Grocery prices are rising as Woolworths and Coles ease back from aggressive discounting, in a sign a full-blown supermarket price war in Australia is unlikely.
Food prices are expected to remain steady or to rise in 2017, providing a boost to Woolworths and Coles’ sales revenue following an extraordinary 2016 financial year where heavy discounting led to the supermarkets sector growing at its slowest rate in 20 years, analysts say.
UBS has reduced its outlook on the probability of a price war in the next two to three years from 25 per cent to 15 per cent.
“While we believe the market will remain competitive, the risk of a price war is falling,” UBS analyst Ben Gilbert said in a recent report. “No listed retailer wants a price war, with discounters and consumers ultimately the only winners.”
Woolworths invested about $1 billion over 18 months to lower food prices, as it played catch up with rivals after having put profit ahead of sales growth in previous years.
Mr Gilbert said the fact Woolworths’ rivals did not respond in a way that would lead to a full-blown price war, as seen in the UK, is a sign the supermarket giants don’t want a similar showdown.
He said Australia’s supermarkets have pointed to more rational price investment in 2017.
The latest official retail trade figures show food prices rose 4.3 per cent in December compared to the same period a year ago.
This is expected to show up in Woolworths’ and Coles’ sales growth, which has been helped by an increase in fresh fruit and vegetable prices, Citigroup said.
Analysts also expect suppliers to put pressure on supermarkets to increase prices as the price of sugar and other soft commodities continue to rise. Coles’ parent company, Wesfarmers, is due to release its half year earnings on February 15, while Woolworths’ results are due on February 22.
During the first quarter, Coles’ crucial comparable food sales growth slowed to 1.7 per cent, compared to 2.8 per cent in the same period a year ago. UBS expects Coles to continue to show a slowdown in its sales growth, while Woolworths’ sales are expected to have grown, in a sign it has managed to wrest back some of its loss market share.
Woolworths comparable food sales rose 0.7 per cent in the first quarter of 2017 — the first quarter of growth in almost two years — in a sign the business is turning around.
Analysts expect the turnaround to have continued into the second quarter.