‘Customers can see it’: Why supermarket prices will keep rising this year

Supermarket bosses have warned prices are rising. Here's why.

Supermarket bosses have warned prices are rising. Here's why. Photo: TND

Australia is entering a new period of food shopping which is seeing supermarket prices rise rather than fall, as large chains such as Woolworths, Coles and Aldi pass along higher business costs to consumers.

In a shift that began last November and has accelerated since, Australia’s biggest supermarkets have begun squeezing shoppers at checkout.

It stretches from ongoing rises in red meat to dairy and other packaged grocery categories sourced from both local and overseas suppliers.

And experts say the trend threatens to disrupt the competitive balance  between supermarkets that has emerged over the past decade, where market dominance was based on cutting prices more sharply than competitors.

Now it appears supermarkets are more focused on containing inflation.

Woolworths Group boss Brad Banducci said as much on Wednesday after revealing prices across Australia’s largest supermarket chain have risen between 2 and 3 per cent since the start of the year.

“Customers can see it on the shelf prices in stores,” Mr Banducci told reporters.

“It’s not something that’s coming, it’s something that is here. We’ll need to work hard to continue to deliver value for our customers.”

Coles chief Steven Cain was less specific on Tuesday, but the message was clear – cost pressures are going up, not ‘down down’.

“We have seen further cost-price pressure coming through in the early part of this half and we expect that to continue,” Mr Cain said.

“As we look to the next six months [we’re] making sure the customer value proposition … is the No.1 priority.”

Aldi has chimed in as well, telling TND it’s also passing on higher costs.

“When prices on some items must increase to account for increased costs in our supply chain, we are committed to offering the lowest possible prices on the market,” the spokesperson said.

“That’s our promise to customers.”

Why grocery prices are rising

This inflationary shift among supermarkets hasn’t happened overnight, but it has accelerated markedly since the start of 2022.

Broadly, there ares two main factors, one international and the other local.

Global first: As you may have read previously, it’s become much more expensive over the past two years for firms to ship things around the world. International freight costs have ballooned as slowdowns to combat COVID have compounded soaring demand for goods during lockdowns.

International freight prices are up between 69 per cent and 249 per cent around the world over the past year, according to data from Freightos.

Retail expert and Queensland University of Technology Professor Gary Mortimer says those pressures are showing up on supermarket shelves.

“When we think about tins of roma tomatoes or pasta from Italy, or rice from India, increasing global supply-chain costs will push shelf prices up,” he said.

“Even dry groceries, like cleaning goods, toilet paper, even pet food – these categories are normally insulated from cost pressures. However increasing fuel costs, utilities and labour shortages are now also adding upward cost pressures.”

The second major factor is local. Some prices, particularly those for red meat, have risen considerably over the past year due to reduced supply amid climatic conditions and local labour shortages on farms.

“Less supply into the market always leads to higher prices,” Professor Mortimer said.

All these higher costs are first faced by the suppliers that sell food to the big supermarkets, and though it has taken time, the latest surveys show these outfits are pushing supermarkets for higher prices.

A survey of supermarket suppliers conducted by Jarden in January found 90 per cent planned to raise prices this year after facing an average 11.3 per cent increase in costs, again largely due to supply-chain pressures and wages.

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Tanya Barden, chief at the Australian Food and Grocery Council, said a double-digit increase in costs reflects the experience of her members.

“We’re seeing an enormous amount of cost pressure,” Ms Barden said.

“For a long time food and grocery prices have been stable in Australia and haven’t actually reflected the full cost increases suppliers faced.”

The big questions facing supermarket shoppers and their budgets is to what extent supermarkets will pass through higher costs to checkouts.

‘We’re very anxious’

Talking about inflation as a supermarket boss is tough, and not just because they risk being seen as out of touch with everyday workers.

As seen in the supermarket price wars of the 2010s, Australians are incredibly sensitive to how much their food costs and will readily flock to the cheapest chain on the market.

It’s a history that makes supermarket bosses sweat at the mention of inflation, as Mr Banducci explained on Wednesday.

“In terms of relative price position … we’re very anxious on this topic and we do track it against Aldi and Coles,” he said.

“We’re [still] in the guardrails of where we’ve been for the past couple of years.”

That helps explain why each supermarket is presenting itself as the best player in keeping a lid on inflationary pressures.

But to what extent is that actually possible?

For context, both Woolworths and Coles booked slight price deflation in the six months to last December. But that has quickly reversed, with Woolworths’ prices rising between 2 and 3 per cent since.

These might not seem like big price rises, but when you factor in wages growth running at just 2.3 per cent annually and soaring prices for other essentials, like petrol, soaring, the budget squeeze becomes obvious.

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Australia’s second- and third-largest supermarkets – Coles and Aldi – didn’t disclose how much prices have risen in 2022, but it would be a mistake to assume they’re in a different boat.

Mr Banducci said Woolworths’ relative position to Coles and Aldi on prices hasn’t changed much, implying their prices have risen too.

And when Jarden analysts surveyed supermarket suppliers late last year, they said Woolworths was most hostile to calls for price rises.

Inflation threat growing

That prices have risen to the extent they have despite pushback from Australia’s largest supermarket chain is evidence that keeping a lid on inflation this year will be tough going.

Louise Grimmer, a senior lecturer in retail marketing at the University of Tasmania, said rising supermarket prices will change the way big chains present themselves to shoppers over the next year.

“Supermarkets can no longer rely on low pricing strategies to retain and attract customers,” Dr Grimmer said.

“They will need to provide other compelling reasons for shoppers to choose their brand.”

Dr Grimmer said supermarkets will place higher emphasis on service, their private label products and convenience to attract their shoppers.

“We will also see a race towards automation and super-fast home delivery times,” Dr Grimmer said.

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