Deflation hits the shelves at Australia’s Woolworths; shares sink

SYDNEY, May 2 (Reuters) – Top Australian supermarket chain Woolworths (WOW.AX), said shelf prices had fallen in the March quarter as it competed for customers facing persistently high living costs, offsetting a consumer backlash but frustrating investors who sent shares lower.

The quarterly update on Thursday shows the narrow path for Woolworths and No.2 rival Coles (COL.AX), which dominate Australian grocery sales. They face immense political pressure to play a part in the fight against rising food insecurity without sacrificing already-skinny profit margins.

For Woolworths, which gets nearly 40 cents of every dollar spent by Australians in a supermarket, that meant cutting prices of fruit, vegetables and meat, which dragged down average prices by 0.2% in the 13 weeks to end-March, from a 5.8% increase in the same period a year earlier.

Food sales rose just 1.5% to A$12.58 billion ($8.21 billion), slower than the country’s population grew, analysts noted.

By comparison, Coles said on Tuesday its price inflation slowed since a year earlier to 1.9% and sales rose 5.1% for the same period.

“We were out-traded in the quarter,” outgoing Woolworths CEO Brad Banducci said on an analyst call.

“We’re determined to get inflation in a reasonable range. We got there. We thought that was critically important for us and for our customers in the context which we are operating in.”

Woolworths shares were down 5% by mid-session to a near four-year low, against a slightly higher overall market (.AXJO), as analysts lashed the company for failing to grow sales volumes more despite cutting prices.

“Clearly in this quarter you haven’t executed well,” Bank of America Merrill Lynch analyst David Errington told Banducci on the call. “You’ve been out-traded by Coles. They’re facing exactly the same.”

Banducci, who is leaving in September, has been a figurehead in a consumer backlash against Australian supermarkets after two years of surging energy, housing and services costs. Last month, he was threatened with jail by a senator while struggling to answer a question in a parliamentary inquiry into the sector.

“Consumers are under pressure in this country and we have a role in helping them,” said Banducci on a media call, when asked if he hoped the price deflation would quieten calls for more regulatory intervention.

($1 = 1.5326 Australian dollars)