Say goodbye to cheap roast chooks
AFTER nearly a decade of hacking away at prices and profitability, the chickens are coming home to roost in the supermarket price wars.
A $1 increase in the price of roast chickens at Coles and Woolworths from $8 to $9 has been described as an "industry-changing event" which could signal the end of the "race to the bottom", according to one retail analyst.
In a note on Wednesday, Bank of America Merrill Lynch analyst David Errington said Coles tested the higher price at some of its regional supermarkets a few weeks ago, prompting Woolworths to follow suit.
Coles then rolled out the higher price nationally, and Woolworths followed.
"From our estimates, at $8 no supermarket makes any profit from selling barbecue chickens and Woolworths sells around 50 million chickens annually and Coles sells just over 40 million," Mr Errington said in the note, reported by The Australian.
"A $1 price move is material but more importantly to us is a likely symbol that Coles and Woolworths are now looking at ways to improve profitability without compromising competitiveness."
Mr Errington said the 12 per cent increase signalled the start of broader price rises in the $90 billion grocery sector.
"Australian food retailers show they don't 'hate' money," he said. "We believe the margins in the Australian supermarket industry have fallen too aggressively in the past two years, and that all participants are likely to allow price inflation to modestly return after a lengthy period of deflation."
It comes weeks after Wesfarmers announced plans to spin off Coles as a stand-alone ASX-listed entity. Mr Errington said the move would contribute to broader grocery price increases, because a stand-alone Coles would be less capable of aggressive discounting.
"An ongoing strategy of price deflation has been damaging to the industry as earnings across Coles, Woolworths and Metcash have decreased by 30 per cent between 2015 and 2017 and margins have contracted from 5.7 per cent to 4.1 per cent over the same time," he said.
"In appears to us that the industry has now rebased and is currently in a position where price increases that support higher sales, earnings and cash generation, can be reasonably expected.''
Earlier this month, Coles revealed it was putting its long-running "Down, Down" campaign, which first hit TV screens in 2010, on the backburner as it moved beyond price to talk about the positive role it plays in the community.
Last month, Coles boss John Durkan stressed that overall prices would continue to fall. "Our long-term strategy, as it has been for a while, is to invest in lowering prices," Mr Durkan said at the retailer's half-year earnings announcement.
"You can see that recently in a number of price drops that we've done since post-Christmas across a variety of products from hams to shampoo that have come down in price. You will always see price investment from us in lowering the basket."
A Coles spokesman said: "We dropped the price of whole hot roast chickens from $11 to $8 more than two years ago and as with all of our Down Down and Every Day price drops, the intention is for these prices to stay down for a minimum of six months.
"Hot roast chickens are still almost 20 per cent cheaper than they were two years ago, and this change allows us to invest in lowering prices on other products that are important to our customers.
"In the past 12 months, we've cut prices on thousands of products including sliced ham, fresh salmon and cleaning supplies and we now have more than 4000 items on Every Day pricing so customers can be sure they will get great value every time they shop with Coles."
A Woolworths spokesman said: "At Woolworths, we understand that every dollar counts and work hard to provide a more affordable weekly shop for our customers.
"In 2016 we dropped the price on our hot roast chickens from $11 to a market leading price of $7.90. Earlier this month we reluctantly moved the price to $9 due to an increase in input costs, particularly feed cost, which is a key component of producing chickens for our suppliers.
"The new price still represents a $2 saving on the everyday price of two years ago. In the last few months at Woolworths, we've dropped the price on hundreds of products, with a real focus on family essentials such as salads, biscuits, pastas, nappies, meats as well as household cleaning items.
"As we continue to keep prices low on as many everyday family essentials as possible, we are also focused on dropping the price on healthier alternatives to ensure all Australians have access to making better food choices."