likely to remain high.
Stokes points out an ageing equipment fleet working in mines and this will underpin servicing and the need to replace the mega-trucks for at least five years.
“With increasing fleet age, customer demand and support is expected to grow not just for the components, but increasingly for machinery in the field to further extend the life of their equipment,” Stokes says. Longer term, WesTrac is expected to benefit as miners look to transition to electrified mining fleets.
Coates hire equipment is often first on work sites and Stokes expects solid demand with the east coast infrastructure pipeline remaining strong. Coates delivered its highest ever returns passing the $1bn revenue mark and was backed by improving margins. The utilisation rate of nearly 60 per cent for Coates remains well above its five-year average.
Even television, through the near 40 per cent stake in Seven West Media, is enjoying a rebound in ad revenue from the lean Covid-19 years with underlying earnings up 52 per cent to $77m.
Seven Group has become one of the few large companies this profit season to issue specific earnings outlook, as it said strong momentum and the ability to manage the inflation cycle will help deliver “high single-digit to low double-digit” underlying earnings growth this coming financial year.
Kerry Stokes’ private investment vehicles control 57 per cent of Seven Group.
johnstone@theaustralian.com.au
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