Coles, Woolworths facing pressure to reveal how they are responding to price hike demands from suppliers

Coles and Woolworths will be under pressure to reveal how they are responding to price hike requests from suppliers hoping to recover costs amid the fuel crisis.

The nation’s biggest supermarkets are set to unveil third-quarter sales next Thursday and Friday.

Analysts at UBS, led by Shaun Cousins, will be looking for commentary around how Coles and Woolworths are handling requests from suppliers to pass on higher costs — whether it’s being refused, which will further crunch supplier margins; accepted and being passed on in total; or being absorbed by the supermarkets.

The investment bank told clients in a note on Friday it was also keen to understand how this approach would change if cost pressures prove more enduring.

The closure of the Strait of Hormuz has sent the cost of fuel and other supply chain costs, like raw materials and packaging, soaring.

For Coles and Woolworths, it will be a balancing act between keeping crunched households happy by keeping prices low and enabling suppliers to remain profitable.

Both supermarket chains have faced increased regulatory scrutiny and been forced to front multiple government inquiries into claims of profiteering.

Last year, the Australian Competition and Consumer Commission failed to come up with any smoking gun to support claims of price gouging from Coles and Woolworths.

Woolworths is currently defending itself in a blockbuster court case brought by the watchdog, which claims that it and Coles misled consumers by advertising discounts on products that were marked higher than their original shelf price.

The court heard Coles’ defence against the allegations in February.

UBS expects Woolworths food sales to hit $13.8 billion in the third quarter, up 5.4 per cent on the prior corresponding period and outpacing sales at Coles supermarkets, set to reach $9.7b, up 3.5 per cent.

Mr Cousins also said sales at Coles’ liquor division — which recently completed a simplification program that saw its Vintage Cellars and First Choice Liquor Market chains folded into the better-known Liquorland brand — would remain challenged.

He will look for impacts on sales following the simplification program, as well as consumer behaviour shifts from out-of-home to at-home liquor consumption and changes to promotional activity.

Meanwhile, Woolworths’ New Zealand food and Big W’s performance are expected to remain subdued.

UBS earlier this week said it expected food inflation to increase steadily, led by fresh food in the fourth quarter due to fuel surcharges and reduced availability.

Mr Cousins expects the shift in spending away from discretionary to staples to be uneven. Supermarket spending is set to increase due to higher inflation, with volumes up, albeit modestly, he said.

“Supermarkets are focused on rebuilding price trust, especially Woolworths, so are asking suppliers to absorb much of these costs but, given the quantum of inflation, this is unlikely to be sustainable,” Mr Cousins said.

“More than during COVID, supermarkets will need to absorb supplier cost increases — more likely fresh, less likely dry grocery — reducing gross margins, but we forecast supermarket prices to rise.”

As a result, UBS expects consumers to trade down to promotions and private label, shop more with discount retailers like Aldi, as well as favour larger-format supermarkets where trips can be consolidated.