Finance Your Budget Coles’ price-slashing years look to be at an end

Coles’ price-slashing years look to be at an end

supermarket duopoly
Coles supermarkets are missing the Little Shop promotion. Photo: Getty
Twitter Facebook Reddit Pinterest Email

There has been a lot of negative press in the past few years about Coles supermarkets and the drubbing they’ve received from arch-rival Woolworths, but there are signs that tide is turning.

Market analysts last week suggested that the long-running price war with Woolies is drawing to a close, and that Coles will stop trying so hard to fend off competition from the low-price groceries chains Aldi and Costco.

Analysts at investment bank UBS say Coles should be “placing less emphasis on price and more on the broader value offer – service, loyalty, theatre” and that already “shoppers are visiting Coles more often and share of wallet is increasing”.

At face value, that might seem counter-intuitive, given the constant cries of ‘flat-lining wages’ heard in the national media – including at The New Daily.

But while wages are indeed struggling to keep up with inflation, the number of jobs created in the past year is helping more households get off the breadline associated with unemployment or severe underemployment.

As Callam Pickering, economist for job-search site Indeed, noted on Thursday, the latest ABS jobs data showed “job vacancies up 4.3 per cent over the three months to February, to be 19.3 per cent higher over the year” and “the number of unemployed people per job vacancy has declined to its lowest level since May 2011”.

These are people who may well be tired of trekking long distances to find a Costco or sick of finding one or more ingredients for a recipe missing from the shelves of Aldi.

In that respect, at least, the new Coles strategy – which includes far less emphasis on the ‘Down, down, prices are down’ jingle – looks well timed.

And it may not have much scope to lower them again, especially after parent company Wesfarmers spins Coles off as a separate listed company next year. It’s harder to fight a price war without a deep-pocketed parent to help out.

Bank of America Merrill Lynch analyst David Errington told The Australian on Thursday: “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.”

The trigger for that comment was the end of a specific price war on roast chickens. Both Coles and Woolies dropped their prices to below-cost two years ago, but have now started raising them again.

Like the more successful Woolworths, Coles is now trying to differentiate its stores on ‘feelgood’ factors as household budgets recover – hence the new Coles slogan of “Good things are happening at Coles”.

Up, up, prices are up

That will trouble some shoppers, particularly those on low budgets who have to travel a long way to reach anything other than a Coles or Woolies store – the business is still as much about what real estate each company holds as the goods and prices on offer.

But that’s not to say nothing has changed.

Six years ago, both the supermarket majors were accused by a parliamentary inquiry of holding, and abusing, too much market power. Their small-business suppliers were being driven to the wall, while Coles and Woolies reaped large profit margins on their goods.

As reported recently, that has improved a lot according to the Australian Council of Small Business.

Moreover, with Aldi now commanding 9 per cent of the market, and well on its way to 15 per cent when its expansions into Western Australian and South Australia hit their stride, the worst days of duopoly pricing power appear to be over.

Bulk discount retailer Costco is still expanding, but the Metcash-supplied independent supermarkets, including IGA, are slowly losing ground – now with only 7.5 per cent market share.

So with Coles and Woolworths set to compete on quality of offering rather than price, and with Aldi gradually revamping its stores nationally to have better fresh food offerings, it’s beginning to look like a ‘triopoly’.

Whether that keeps prices from rising back to their pre-price-war levels in real terms is yet to be seen.

But at least for now, the stranglehold the big two had on the market looks considerably looser.

View Comments