Dec 14, 2015

Your grocery bill is on the rise, unless there's another price war

The low Australian dollar and the lure of overseas markets are expected to push up grocery prices, as long as Woolworths' aggressive bid to reclaim market share doesn't trigger a new price war.
Fierce competition in the nation's supermarket sector has driven price deflation for more than five years, according to Bank of America Merrill Lynch - but a lot of these savings were funded by suppliers to the detriment of their margins and returns, as evidenced by the ACCC's legal action against Woolworths launched on Thursday.
Merrill analyst David Errington said the weak Australian dollar was likely to support an increase in food exports, which could ultimately result in shortages and higher prices for shoppers.
"The past five years has been a period of relatively sustained price deflation in Australian food after a lengthy period of relatively high price inflation," Mr Errington said.
"Arguably it was the re-emergence of Coles as a major competitor in the Australian supermarket industry and to a lesser extent Aldi in later years, that triggered the price deflation."
He said an analysis of Coke Amatil's Australian Beverages, Goodman Fielder's baking and Goodman Fielder's grocery results showed consistent profit margin declines for the producers for the past five years.
"It is clear that the food producers' margins have largely funded the price deflation as their margins since FY 2010 have been in consistent and fairly dramatic decline," Mr Errington said.
He said the major grocery retailers, Coles, Woolworths and Aldi had pushed prices lower and as a result food producers had responded by reducing their investment in manufacturing capacity.
"In our view, this was going to lead to a reduction in food producing capacity in Australia at some point and potential shortages in supply," Mr Errington said, "we think there are signs of this now emerging."

Shortages of supply

Former Victorian premier Jeff Kennett said the shortages of certain brand of baby formula showed offshore demand wasn't just pushing up prices, it was also restricting access to certain products.
The big increases in meat prices are the result of both Asian and US demand for Australia beef and Mr Kennett said in his work for Coles he had met several suppliers who had turned their backs on the major local supermarket chains.
"I've already had to manufacturers tell me they are not supplying domestic supermarkets, they are selling product overseas where they can make substantially more money and this was before the dollar fell," Mr Kennett said.
"There are dramatic changes taking place... the dollar will prove to be a minor influence compared to simple demand."
Price inflation is already evident in honey, pork, baby formula and beef.  The price of some cuts of beef have spiked by more than 50 per cent in the past year and pork shortages are expected to push up the price of Christmas hams this year.
Price inflation is positive for supermarkets but Woolworths' $500 million investment in reducing prices and turning around its supermarket business has the potential to kick-off a fresh price war.
Tasman Meats chief executive Matt Swindells closely watches supermarket prices to ensure his independent chain is beating the big boys and he's confident there will be a fresh round of competitive discounting between the majors.
He said the supermarkets sacrificed margins to fund price reductions rather than solely relying on suppliers and he didn't agree with forecasts of grocery price increases.
"You can see that in the margin reductions at the supermarkets," he said. "If I was the new CEO of Woolworths ,I would take 1 to 2 per cent out of margins."

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