No escaping the inflation virus for Coles as prices edge higher

Meanwhile, supermarkets have experienced state-based rollercoasters in revenue as sales rose during the various lockdowns and maximum-COVID scare periods and then started to normalise when infection rates tapered off. Online sales have also moved in COVID related waves.

That said, Coles has managed COVID costs pretty well – seemingly better than its arch competitor Woolworths.

The extent to which higher trolley prices play into demand will dictate Coles’ performance over the next six months.

For the six months to December Coles supermarkets posted an 1.5 per cent increase in like-for-like sales and a 4.4 per cent decline in earnings before interest and tax (EBIT)- a performance that was ahead of expectations and rewarded with a 3 per cent share price gain.

Woolworths has guided to a decline in its December 2021 half earnings before interest and tax in its Australian food business of between 7 per cent and 9 per cent.

Coles received a helpful tailwind from its “smarter selling” initiative – which removed $100 million in costs in the December half and is forecast to take out another $100 million in the six months to June. The extent to which higher trolley prices play into demand will dictate Coles’ performance over the next six months.

Cain noted on Tuesday that Australians are currently sitting on record savings – which augurs well for their ability to handle higher supermarket bills.

But not all have a savings buffer. And history demonstrates that it’s the discretionary end of retail that gets hit hardest when prices rise.

Supermarket shoppers have generally responded to higher prices by substituting products with cheaper alternatives. This could play well for major supermarkets who offer customers less expensive home brands – which in some cases are higher margin products.

It is understandable that given the current volatile environment Cain wasn’t too keen on Tuesday to provide much detail around the earnings outlook.

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On the cost side, the outlook is looking more positive as COVID is moderating, but revenue trends are harder to predict.

“As Omicron spread through the community in the early part of January supermarket sales were elevated before moderating later in the month. There has been a significant variation in sales performance between states, store locations and on a week-to-week basis as a result of COVID-19 and floods in South Australia which have had an impact on sales, particularly in Western Australia,” Coles said.

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