Supermarket giant Woolworths has been lifting grocery prices in a move aimed at plugging a hole in earnings from its loss-making hardware business and building a war chest to tackle fast-growing discounter Aldi.
According to a report by Citigroup, Woolworths has raised prices on a wide range of lower-profile products – such as baked beans, yoghurt, pasta and cream – by between 1.3 per cent and 8.7 per cent over the last two months.
Citigroup analyst Craig Woolford said the price increases started in May and had become more widespread. In most cases they were not triggered by suppliers.
“This is known as ‘price creep’ and may reflect food and liquor needing to plug a hole in earnings left by Big W and Masters’ weakness,” said Mr Woolford.
“Based on our feedback, the price rises have been made to boost gross margins,” he said.
For example, the price of San Remo pasta had risen by 8.7 per cent $2.63, SPC baked beans by 7.7 per cent to $1.40, Farmers Union greek yoghurt by 3.3 per cent to $6.65 and Pura thickened cream by 4.3 per cent to $3.43.
Mr Woolford said a 1 per cent price rise on one quarter of the average shopping basket could add $7 million to Woolworths’s earnings before interest and tax each month.
“Our price tracking suggests some lower profile grocery items have seen 3 per cent or more price rises since May 2014. This could amount to $42 million in extra earnings,” he said.
Mr Woolford believes Woolworths might be trying to boost gross margins in food and liquor to offset weaker earnings at BIG W and big losses at Masters, which is forecast to lose $166 million this year, compared with losses of $139 million in 2013.
Alternatively, Woolworths could be building a war chest for promotional pricing to better respond to discounter Aldi, which is adding more branded groceries to its range.
Promotions offering price reductions of 50 per cent generate significant volume growth and have been used successfully at Coles over the past three years.
Mr Woolford said suppliers’ input costs had risen, particularly for dairy and wheat.
However, the price increases in May and June had been driven by Woolworths, rather than suppliers, and had not been always been copied by Coles.
“A range of suppliers have not actually raised their prices, yet Woolworths shelf prices are higher,” he said.