Coles warns of grocery cost pressure from squeezed suppliers looking to offset ripple effects of war in Iran

Sales growth at Coles has failed to keep pace with its arch rival as the grocery giant warns customers that supplier are pushing for higher prices to offset the ripple effects of the war in the Middle East.

Chief executive Leah Weckert said on Friday that value for money remained front of mind for shoppers who had been squeezed by higher fuel prices over the past two months and the threat of additional interest rate hikes by the Reserve Bank.

But the supermarket chain was positioned to take advantage of changing consumer behaviour as more Australians give up meals out in favour of cooking at home to ease the pressure on household budgets.

“We know value and availability will be important to our customers over the months ahead and we are well placed to respond to this with our extensive own brand portfolio, our leading eCommerce platforms and the strength of the infrastructure and capability that sits within our supply chain,” Ms Weckert said.

Sales across Coles’ supermarkets and liquor division grew 3.1 per cent in the three months to March 29, compared to the same time a year ago, to $10.7 billion.

Sales at its supermarkets climbed 4 per cent to $9.78b — well down on Woolworths, which on Thursday reported its Australian food business grew 5.9 per cent to $13.83b over the same period.

Excluding tobacco sales, Coles’ revenue rose 5.7 per cent, again left behind by Woolworths’ 7.3 per cent.

But Coles did report a big uplift in its exclusive private label offerings, with sales up more than 7 per cent as it added another 142 products.

It was supported by a new Coles Kitchen salad range and the refresh of its Coles Simply range. Across the portfolio, Coles Finest remained the strongest performing tier with revenue increasing by 8.2 per cent.

But the company warned that while revenue growth in the fourth quarter so far remained broadly in line with the previous three-month period, it was starting to feel the effects of the US and Israel’s war with Iran.

“In recent weeks, we have seen an increase in supplier cost price increase requests and higher costs within our own operations, particularly in fuel, freight and packaging,” it said.

“We are actively managing these and will mitigate impacts where possible, while balancing the needs of customers and suppliers.”

Coles stopped short of following Woolworths, which warned full-year earnings would take a hit as a result of the conflict and would not reach the upper end of its previous guidance.

Woolworths shares were hammered almost 8 per cent lower on the news that it would freeze prices on 300 items as its fights to win over cost-conscious shoppers hurt by the cost of living crisis and rising inflation.

Coles was also swept up in the negative investor sentiment and dropped 3.6 per cent. It fell a further 4 per cent after Friday’s update and was sitting at $22.03 in early trade.

It is also seeing the impact of more value-focused shopping at its liquor division, where comparable store sales tumbled 4.3 per cent to $781 million as consumer sentiment weakened in March following the outbreak of war in the Middle East.

“In response to the current environment and longer term consumer trends, we remain focused on delivering a convenient liquor offer, underpinned by trusted value and an increasing focus on leveraging our integrated food and drink proposition,” it said.