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The $4 billion ASX-listed retailer acknowledged during its 2022 results on Monday that inflationary pressures were causing uncertainty for customers and suppliers, but chief executive Doug Jones said he was confident Metcash could compete with the supermarket giants throughout this period.

He said that while all retailers face uncertainties of rising inflation, “independent retailers are in a great place”.

Jones said a lift in sales across the company’s grocery arm over the past seven weeks suggests the business is in a strong position, with customers maintaining a preference for independent supermarkets even after COVID lockdowns.

“[Our sales are] showing that shoppers are sticking with independent stores and that trend is now becoming a habit,” he told analysts after revealing a 2.7 per cent lift Metcash’s annual profits to $245.4 million.

Jones told The Sydney Morning Herald and The Age the company’s wholesale logistics structure would give the company flexibility during times of supply chain challenges and product shortages. He said Metcash’s position as a wholesaler was different from other supermarkets such as Coles and Woolworths, with its focus on providing store owners across its network with a wide range of suppliers from around the country.

“The model supports retailers buying locally from local suppliers. We have a robust supply chain that allows us to respond [to challenges],” he said.

Metcash’s food retailers reported an earnings jump of 4.1 per cent during 2022, while liquor was up 9.8 per cent and hardware sales were 40.7 per cent higher as the company’s IHG and Total Tools businesses benefited from the residential construction boom.

The company’s investors will receive an 11 cent fully franked dividend for the half, compared to 9.5 per cent at the same time last year, meaning the full-year dividend of 21.5 cents is up by 23 per cent.

The market welcomed the numbers, with Metcash shares jumping as much as 6.3 per cent throughout the morning to a high of $4.49 before closing at $4.12.

Metcash revealed on Monday it had entered a long-term leasing agreement with Goodman Group for a 115,000 square metre distribution centre at Truganina in Melbourne’s outer west to replace its current Victorian distribution site in Laverton.

The building, which is expected to be completed in 2024, will carry a fitout cost of $70 million. “We are delighted to be able to announce this significant long-term investment for our independent retailers in Victoria, which is a reflection of our continued focus on championing their success,” Jones said.

Total group sales have jumped by 8.6 per cent in the first seven weeks of the 2023 year, but the company warned growing inflation could impact the outlook.

Chief financial officer Alistair Bell told analysts that business was building strongly on what had been a stellar year of trade. “We will continue to invest in inventory, [even] while inflation remains high,” he said.

Jarden analyst Ben Gilbert said that the strong sales figures for the first months of this year could mean stock watchers up their consensus expectations for the company.

The earnings figures could encourage the market to “become more confident that [Metcash] can hold onto a large portion of the share gained through COVID than previously anticipated”, he said in a note to clients.

Australian retail sales have set a new record for the third straight month with $34.2 billion spent in stores and online in May – a 10.4% increase on a year ago and up 0.9% on the previous month, according to figures released today by the Australian Bureau of Statistics.

Australian Retailers Association (ARA) CEO Paul Zahra cautioned that while sales are strong, the growth is unlikely to be sustainable, and also reflects the higher consumer prices that are now flowing through the economy as inflationary pressures take hold.

“It’s pleasing to see retail sales maintaining their strong trajectory - however, the figures aren’t necessarily a true reflection of how the sector is performing in an inflationary landscape. The high sales volumes can be partially attributed to the higher consumer prices we’re seeing across the economy, particularly in the food industries. Whilst sales are elevated, business costs are increasing enormously, in many areas at a far higher rate,” Zahra said. 

“It’s unlikely we’ll see retail spending maintain these levels as the rising cost of living begins to take hold on family budgets. A generation of homeowners are experiencing their first interest rate hikes, so there’ll be some natural belt tightening. When people rein in spending, discretionary purchases are some of the first things they cut.

“Leasing costs are going up for many businesses, along with fuel and energy, while supply chains continue to be constrained. There’s been no let up to the disruption since Covid hit; things have only intensified since the war in Ukraine and many small businesses in particular are challenged right now.

