Huge increases in utility prices are adding to the pressure on Australia's major supermarket chains as they seek to balance rising power, water and wages bills with sagging profitability.
Wesfarmers chief Richard Goyder revealed at the conglomerate's earnings announcement that Coles' utility bill had spiked by as much as 14 per cent at the same time as it was forced to pull forward price cuts and promotions to safeguard its hard-earned market share against a resurgent Woolworths.
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Wesfarmers half-year mixed bag
The retail giant reported strong results from Bunnings, Kmart and Officeworks, but a decline in earnings from Coles and Target.
There are some upsides to the concerns about energy security – sales of generators at Wesfarmers' Bunnings chain in South Australia have spiked following black-outs in that state – but those are far outweighed by rising utility bills.
That increase is adding to the cost pressures on the supermarket sector and more broadly Australia's competitiveness, according to Mr Goyder.
![Keeping the lights on is proving an ever more expensive challenge for the major supermarket chains.](/web/20170227171248im_/http://www.canberratimes.com.au/content/dam/images/g/u/h/u/u/1/image.related.articleLeadwide.620x349.guht9s.png/1488073572706.jpg)
"We are worried about it and certainty of supply, Australia is blessed with low cost energy resources and if you agree to a small extent to my theory about there being a [global] economic battle, why wouldn't we take advantage of low energy costs?"
Coles boss John Durkan claimed 2016 saw the weakest grocery market conditions in three decades as the supermarket giant, one half of Australia's supermarket duopoly, revealed an 8 per cent fall in its first half earnings.
Light bulb moment
At arch-rival, Woolworths, chief executive Brad Banducci said the group was trying to reduce power costs through switching to energy efficient LED lights and was modelling how big electricity cost increases could effect its business.
Mr Banducci said it was not yet clear how the large price rises mooted for the Victorian market would impact the supermarket business.
Fred Harrison is bracing for increases of up to 20 per cent on his power bills across the Ritchies IGA network of 80 independent grocery stores in Victoria, NSW and Queensland.
"All our costs are firmly rising at inflation or higher and electricity is going up by a fortune this year," the Ritchies IGA chief said.
"It's a massive increase that sits behind wages and rent, it's the No.3 expense now.
"I know that with contracts coming up now they are talking about increases of 20 per cent and you have to pay for that with cash so it's a little bit more margin."
Discount pressure
The cost pressure comes as supermarkets are slashing prices to attract customers. Mr Harrison said the current level of discounting in Australia's grocery sector was unsustainable in a market that was also under pressure to pay big increases in fixed costs.
And it's not just the retailers that are battling to contain big cost increases, Mr Harrison said suppliers would not be able to shoulder any further input cost increases or increased utility costs without putting through cost increase on their product lines.
"I'm not saying that we need 5 per cent inflation but if we could achieve cost increases of between 2 and 2.5 per cent and inflation at a similar number that's still a win for consumers," Mr Harrison said.
The challenges of this slow growth era are the same for all operators, according to Mr Harrison, who warned there was a point where efficiencies started to hurt services.
Comparable store sales from the independent group are running at about 2 per cent, compared to a 0.9 per cent increase in Coles like-for-like sales growth for the second quarter or 1 per cent on a food-only basis.
Food and liquor margins are expected to slide by as much as 80 basis points in the second half as Coles keeps its foot on the promotion and pricing "accelerator"Â even as suppliers fear the increased frequency of deeper discounts is leading the sector ever closer to the "death knell" of one-for-two pricing.
One supplier, who would only talk on the basis of anonymity said one-for-two pricing was where the full service supermarkets went in the darkest days of their battle with the discounters in Britain.
"The problem for suppliers is the depth of increases, it means you are selling much more on promotion and that has a cost for suppliers, especially when those promotions are going up [in frequency]Â by 50 per cent," he said.
"It amounts to an increase in variable spend and the biggest problem with that is if it becomes a structural shift, it turns into a downward spiral."
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