Major supermarket Woolworths is hiking prices on low-profile items to boost profits and regain losses, say analysts.
While Woolworths has recently faced complaints it is squeezing supplier’s profits, the report suggest the supermarket is strategically pushing its own revenue margins.
The research from Citigroup tracked grocery prices for the last two months and found an increase of up to nearly 9% since the start of May.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
“Based on our feedback, the price rises have been made to boost gross margins,” reads the report. “Rather than being a positive sign, the price rises are most likely offsetting weakness at Masters and Big W.”
The price hikes were not made on high profile items, but examples included grocery staples such as 500g San Remo pasta (up 8.7% in two months), 425g SPC baked beans (7.7%) and 300ml Pura thickened cream (4.3%).
“From our feedback, the price rises became more widespread over the past two months and, in many cases, were not driven by supplier cost increases,” read the report.
Citi estimated the price hikes may have added $42 million in earnings for Woolworths since May.
The report suggests the reason Woolworths is looking to widen its profit margins is to offset losses made by its Masters and Big W stores. Citi estimates a loss of $166 million at Woolworths Home Improvement this financial year, and an 11% decline at Big W.
“Alternative explanations for the price rises are Woolworths could be building a war-chest for promotional pricing; using the price lever to more effectively fight Aldi; or simply passing on supplier cost increases.”
The chief executive of independent supermarkets association Master Grocers Australia, Jos de Bruin, told SmartCompany this behaviour was not unexpected.
“Why is this a surprise?” says de Bruin. “We’ve known about this forever. You can’t pretend you’re cutting prices by half and not making it up elsewhere.”
He says Woolworths and Coles will entice customers into the stores with half-price items, which are typically high profile items such as soft drink, coffee or milo, but when a customer does a full grocery shop in store, the margins on discretionary items and fresh items will be marked up to compensate.
“If you come in for your half-price Coke and then do a full shop, you’re going to be paying a huge mark up on that jar of olives,” says de Bruin. “It is a common fact that margins are made up within the minor products.”
“With respect, consumers need to be aware that somewhere along the way they make up the price.”
He says independent supermarkets are often seen as not being as competitive on prices as the majors are, but actually have steadier and fairer profit margins across the board.
“Shareholders are [the major’s] number one priority, not customers… We have to put the truth out there that things are not what they seem.”
A Woolworths spokesperson told SmartCompany in a statement the supermarket will “continue to offer the lowest prices every day across our range of groceries”.
“The sample of just 10 unrepresentative items taken by the analyst cannot accurately represent prices for an average shopper across the thousands of everyday goods. Grocery prices continue to fall with 18 consecutive quarters of price deflation. Shoppers have saved an average of $445 each year per household over the last 5 years. Woolworths remains the lowest price full range supermarket in Australia.”