The price of food and other grocery items is set to increase by an annualised rate of 6.8 per cent this year, according to a survey of 45 suppliers in the fast-moving consumer goods (FMGC) sector conducted by research analysts at Jarden.
That rate of price increases would lift food inflation into the top quartile historically and tends to be accompanied by a period of sharemarket outperformance for listed supermarkets, the report led by analyst Ben Gilbert says.
Supply chain issues are set to abate and be replaced by food inflation, say analysts at Jarden. Ashtyn Hiron/9 News Perth
The Jarden analysts are bullish on the listed supermarket sector, citing Woolworths’ mid-December earnings downgrade as the moment of peak pain, with price increases and lifts in FMCG market growth suggesting trends may be improving.”
“We remain overweight the sector, with the view supply chain issues are temporary, inflation reduces near-term earnings risk and creates upside to the 2023 financial year,” the report says.
The price increases will be felt by suppliers. The weight-adjusted average price increases of 6.8 per cent will be insufficient to offset the average cost inflation of 11.3 per cent experienced by suppliers.
Jarden’s survey was conducted online last week and targeted key players in promotions and trading across food, health and general merchandise sectors. The respondents were guaranteed anonymity to facilitate accurate responses.
Just under 90 per cent of respondents said they would increase prices, with 70 per cent planning to raise prices within the first half of the year.
The price increases of more than 6 per cent annualised are “coming now and are large” according to Jarden’s report, but they are in line with price increases in the United Kingdom and the United States.
While Australian and European listed supermarket companies have traded broadly flat over 12 months, an index of US supermarkets is up about 40 per cent. Food and beverage inflation has been significantly higher in the US since 2020 and is tracking well above 5 per cent.
Just under half of the participants named Woolworths as the hardest retailer to engage with, suggesting the supermarket giant was the “most aggressive in pushing for terms in the market.”
The scenario of sharply rising prices should play into the hands of the powerful retailers, because it makes it easier for them to raise their selling prices and expand their gross profit margins.
“[Survey] results and our industry discussions suggest retailers are pushing for more terms and reducing promotional programs in conjunction with inflation discussions,” the report said.
“This should, at least, see gross margins held post price increases. If structural, we think this provides medium-term sector upside.”
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