Australia’s largest retailers walk fine line between swallowing cost pressures and passing costs on

Soaring costs from energy to transport, and how much can be passed onto shoppers is challenging many top retailers, The Australian’s 2022 CEO Survey finds.

The soaring costs of everything from energy to transport – and how much of that can be passed onto shoppers – is emerging as a key challenge for the nation’s leading retailers as they also compete in a tight employment market, according to The Australian’s 2022 CEO survey.

Many of these leaders say they are faced with a dilemma not seen for decades as inflation leaps above historic levels: should they allow their businesses to wear the extra costs or pass some on to their consumers, with the fall out from either choice usually a loss in profitability or a loss in sales?

And this is coming hurtling towards them as their in-trays start piling up with challenges including supply chain chaos, a changing industrial relations landscape and their own consumers demanding more action on climate change and renewable energy.

“Obviously, food and drinks are less discretionary than many other industries. Many Australian households are, however, clearly facing significant cost of living pressures with rising inflation and mortgage payments,” Coles boss Steven Cain told The Australian’s 2022 CEO survey. “Value is becoming more important, so we have ‘dropped & locked’ prices on hundreds of key products until the end of January.”

For Domino’s Pizza CEO Don Meij the inflationary pressures running through his company – one of the biggest buyers of cheese and meat in the region – has seen some behavioural changes among customer. “Like all businesses right now, we are not immune to the rising cost of ingredients, labour and energy,” he said. “This has seen some customers switch from delivery to pick-up.”

Coles CEO Steven Cain says value is becoming more important to his shoppers in the wake of a rising cost of living.

Domino's CEO Don Meij has noticed a change in buying behaviour from his customers as inflation climbs. Picture: Annette Dew

Domino’s, which operates in the cutthroat fast food industry, has attempted to drive savings and efficiencies from within its own business to shield diners from the worst of the inflationary impact.

“We’re applying what we call a ’value tree’ approach to offsetting these pressures – increasing operational efficiencies to reduce costs for stores, and creating new product ranges that continue to do what we have always done – deliver high quality food at an affordable price – but with a more sustainable profit margin,” Mr Meij said. “The reality is we do need to pass on costs in some areas, but are still laser focused on delivering customers great value by providing “more for more”.

Sarah Hunter, at Officeworks, is bracing for the rush of back-to-school sales early in 2023 which could make or break her budgets for the office products retailer.

“ We expect positive sales momentum to continue during our busy trading periods from Black Friday to Back to School, where our value promise is even more appealing during challenging economic times,” she said. “We continue to invest for the long term to deliver strong returns for shareholders, and we remain focused on our productivity and efficiency initiatives. We have a focus on our store and support centre operations and are modernising our supply chain and investing in our team to deliver our growth ambitions.”

Customers at Endeavour chief executive Steve Donohue’s BWS and Dan Murphy’s chains are also facing steeper prices.

“Inflation and rising interest rates do naturally impact our customers and their purchasing behaviour. Inflation also uniquely affects beer and spirits, due to twice yearly CPI-linked excise increases,” he said. “Next year will see more pressure on households, so as always we’ll continue to focus on delivering the best value for money at all price points.”

Endeavour Group CEO Steve Donohue says rising inflation is impacting purchasing behaviour at his liquor stores and pubs. Picture: David Geraghty.

And this all comes as the CEO’s fight it out for staff at a time of labour shortages that are causing productivity losses and rosters at stores that can remain unfilled.

“Labour shortages ultimately mean there is a war for talent within the Australian jobs market,” said Endeavour’s Mr Donohue. “It is more important than ever to be an employer of choice. Our company’s purpose, culture, inclusion, and conditions are discussed daily with prospective candidates.

“We have felt the impact of labour shortages acutely in our business … but I’m pleased to say we’re in a strong position going into the festive season,” he added.