Key Points
- Woolworths and Coles both announced significant sales revenue growth.
- Both supermarkets say their profits are due to people spending less on eating out
- Experts say supermarkets rely on customers used to paying more for essential items during times of crisis
Both Coles and Woolworths each announced their numbers were up this week. Woolworths showed no signs of slowing down, announcing it had made a $1.62 billion full-year profit after tax, up 4.6 per cent from last year.
Coles also reported sales revenue was up by 6.1 per cent for the financial year, with cash profit rising to $1.1 billion from $1.05 billion the year before.
What the supermarkets say about their profits
The supermarket giants say their profits are due to customers affected by the cost of living crisis cutting out discretionary spending such as eating out, in favour of groceries.
According to Coles, times of uncertainty significantly impact how their customers shop, prompting them to buy in bulk and purchase more frozen food.
Woolworths also said their customers were shopping smarter, saying that some were trading down from beef into more affordable sources of protein and swapping fresh vegetables for frozen and canned options.
But Professor Nitika Garg from the UNSW School of Marketing said people spending more on groceries and making less discretionary purchases can’t be the only reason supermarkets are enjoying a surge in profits.
What goes up, doesn't come down
“The fact that supermarkets are making this much profit is an issue because somewhere along the line they have had to carry forward excess margins. When we had supply issues, prices went up and on some items prices are still high,” Garg said.
“If you look at meat products right now, they are super expensive, and the price of milk went up when we were experiencing supply issues, it's yet to come down. Are these profits being passed on to the farmers? Chances are they are not."
Garg also notes that supermarkets often rely on customers adapting to paying more for essentials when an external event impacts the supply chain, further contributing to rising profits.
She said when an event such as a natural disaster or a war causes a disruption to the supply chain and there is a change in costing, supermarkets often look to see if a customer can absorb the cost.
"Once the disruption to the supply chain is fixed, it becomes harder for a retailer to roll back on that profit margin, especially if their consumers are already used to paying more for the same product,” she said.
"Supermarkets rely on consumers adapting, especially in vulnerable times."
What's 'shrinkflation' got to do with it?
'Shrinkflation', or the concept of a product shrinking in size but being sold at the same price, is a practice that helps supermarkets to safeguard profit margins.
Consumers might not initially detect the reduction in size, allowing retailers to navigate price sensitivity during periods of ambiguity and crisis, without giving the impression of substantial cost hikes.
What does the future look like?
Australia's predicted bumper crop year, coupled with times of economic uncertainty, can only mean that supermarkets will continue to enjoy big profits, according to Professor Ellen Garbarino from the University of Sydney's Business School.
"When lots of quality produce becomes available, supermarkets are able to use seasonal specials as a marketing tactic to draw you in and help you spend money."
She also says as long as uncertain times are ahead, supermarkets will continue to reap the benefits as more people seek comfort and security at home.
