Pricing power means Woolies, Coles a safe bet in tough times

afr.com:

Woolworths and Coles have the size and clout to keep passing on shelf price inflation to shoppers, making them safe havens in the retail sector as cost-of-living pressures catch up with households – and they stop spending.

Woolworths has been a solid performer over the past 12 months. Its share price is up about 10 per cent, keeping pace with the broader sharemarket, while Coles has made smaller gains of about 2 per cent.

Simply, people have to keep eating. There is a “trading down” effect where shoppers are substituting private label brands for branded items, and frozen food options for fresh. But Woolworths and Coles will keep those customers in their stores, even if they are choosing cheaper products.

Food inflation is running at almost 9 per cent, according to UBS. The hit to shoppers at supermarket checkouts is painfully evident each week, but those higher prices are a plus for Woolworths and Coles.

Metcash, which supplies groceries to IGA supermarkets, has suffered an 11 per cent drop in its share price over the past 12 months. It also runs the Mitre 10 hardware chain, which is expected to remain resilient in tougher economic times as households do more home maintenance.

Cost-of-living pressures are set to increase further as electricity and gas bills jump from July 1, and the full effect of the Reserve Bank’s 12 interest rate rises wash through the economy.

Wilson Asset Management portfolio manager John Ayoub said the last few months of calendar 2023 will be hard for households. “Consumer spending will deteriorate further with affordability and household free cash coming under pressure,” he said.

He said Woolworths and Coles would benefit from inflation and the normalisation of their cost base, as they trim costs