Sell less stuff for more money: welcome to the world of Coles/Woolies grocery inflation

Coles reported higher price rises than Woolworths in the first three months of the year, as the two supermarkets face a world of inflation where they take in more revenue… but without selling many more groceries.

In January, February and March this year, Coles increased sales by 4.2% — but it didn’t achieve that by selling 4.2% more products. Instead, inflation propped up the number. The company reports inflation of 3.3%, meaning the volume of goods they sold was just a miserable fraction of a per cent higher than the year prior.

Woolies, meanwhile, increased revenue by 5.4%, and reports inflation of 2.7%. So it’s increasing the amount of food and drink it sells more than Coles, it seems — perhaps as a direct result of that slightly lighter price growth? I wouldn’t put it past Aussies to be comparison shopping down to the fraction of a per cent.

All this matters more than ever, because with inflation surging, the cost of living is the unwelcome guest at the centre of our national discourse. People can’t avoid buying food, and it accounts for more of their budget than petrol does, so grocery inflation matters enormously.

The supermarkets, who have long battled for supremacy in the domain of “perceived value”, are laser-focused on consumer price perceptions. And they know how to shape them.

Woolies’ new slogan is “Get Your Woolies Worth”, while Coles is sticking with “Down Down”. (Used unabashedly, despite the fact prices are rising.) Expect promotions related to this to ramp up dramatically as Australia pivots to a cost-of-living war footing.

Price hikes are still new territory

High inflation and weak volume growth are something of a change for our big supermarkets, which have reported a lot of price deflation in recent years — a result of battling Aldi and each other for the best reputation on value.

The extreme extent to which grocery price inflation vanished six years ago is not well appreciated. In 2016, the Australian Bureau of Statistics was able to find grocery inflation of just 1.5% in the preceding five years. Compare that to the 2.8% price inflation it saw in the first three months of 2022. In the 2017 financial year, Woolies reported price inflation of negative 2.1%.

Bear this in mind when people won’t stop talking about high inflation — there was very little talk at the time about low inflation. Our ability to notice price changes is asymmetrical.

Now, prices are going the other way. It’s a bit like the floods — grocery price inflation was in drought for ages, but now we’re getting multiple years’ worth in no time at all and it’s all very unpleasant.

Are they lifting prices less than inflation?

What you may have noticed is that the inflation numbers the supermarkets report are lower than the official inflation read of 5.1%. Is it because Coles and Woolies just care so much about us? It’s more mathematical than that: official consumer price inflation reflects the shocking petrol price rise directly, while at Coles and Woolies, higher fuel prices are only part of the input cost mix.

Price rises at the supermarkets are more comparable to inflation in the food part of the data, which is 4.3% over the past year. But of course supermarkets sell tobacco — which rose 2.9% in price over the past year — and some clothing, which fell in price by 1.5%. Those facts help explain why their selling prices were not quite as high as the official measure.

In the past, higher prices at supermarkets have been the result of profit drives. It will be fascinating to see if the supermarkets report higher profits at the end of the year when it all shakes out. Because they are certainly experiencing some input price rises, and talking about them a lot, too.

“Notable increases in Long Life categories included Drinks and Household Care; and in Fresh included Meat (most notably beef) with higher commodity cost prices, and Vegetables with supply impacted by poor growing conditions and flooding,” Woolworths observed in its most recent ASX release.

Nobody shops in-store anymore

Have you noticed supermarkets are a bit quieter? Australians are continuing to shop less frequently but buy more when they go. The number of items in the basket is up 4.8% while the number of times we shop has fallen 4.3%, Woolworths reports.

What’s more, we are buying far more online. Coles’ online sales growth grew a whopping 45% between early 2021 and early 2022. If you thought the pandemic online shopping surge would abate, you were wrong!

Online shopping is still only about 10% of Woolworths’ supermarket sales, but it matters more and more. Its website sold $311 million more than at the same time last year, while the company’s thousand-odd enormous supermarkets sold just $238 million more.

In fact, sales growth at the physical supermarkets (2.4%) was lower than the rate of inflation Woolies reported (2.7%), meaning the volume of stuff we bought from physical Woolworths supermarkets (not including Metro-branded stores) was almost certainly lower than the same period last year.

With that info in hand, it’s no surprise Woolies is closing down stores. In the first three months of 2022, Woolworths closed two large-format supermarkets. Meanwhile Coles opened three… but shut down four others. Meaning both big names shrank their physical presence in the opening months of 2022.

The future of the supermarket business, it seems, is having fewer actual supermarkets and selling less stuff for more money.