Pricing squeeze looms
Supermarkets face more cost pressures
THE grocery “honeymoon” may be over for Australia’s major supermarkets as competition tightens and consumers come under increasing cost pressure, according to Morgan Stanley analysts.
The price gap between the major supermarkets and German chain Aldi now stands at 18 per cent after bottoming at 14 per cent two years ago, the investment bank’s analysts say, despite a period of investment by Coles and Woolworths
Grocery prices at Aldi dropped by 1.6 per cent yearon-year in August, they say in a report for investors.
“Given that Aldi effectively sets the supermarkets pricing umbrella, we think Coles and Woolworths will need to continue to incrementally invest in price,” the report said. “We estimate that now around 75 per cent of the Australian population is able to shop at Aldi and/or (US retailer) Costco relatively easily.”
Woolworths’ sales trajectory went from a slide of 1 per cent in the third quarter of the year to June 2016 to 2 per cent growth in the third quarter of the past financial year.
Morgan Stanley said the improvement was sparked by Woolworths’ loyalty program relaunch and investment in labour hours to improve checkout waiting times, but the investment bank does not expect these gains to continue.
“Woolworths has improved its execution from a very low level, but looking ahead as it laps over more difficult comparisons, Solomon Lew, Myer’s biggest shareholder, says Myer is trying to sell apparel that is up to three years old we think these free kicks are over,” the report said.
“We think the market is too optimistic on the Woolworths recovery story and if it disappoints these expectations, the shares will likely fall.”
Morgan Stanley was slightly more optimistic on the outlook for Wesfarmers-owned Coles, saying its performance might improve following further price investment, forcing Woolworths to match initiatives.
Wesfarmers would also benefit from its exposure to the coal industry, and due to the strength of Bunnings, the analysts said.
Consumers were being driven to cheaper alternatives to Coles and Woolworths as real wage growth remained flat and costs for essentials rose, they said. “We think Aldi will continue to succeed.”