Supermarket prices yet to bottom

AS MUCH as Australia’s supermarket giants won’t want to hear it, price deflation in the shopping aisles is here to stay, according to ANZ research.

Despite Woolworths and Coles embarking on a bruising price war on items such as milk, bread, eggs and, of late, roast chooks, ANZ senior economist Jo Masters says domestic supermarket profit margins remain above global averages and have further to fall.

“Australia’s supermarket sector has been under significant price pressure from increased competition for some years,” Ms Masters said on Tuesday.

“As a result, supermarket prices are in outright deflation and margins are contracting.”

ANZ figures show Woolworths winding prices back by about 2% a year. At arch-rival Coles, prices are falling at a rate of about 1%.

Both are far outpacing the 0.2% annualised deflation for the supermarket category in the Australian Bureau of Statistics’ Consumer Price Index.

“What we’re saying is we’re not sure deflation in supermarket prices has to deepen, but we don’t expect negative 2% to turn positive anytime soon – or increase to 5% falls,” Ms Masters told Business Daily.

It comes a week after Woolworths head Brad Banducci said he would be swapping the price-cut “sledgehammer” for a scalpel.

Mr Banducci said the biggest moves had been made and the grocer would now be taking a “more forensic, more thoughtful” approach to prices.

Ms Masters said the British experience offered a guide to what could be in store for Australia’s supermarket sector.

Tesco’s margins had been squeezed from 5% to 2% and Sainsbury’s from 3.5% to 2.5% “in just a few years”, she said.

US e-commerce titan Amazon – which is establishing a distribution hub in Dandenong South, Victoria – could yet roll out its online grocery service, Amazon Fresh, in Australia, further disrupting the duopoly, Ms Masters said.

“Amazon’s penetration in online groceries may take longer to reach critical mass than for other categories.”

Consumers have already seen margins squeezed and prices cut on goods such as technological gadgets, clothing, footwear, furnishings and outdoor products, and on internet services.

Home building costs were potentially next in line for a squeeze, Ms Masters said.

“What’s required to turn the equation around is stronger wage growth,” she said.

“We’ve only got core inflation squeaking back into the Reserve Bank’s 2–3% target range by late 2018, so it’s hard to imagine retailers gaining significant pricing power anytime soon.”

Australia’s supermarket sector has been under significant price pressure from increased competition for some years — Jo Masters