From lockdowns to logistics Woolworths moves from one challenge to another

October 27, 2021 â€" 4.06pm

Woolworths boss Brad Banducci doesn’t want to be alarmist about inflation. But when he mentions that a shipping container that cost less than $1000 a year ago is $4500 today, alarm bells rang.

And when he described his expectation for food inflation as “the toughest of all questions” the bells got louder.

Australia’s largest supermarket managed to keep the inflation genie inside the baked bean can for the duration of the pandemic. That’s the good news.

Woolworths CEO Brad Banducci notes apples are cheap.Credit:Dominic Lorrimer

But pressures are coming down the pike - some of which relate to logistics and some to supply.

The extent to which consumers will feel this at the checkout depends on how much retailers such as Woolworths and Coles are willing to absorb into their own profit margins.

Indeed, with much of supermarket fresh food supply sourced domestically, it will be the imported grocery staples that are more susceptible to price rises.

The transport and logistics or supply chain issues are the biggest challenge. Banducci said on Wednesday that Woolworths regularly fielded approaches from suppliers for price increases. But at the moment, he admits, there are more than usual.

“So we can see legitimacy from the cost increase the suppliers are giving us but we’ve got to be very careful on how we pass those through to our customers,” he said.

Woolworths appears to have navigated the challenges of shipping and containers for the moment but most recently it has needed to deal with its suppliers’ shortage of pallets. “So it’ll continue to be a challenge as these bottlenecks are dealt with and as I say, it’s pretty dynamic.”

Banducci says the situation is under control as it relates to the busy Christmas period but beyond that he is making no assurances. “We are working to get the volumes into the country that we need,” he said, while adding that most goods were either at sea or about to be dispatched.

The good news is that fresh fruit and vegetable prices (apples and avocados in particular) are deflating in price - the bad news (and this shouldn’t be news to anyone that shops) is that red meat prices are particularly high.

This is thanks to strong export demand and the decision by some producers to hold on to livestock in order to rebuild herds.

The pandemic-induced supply chain issues are not confined to the supermarket sector.

Hints of inflationary pressure are already becoming evident in the core inflation numbers released on Wednesday for the September quarter.

While the headline rise of 0.8 per cent was in line with economists’ expectations, the core inflation number (the measure preferred by the Reserve Bank of Australia) was higher than forecast.

Capital Economics noted that rising import costs were a factor that could lift goods inflation in the months ahead.

To date consumers have experienced elevated prices for building materials and fuel but based on the supply chain issues highlighted by Banducci the economy should brace for a further spread.

On the plus side, Australian consumers are particularly cashed up after many have been locked out of all but essential retail for four months. This may result in shoppers being a little less price sensitive than usual.

Meanwhile, Banducci is warning that the turbocharged boost in revenue that it experienced during the pandemic lockdowns is beginning to fade based on October sales numbers.

Sales remain stronger than they did pre-COVID but as Melbourne and Sydney have opened dining out as an option, growth in grocery sales is easing.

Given many consumers are still working from home and may do so permanently it is difficult to forecast where the new normal will land.

On a two-year average comparison, Australian food sales were up 8.7 per cent for the three months to September but like-for-like sales for the three months grew 2.7 per cent against the previous corresponding period. This was below market expectations and sparked a 3 per cent fall in Woolworths share price.

On the flip side BIG W’s revenue has been recovering post lockdown.

And while Woolworths’ supermarket sales have grown during COVID, the costs associated with managing the stores to deal with the pandemic have risen.

On Thursday rival Coles will deliver its quarterly sales report card and some clarity on how it is managing the COVID ripple effects of supply bottlenecks and inflation.

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