Food price pressure wanes: Woolworths

Posted by Daniel Palmer on 21st October 2009

Woolworths, Australia’s largest supermarket operator, has indicated that it expects to see continued food disinflation for the remainder of this year.Speaking following the release of Woolworth’s first quarter results, CEO Michael Luscombe said that the company had passed lower commodity costs onto consumers.

“I think this was a really good quarter for Woolies, but more importantly I think it was a really good quarter for Australian families,” he told analysts during a conference call.

At the groups largest unit, Australian Food and Liquor, Woolworths saw the inflation rate running at about half its previous level, driven both by falling costs and the company’s strategy to invest in price, Luscombe said.

“Clearly we cycled some pretty high prices and globally effected prices in the previous year. It was noticeable in dairy, so obviously dairy products had come back and there has been a reduction of course with the milk levy. Meat and produce and propriety bakery are also pretty flat to negative in this past quarter.”

Mr Luscombe said that food inflation at its Australian Food and Liquor business pulled back from 4.2% in May to total 1.46% in August and 1.65% in September.

“We will probably see not much change [in inflation levels] going through to Christmas now,” he predicted. “I don’t see that the dairy numbers should change back to inflation; the grocery numbers are ticking along nicely; meat has certainly come off quite a bit; produce has actually remained deflationary; and, of course, with bread which cycled the big jumps we had the previous year.”

Woolworths has pulled back the price of its own label products in a bit to increase volumes, reducing some prices by as much as 30% year-on-year.

“There has been quite a bit of both cycling of commodity prices – obviously some products that were imported we are able to buy a little bit cheaper now with the Aus dollar – and, yes, we have been doing what we normally do – reinvesting in prices to drive growth,” he commented.

Mr Luscombe added that whether the higher value of the Australian dollar would continue to place downward pressure on food prices would depend on the strategies employed by individual retailers.

“In our case what we have typically done is passed onto consumer… other retailers will choose to save margin,” he revealed.

However, Luscombe acknowledged that while investing in price has driven volume expansion, it has also held back dollar sales growth.

“In terms of fresh, clearly our volumes are up dramatically – but the dollars are a little bit challenged because of deflation,” he said.

Woolworths’ total sales in the 14 weeks to 4 October rose by 4.2%, or 7.4% excluding petrol, the company revealed.

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