Coles lifts profits but warns of rising inflation across the supermarket aisle

Coles boss Steven Cain expects a rise in mortgage stress to increasingly affect consumer behaviour – with shoppers already switching to lower-priced groceries.

Coles chief executive Steven Cain expects a rise in mortgage stress as fixed-rate loans roll off to increasingly affect consumer behaviour – with shoppers already switching to lower-priced groceries.

Mr Cain said the supermarket giant had begun to detect a split in customers at the end of the financial year to June 30, with a steady but noticeable lift in shoppers who were buying value-priced frozen vegetables and tinned foods.

“It’s sort of a tale of two cities, but it’s probably that difference between the upper end and those that are really on a budget, which appears to be increasing,” Mr Cain said after the company posted a 2 per cent rise in revenue to $39.75bn as profit lifted 4.3 per cent to $1.05bn for 2022.

Increased hospitality spending – as consumers spent money at restaurants and cafes fuelled by a rise in savings over the Covid-19 pandemic – had snatched some sales from the supermarket sector, Mr Cain said. But he expected that spending to soon run out of steam as the lag effect of four interest rate rises begins to pinch household budgets.

“Hospitality is still benefiting from pent-up savings dollars, but certainly you wouldn’t expect that to continue for forever as savings diminish, and then we are also aware that interest rates are rising,” Mr Cain said.

“The number of people coming off fixed-rate mortgages is rising as well, so that’s going to shift over the next six months as well.

Mr Cain’s comments came as AMP chief economist Shane Oliver forecast many households would endure higher mortgage stress – as rates rose to more than 3 per cent. This was starting to affect shopper behaviour at Coles, Mr Cain said. “If you look at what customers are buying, these are not meteoric shifts … it’s a little bit more subtle,” he said.

From wheat to labour costs, Coles has forecast strong inflationary pressures in the months ahead. Picture: NCA NewsWire / Jeremy Piper

“We are seeing a shift to private label, so we’ve got a range of pastas priced at about $1 that we have been focusing on and the sales (growth) of that product are in the double digits. There’s been a bit of a run on frozen veg … and then we are seeing people shift into cheaper cuts of meat, including a bit of a shift from things like beef, pork and lamb and chicken meats, which is a bit a bit cheaper.”

Coles also reported on Wednesday that the price of groceries at its stores had risen markedly through 2022, totalling 1.7 per cent for the year and rising 4.3 per cent in the fourth quarter, with the company bracing for further inflationary pressures led by higher wages and supply chain costs.

However, some food prices such as lettuce – which had hit the headlines with prices of $12 a head – had started to moderate and the peak of inflation could be in sight.

“In July, we have seen further cost price inflation in produce due to recent flooding, in bakery due to wheat commodity prices, and in packaged groceries due to various supply-chain cost increases including wages, packaging, raw ingredients and freight,” Mr Cain added on Wednesday.

“We are also seeing inflationary pressures impacting our own cost base with increasing wages, rent, fuel, supply chain and capital costs. In addition, Covid-19 and the flu has seen increased team member absenteeism costs continue to impact the business.”

The retailer said Covid-19 costs of about $240m were incurred during the year, compared to about $130m of Covid-19 costs incurred in 2021.

At its supermarkets arm, sales revenue was $34.6bn for the year, an increase of 2.2 per cent.

Online sales were $2.8bn, up 4.1 per cent. Supermarket pre-tax earnings of $1.7bn increased by 0.8 per cent with an EBIT margin of 5 per cent. Liquor sales revenue was $3.6bn for the year, an increase of 2.5 per cent on the prior corresponding period.

Earnings from the liquor arm fell 1.2 per cent to $163m.

There was also a blowout in the cost of its two key IT and distribution projects that would ramp up its investment spending over the next few years as Coles repositions to incorporate robotic warehouses and state-of-the-art online shopping platforms.

A supply-chain deal with provider Witron had been slated to cost $950m but would now cost $1.04bn over the next few years due to higher construction costs, labour and other overheads.

A partnership with Ocado for an automated fulfilment centre to fuel its e-commerce ambitions would now cost around $330m, up from an original price tag of $130m to $150m, as Coles decided to ramp up the infrastructure in the wake of the online shopping boom sparked by Covid-19.

Mr Cain did not provide a trading update for the first weeks of the new financial year.

Jefferies analyst Michael Simotas called the Coles full-year result a solid one, with every division slightly ahead of his estimates.

“No definitive outlook commentary but tone generally cautious,” he said. “That said, given sensitivities around food inflation, management was always going to be guarded on the outlook. Second-half gross margin strength suggests Coles is passing through food inflation.”

“Coles full-year result looks in-line with expectations, but the outlook and Witron cost blowout take the gloss off,” said Barrenjoey analyst Tom Kierath. “We think the major reasons Coles trades at a discount to Woolworths is due to Witron/Covid risks, which has played out here.”

Coles declared a final dividend of 30c a share, up from 28c.

Shares closed down 86c, or 4.6 per cent, at $17.84.

Originally published as Coles lifts profits but warns of rising inflation across the supermarket aisle