Shoppers are showing early signs of rebellion, leaving supermarket giant Coles unable to increase shelf prices to expand profits as households question the fairness of hikes at the country’s major chains.
On Tuesday, Australia’s second-biggest food retailer reported a modest 3.6% fall in half-year net profit to $594m and slight compression in profit margins amid increasing costs that it could no longer offset through product price hikes.
The results suggest supermarkets are grappling with a new type of shopper they haven’t seen since the pandemic made it difficult for consumers to know what a fair price might be.
Four years ago, there were the barnstorming sales attached to the early pandemic panic that lifted supermarket profits. This was replaced by the inflationary period where the major chains were able to more than offset increased costs by bumping up product prices, leaving shoppers perplexed but compliant.
Now, consumers are using their collective spending power to search for genuine discounts and they are changing buying habits and switching retailers when viable.
In its submission to the Senate inquiry on supermarket prices, lower-cost rival Aldi said it recorded a 4% increase in customer numbers last year “as cost-of-living pressures continued to mount”.
Some of those new customers will have come from the major chains, which collectively control two-thirds of the market, compared with Aldi’s 10%.
Consumer wariness of supermarket prices is heightened by the growing public and political scrutiny of the sector, now under the glare of parliamentary inquiries and a regulatory pricing investigation.
In response, the major supermarkets are scrambling to shore up customer loyalty.
Coles, like Woolworths, is putting significant work into its loyalty offers, catalogues and app to connect with shoppers who might otherwise look elsewhere.
It partly credited its Pokémon collectibles campaign with helping drive sales in the new year, up 4.9% in the first eight weeks of 2024.
The Coles chief executive, Leah Weckert, said on Tuesday that a cut-price lamb chops campaign in January was a “runaway success” and that the company had introduced a new online feature that helped customers sort products according to the cheapest unit prices.
Both initiatives were launched as public anger over supermarket prices escalated and farming groups accused the big chains of not passing on falling produce prices to customers.
Weckert told journalists that Coles was not making pricing decisions based on political pressure.
“We are running our business for the benefit of our customers and we are making decisions based on that,” she said.
The major supermarkets know, however, that every significant pricing decision has the potential to catch the eye of the competition regulator, which was recently ordered to run a 12-month inquiry.
Weckert and her outgoing Woolworths counterpart, Brad Banducci, are also expected to appear before a hostile Senate inquiry in March, when pricing decisions, supplier relations and the market power of the major chains will be examined.
The thing about profiteering – which the major chains strongly deny has occurred – is that it only works until it doesn’t. Once consumers get a sense that it may be happening, they rebel.
On Tuesday, Weckert defended Coles’s profitability while denying it had price-gouged.
“Profits are an essential thing for any business. They enable us to continue to operate and for us that means we get to employ 120,000 people,” she said, adding that profits also aided suppliers and shareholders.
To be sure, shareholders of the major chains are not crying into their home brand soup.
Many households have few viable options other than to shop at the two majors, a structural factor that might curtail any uprising against their pricing practices.
At 5.1%, Coles’s profit margins for its supermarket division are still above pre-pandemic levels. Its shares also spiked higher by more than 6% on Tuesday shortly after its financial results were published.
The increase in profit margins, compared with pre-pandemic levels, is even more dramatic at Woolworths.
This shows that the cost-of-living pain experienced by consumers in recent years has not been shared by the companies that fill the food pantries and fridges of their own customers.