“These challenges are running alongside the labour and skills shortages that continue to hamstring many in the industry. The majority of ARA members say the situation has gotten worse over the past three months, and without government intervention, the situation will only deteriorate.”

Surging fruit and vegetable prices driven upwards by flooding and increased operating costs for farmers have become the latest addition to household cost-of-­living pressures.

Fresh produce has risen in price across the board, adding to the weekly grocery bill for Australian households, despite favourable growing conditions pre­dicted to provide a record harvest.

The global problem, driven by increased input costs for farmers for everything from fertiliser, chemicals, diesel and labour to transport, was further exacerbated by flooding in vegetable-growing regions in southeast Queens­land and northern NSW.

A federal Department of Agriculture, Water and the Environment spokesman said underlying price pressures would “remain in place at least through to the end of the year”.

In the Brisbane riverside suburb of Newstead, Standard Market Company general manager Chris Frame said he’d been forced to reduce his margins so that customers would not be turned off.

“We’re finding things are so expensive we’re having to reduce our normal margins just so we don’t appear ridiculous,” he said.

“This week, we paid $200 for a box of beans, which is $20/kg.”

Usually a box of beans would cost $7-$12/kg.

“It’s just the nature of the retail game, we have to deal with it,” Mr Frame said. “We’ve never seen prices like this ever before.”

In supermarkets, broccoli was at $3.90 a kg in 2018 and is now $8.90 a kg. A cauliflower, $2 each in 2018, is now $4.50, while an iceberg lettuce, previously $2.80, is now $5.50.

Market analyst Andrew White­law from Thomas Elder Markets said fertiliser and chemical costs had been driven up because of higher gas prices and the war in Ukraine. “You’ve got all these major costs that, up until now, farmers didn’t have any opportunity to pass on,” he said.

“Now there’s a cost price squeeze where the cost of growing whatever it is you grow is increasing at a rate in many cases higher than the price you get at market.”

Ausveg spokesman Tyson Cattle said growers had been absorbing cost of production increases since the Covid pandemic outbreak. “Growers have had a 35 to 45 per cent increase in the cost of production since before Covid,” he said. “On the retail end, fruit and veg prices have gone up only about 7.5 per cent from February 2020 to February this year.”

He said price rises would calm as growers planted and harvested new crops – usually a 12 to 16-week turnaround – but “it’s our view we’re going to have to see a more consistent high price.”

Fresh fruit and vegetables, cooking oil and staples such as bread and pasta are among grocery items expected to climb in price as supermarkets and stores face increasing costs along supply chains.

Vegetable and fruit prices rose by 6.6 per cent and 4.9 per cent respectively in the first three months of 2022, according to latest CPI figures. But shoppers hoping for the pinch on their wallets to ease will find little respite, experts say.

“In terms of looking forward, we don’t see any relief for the rest of the year,” said Sean Smith, the chief of Frugl, an app that tracks and compares grocery prices. “Overall, the prices are going to go up. And that will continue.”

A perfect storm of factors has pushed retail costs higher. These include border closures during COVID which has led to critical labour shortages that big business has now flagged as a priority for the Labor government. Floods in Queensland and northern NSW have adversely impacted crops and transportation, while Russia’s war on Ukraine has exacerbated matters by reducing global supply of oil and wheat.

Farmers and retailers have tried to absorb these rising costs over the past few months, Smith said. But “our view is that they’ve really reached breaking point, and they just can’t absorb any more”.

What will cost more?

Soft drinks, instant coffee, cooking oil, some canned goods and beef sausages are among the grocery items that have seen the sharpest price rises. Since the end of 2021, shoppers are now paying 50 per cent more for a 2-litre bottle of Coca Cola and Moccona instant coffee, according to Frugl data provided to The Herald and The Age. Meanwhile, Crisco’s sunflower oil has increased 20-30 per cent.

Baked beans and spaghetti in tomato sauce have risen by more than 30 per cent in some instances, while an eight-pack of beef sausages has increased by as much as 20 per cent.

National Farmers Federation chief economist Ash Salardini pointed to the long-lasting impacts of Russia’s invasion of Ukraine. Together, the two countries make up 30 per cent of global grain supply and are known as the world’s breadbasket. They are also key exporters of vegetable oils.

