You’re not imagining it: prices are ticking up at Australia’s major supermarkets, especially for fresh fruit and vegetables.
The sector, which has seen ferocious competition in recent years thanks to the arrival of German budget chain Aldi, saw a strong lift in prices for the first time in eighteen months, according to special research from Deutsche Bank.
The industry is waiting to see the full extent of US internet giant Amazon’s plans to enter the market, especially how aggressively it will compete in the fresh grocery category. The company is known to be building capability for its Amazon Fresh service, through which customers can order groceries online in the morning and have them delivered by dinner time.
Deutsche Bank, which checks prices around the country at supermarkets on fixed basket of goods each week, says fresh fruit and vegetable prices surged more than 7% in the December quarter, compared to a limp 0.7% in the three months to September.
The effect on across-the-board prices in the sector is seen in the chart below:
Between the major two supermarkets, the price rises were much more pronounced at Coles, compared to Woolworths which has been pursuing a turnaround strategy involving the closure of 30 stores and cutting 500 jobs. This shows the difference between the two:
The inflation in fresh goods is offset at the major chains by their continued investment in their private label products, which saw deflation during the quarter.
Deutsche highlights that Woolworths stands to gain more than Coles’ holding company Wesfarmers from food inflation, simply because the diversity of Wesfarmers portfolio of businesses makes its earnings less sensitive to the impact of stronger supermarket revenues.
Deutsche has a buy rating on Woolworths with a $27 price target, and a sell on Wesfarmers with a $38 price target.
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