“Things like bread, anything that requires wheat – I daresay you’re going to be paying 20 to 30 per cent more,” Salardini told this masthead.

Most of that has already been priced in, but there’s further to go, he said. “Don’t expect any drops in the next 12 months. If you see 5-10 per cent increases, don’t be shocked.”

Smith believes the cost of fresh produce will climb. “I don’t think this is coming. It’s happening now,” he said. “The fresh aisles ... are just quite bare.” This will push up demand elsewhere. “If there’s a shortage in fresh [produce] – there’ll be a shortage in frozen as well.”

Coles boss Steven Cain has remarked that the current inflationary pressures were the worst he has seen in some time, while Woolworths chief Brad Banducci said his supermarkets had seen 2-3 per cent price rises.

In response to cost of living pressures, both supermarket giants have lowered the price of hundreds of everyday items. Aldi and IGA noted the entire industry was facing cost pressures that would be passed on to consumers to some degree.

“We remain committed to passing on the smallest cost increases sustainable and maintaining our price gap to the competition,” an Aldi spokesperson said.

IGA stores have individual relationships with local suppliers but customers would probably face cost increases in items supplied by wholesale distributor Metcash, IGA’s parent company.

“Where they have legitimate reasons to increase prices, we will need to pass on these cost increases to our independent retailers,” an IGA spokesperson said. “We help to address the impact of this on shoppers by seeking to supply our retailers with a wide range of products at different price points to provide shoppers with pricing options.”

Australian Farmers Markets Association chair Jane Adams urged Australians to shop at local businesses and markets as a way to reduce costs and ensure a viable alternative to supermarkets, which have much longer supply chain links.

“If the farmer’s input costs are within better control, that balance can be passed onto the consumer,” Adams said, pointing out that local producers have greater control and flexibility over issues such as packaging.

“While you’re doing that, you’re supporting Australia’s farmers and artisan food makers.”

Woolworths Group boss Brad Banducci says due to rising inflation – where a head of lettuce now costs more than $6 – the retailer is freezing prices on everyday essentials such as flour, sugar, vinegar, laundry powder and nappies until the end of the year.

According to an email going out to customers from Mr Banducci this week, the trolley price freeze mostly of Woolworths-branded products, is in addition to the more than 300 products Woolworths added to its “prices dropped for winter” program last month.

Food inflation in Australia began to increase towards the end of last year following years of low inflation, driven by domestic freight costs climbing, shortages of pallets and higher global commodity prices due to the war in Ukraine.

The head of the nation’s largest grocery chain said initially it affected mostly meat and imported products, but had since hit almost every category.

“Most recently, we have seen material inflation in vegetables given the very poor growing season on the eastern seaboard, due to the rain, high humidity and low light levels – hence what you may see on cucumbers, capsicums and lettuces, amongst others,” he said in the email.

“Incidentally, our current price for iceberg lettuce on the eastern seaboard is between $6 and $6.90 a head, much higher than we would like, but our biggest challenge is keeping stock in supply,”

Mr Banducci said because the average family in Australia spent more than $200 a week on groceries, the price freeze until the end of the year on everyday items such as Woolworths Essentials laundry powder, Woolworths pasta and frozen peas and Little Ones nappies was important.

In May, about 40 per cent of Woolworths’ Australian supermarket suppliers had asked for an increase to prices. That represents 50 per cent of its sales, which jumped 5.4 per cent to $11.43 billion in the third quarter.

Average prices rose 2.7 per cent in the March quarter at Woolworths, with increasing shelf price inflation driven by industry-wide input cost pressures and lower promotions on products due to stock availability issues.

All companies are battling rising costs from logistics and energy costs to labor, which is set to worsen with the Fair Work Commission’s decision on Wednesday to increase the minimum wage by 5.2 per cent worth about $40 a week from July.

Woolworths and, to a lesser extent, Coles are also taking advantage of rising prices to expand their gross margins – for example, lifting shelf prices by 10 per cent when wholesale prices rise 8 per cent – to offset pressure on their own cost of doing business.

The retailers walk a fine line as they want to avoid being seen as taking price when their customers are grappling with surging costs of living.

Supermarket rival Aldi was quick to jump on Woolworths price freeze, with a spokesperson telling the Financial Review that its low price model means “quantifiable savings on your whole basket every time you check out” rather than just promotions on a select-range of goods.

A recent Aldi Price Report, with research undertaken by PwC and data analytics group YouGov, revealed that last year the chain saved families almost $2,500 each.

“With inflation continuing to impact Australians’ weekly grocery shop, it is our ambition to take as much stress out of the weekly shop as possible, so that every time someone walks through our doors, they can be confident that they are getting the best prices on the highest quality groceries, across their whole basket,” an Aldi spokesperson said.

Coles did not reply to questions about if it too will offer a similar price freeze on everyday items to ensure continuity of price for customers until the year-end.

This time last year, Marco Mason had just finished ploughing 12 hectares of iceberg lettuce back into the ground after frost all but destroyed the crop.

Now, the humble vegetable is among his star performers, fetching record wholesale prices and helping offset the rising cost of production at his Werribee South farm.

Earlier this year, Mason watched in disbelief as the wholesale price for a box of 12 lettuces soared from the typical $20 to $100.

“Every second or third day, it was going up by $10 a box,” he said. “It probably will be our most profitable year yet.”

The iceberg lettuce, previously considered among the least sexy of leafy vegetables, captured headlines when prices hit $12 a head. A shortage of supply has only made the iceberg more desirable.

Fast-food chains struggled to secure enough lettuce for their burgers, with KFC switching to a lettuce/cabbage blend.

Although prices are now about $6, this is a substantial increase on the sub-$3 last year when there was far less demand for iceberg lettuce. At the current price, iceberg lettuce rivals affordable cuts of meat or chicken on the family dinner table.

Mason said widespread damage to farmland caused by devastating floods in Queensland was the single greatest cause of skyrocketing iceberg prices.

Not only were crops wiped out in the floods, but farmers in fertile growing regions cannot run tractors on sodden fields to plant more vegetables.

Queensland is a major supplier of lettuce, particularly during the cooler months in Victoria.

The 2020/21 Australian Horticulture Statistics Handbook showed Queensland accounted for 37 per cent of fresh lettuce varieties, compared with 43 per cent in Victoria. Queensland’s production reached almost 51,000 tonnes of lettuce in that year.

This week, Mason’s farm was harvesting the last of its iceberg lettuce crop, which was spread across about 162 hectares. He said the price peak had probably passed for iceberg and there would be a market correction within a fortnight.

But Mason said wholesalers were preparing for more price hikes in other vegetables, including broccoli, amid further supply gaps in Queensland.

“A lot of vegetable lines will be pretty expensive over the next few months,” he said.

In Woolworths’ latest fresh market update, fruit and veg general manager Paul Turner said heavy rain and low sunlight in Queensland had resulted in reduced supply and quality of many vegetables.

“We’re still seeing challenges with lettuce and berry supply, so while the new crops have been planted, it will take a few weeks for stocks to return to more stable levels,” he said.

A Coles spokeswoman said floods in northern NSW and Queensland earlier this year, in addition to recent cold weather, had impacted supply of lettuce, berries, beans, tomatoes, broccoli and herbs.

National Farmers Federation acting chief executive Ash Salardini said the pandemic had also caused havoc for the freight industry, and that was particularly problematic for the highly perishable iceberg lettuce.

He said the extra spoilage of crops might also contribute to higher prices.

“Iceberg lettuce does not last very long,” he said. “It has a very short shelf life.”

AusVeg spokesman Tyson Cattle said the sharp increase in lettuce prices was caused by the lack of supply from Queensland.

“This time of year, Victoria doesn’t have the capacity to backfill that supply,” he said.

He said farmers in Queensland food bowls, including the Lockyer Valley, were unable to run tractors on flooded fields.

However, he said the iceberg price boom did not necessarily mean farmers who were able to harvest their crops were reaping huge profits.

Cattle said the cost of production had increased by up to 45 per cent in the two years to February. But retail prices had risen only 7.5 per cent in that period, he said.

Cattle said workforce shortages had resulted in many farmers reducing their production levels.

Australian food tech startup Eden Brew has raised US$5 million in funding to assist in expansion and the retail launch of its animal-free ice cream range.

The company uses fermentation to produce dairy that contains all six proteins identical to a cow’s milk. The capital raised in this round will be used to scale its in-house milk product innovation and launch a new ice cream range within the next 18 months.

Eden Brew co-founder and CEO Jim Fader said the company is making rapid progress toward developing the “holy grail” of dairy proteins.

“While there are numerous milk alternatives, they cannot sustainably meet future demand and don’t achieve the sensory or processability properties of cow’s milk,” he said.

“Our natural method of fermentation future-proofs dairy’s place at every kitchen table, in every cafe, and every ice cream cone.”

The company has been backed by investors including Mars’ US-based Digitalis Ventures and a follow-on from Main Sequence.

Main Sequence partner and Eden Brew chair, Phil Morle, said precision fermentation is already enhancing food production and meeting surging protein demands at a lower cost with less impact on the environment.

He believes the innovation can improve the efficiency of current industrial food production and meet the demands of 10 billion people by 2050.

Nature One Dairy has joined the race to help with the US baby formula crisis and is working with Austrade and the Victorian government to gain approval from the powerful US Food and Drug Administration (FDA) for its infant range.

Nature One Dairy chief executive and founder Nick Dimopoulos said he fielded several requests from the big retailers in the US about supply.

“Being both a manufacturer and brand owner, we can scale up our supply and provide our high-quality Australian-made products to support the current situation in the United States,” he said.

The market valuation of Bubs Australia rocketed $115 million higher on Monday after the company secured a deal to send 1.25 million tins to the US to ease a nationwide shortage after a contamination scare at a plant.

The a2 Milk Company last week also submitted an application to the FDA to supply its a2 Platinum infant formula.

Australian lifestyle brand Frank Green has just launched a shiny new range of reusable cups and bottles in rainbow, gold, silver and blue chrome in an effort to attract a different type of customer: style-conscious shoppers who care more about what a product looks like than its carbon footprint.

“The conscious consumer has played a huge role in our growth as a brand to date and comprises the majority of our existing customer base, however, we’re now increasing our relevance to customers who choose products based on how they align to trends and personal style as the main priority,” Ben Young, Frank Green’s founder and CEO, told Inside Retail.

It’s not that Frank Green is abandoning its values, Young clarified, but rather using style as a vehicle to reach more customers and inspire them to live more sustainably. 

“Our mission is to stop single-use plastic consumption. To do that, we need to remove the perceived barriers that prevent customers from choosing a sustainable product. One of these barriers is style, so by designing an on-trend product, like the chrome collection, we are showing customers that living sustainably can still be stylish,” he said. 

With chrome and liquid metal trends popping up on the runways of some of the biggest names in fashion, Young hopes that customers will view the new range as “wearable fashion accessories” – not just reusable lifestyle products. 

Expanding the product range

Style and functionality have always been an important part of Young’s design process. He launched Frank Green in 2014 after spending three years trying to create a reusable coffee cup that people would actually want to use. 

“I was always trying to understand why people didn’t use them, and it was quite simply that they didn’t look very good and didn’t make consumers’ lives easier,” he recalled in a recent interview for Klarna’s new video series, Bold Moves. 

His solution – the Frank Green SmartCup, a sleek cup with an innovative push-button lid – won the Good Design Australia award for product design in 2015.

Over the years, the brand has expanded into reusable water bottles, reusable bags, insulated food storage containers and coffee and tea accessories. Further product launches are in the pipeline for 2022. 

“We’ll continue to target the single-use products that are most devastating to the planet. Any items that have single-use plastic in them, watch out,” Young said. “We’re going to create a beautifully designed consumer product that you’ll love to use forever instead.” 

Last year, Frank Green brought its manufacturing in-house with the opening of a 6000-square-metre warehouse in Melbourne’s inner west. 

Getting suppliers on board

As part of Frank Green’s fashion pivot, Young has also appointed a new PR agency, MCMPR, whose clients include Zimmermann, Tory Burch, Net-A-Porter and Oroton.

“As a carbon-neutral agency, MCMPR is focused on a sustainable future. We believe that the communications industry has a responsibility to influence and drive positive change, so we jumped at the opportunity to work with Frank Green,” Marie-Claude Mallat, the agency’s founder, said in a statement. 

“The products are incredibly well designed and complement the latest fashion and beauty collections from our other global clients. The team and I are thrilled to support Frank Green’s stylistic vision and deliver results that move the dial.”

The move is in keeping with Frank Green’s growing focus on the environmental impact of its supply chain.

“At Frank Green, we’ve spent a lot of time putting together a supplier code of conduct that is so many things, but importantly, it’s about sustainable practices in business,” Young said in the Bold Moves video.

“The energy that our suppliers use, where they get their materials from and their carbon footprint has been mapped out…because we need to be able to show our customers that we’ve done that due diligence.”

The chief executive of Endeavour Group, which owns the Dan Murphy’s and BWS liquor retailing outlets, says foot traffic in large shopping malls has not fully returned to pre-COVID-19 levels but a “degree of normality” is back in strip shopping and stand-alone stores.

Steve Donohue said on Thursday the group was also experiencing solid demand for the large volumes of new products on its shelves, and that was helping to preserve profit margins at a time when inflationary pressures in the supply chain are rising.

Mr Donohue said the group aims to open between 20 and 30 outlets annually, with emphasis on Queensland and South Australia.

Dan Murphy’s, in particular, has a strong base in Victoria where the business started, while expansion in Western Australia is harder to pursue because of regulations around the granting of new liquor licences.

Endeavour operates 258 Dan Murphy’s stores, 1411 BWS liquor outlets and a hotels business with 340 outlets. It is a large player in gaming through a combined 12,400-plus poker machines across many of those hotels, making it the largest owner of poker machines in Australia, and the third-largest gaming operator in Australia after Crown Resorts and The Star.

About 60 fund managers and investors went on a tour of some of Endeavour’s pubs and retail outlets in Melbourne on Thursday as part of an investor day, and Mr Donohue spoke to The Australian Financial Review by phone mid-afternoon.

Endeavour was demerged from supermarket giant Woolworths and listed as a separate entity on the ASX in June last year. Woolworths still retains a 14.6 per cent stake in Endeavour.

Endeavour shares had gained about 25 per cent in the 11 months since the company became a stand-alone entity, but slid on Thursday by 6 per cent to $7.20.

Mr Donohue said it was difficult to forecast what effect rising electricity prices would have on the group’s retail and hotels operations, with energy prices one of the components of general inflationary pressures. Rising wage pressures in an industry where labour shortages are common, rising rents and increased prices of goods from suppliers were all feeding into costs increasing.

Endeavour is making sure it tailors its product range carefully to local catchment areas.

“People really want locally made products,” he said. This had been starkly evident in the large amount of new gin products on the market, and in the craft beer segment.

“You are getting a very bespoke range in local stores.”

Dan Murphy’s and BWS made huge gains in their online businesses during the pandemic as at-home consumption rose sharply. Foot traffic volumes into bricks-and-mortar stores in stand-alone locations and in strip shopping venues were “returning to a degree of normality”.

But large shopping centres were still some way off, with people still showing some reluctance in those venues.

“I think malls haven’t quite got back to pre-pandemic levels,” he said.

Endeavour Group said its new product development pipeline for the liquor stores was running at about 11,000 new stock-keeping units a year, compared with 5000 in 2015. New products coming onto the shelves generally bring higher margins because they are not subject to the same level of discounting which tends to be prevalent in older brands.

MST Marquee analyst Craig Woolford said a capital spending forecast of between $320 million and $460 million annually may result in some small downgrades to cash flow forecasts. He has a “hold” rating on the stock and a 12-month price target of $7.45.