According to a report by Citigroup, Woolworths has raised prices on a wide range of lower-profile products by up to 8.7 per cent over the last two months.

According to a report by Citigroup, Woolworths has raised prices on a wide range of lower-profile products by up to 8.7 per cent over the last two months. Photo: Glenn Hunt

Supermarket giant Woolworths has been lifting grocery prices in a move aimed at plugging a hole in earnings from its loss-making hardware business and building a war chest to tackle fast-growing discounter Aldi.

The price rises contributed to an acceleration in food inflation, which has returned to positive territory after two years of deflation.

According to a report by Citigroup, Woolworths has raised prices on a wide range of lower-profile products – such as baked beans, yoghurt, pasta and cream – by between 1.3 per cent and 8.7 per cent over the last two months.

Citigroup analyst Craig Woolford said the price increases started in May and had become more widespread. In most cases they were not triggered by suppliers.

“This is known as ‘price creep’ and may reflect food and liquor needing to plug a hole in earnings left by Big W and Masters’ weakness,” said Mr Woolford.

“Based on our feedback, the price rises have been made to boost gross margins,” he said.

Deutsche Bank analyst Michael Simotas said food inflation accelerated during the June quarter in both fresh foods and packaged groceries. Inflation in long-life groceries was now running at around 3 per cent, consistent with long term trends, and was likely to further accelerate over the next few months.

Deutsche Bank’s supermarket price index, which tracks prices on seven discrete grocery baskets, rose 5.4 per cent in the June quarter after rising 4.8 per cent in the March quarter and 3.3 per cent in the December quarter. Price inflation at Woolworths in the June quarter appeared to be higher than that at Coles and Metcash.

Prices of private label groceries also grew in the June quarter after cycling price reductions taken by Coles in late 2012/early 2013 and subsequently matched by Woolworths, Deutsche Bank said.

At Woolworths, the retailer increased the price of San Remo pasta by 8.7 per cent to $2.63, SPC baked beans by 7.7 per cent to $1.40, Farmers Union greek yoghurt by 3.3 per cent to $6.65 and Pura thickened cream by 4.3 per cent to $3.43.

Deutsche Bank says Woolworths also recently increased the price of home-brand bread, lifting the price of Homebrand white from $1.15 to $1.25 mid-June after previous price increases in March and January.

Mr Woolford said a 1 per cent price rise on one quarter of the average shopping basket could add $7 million to Woolworths’s earnings before interest and tax each month.

“Our price tracking suggests some lower profile grocery items have seen 3 per cent or more price rises since May 2014. This could amount to $42 million in extra earnings,” he said.

Mr Woolford believes Woolworths might be trying to boost gross margins in food and liquor to offset weaker earnings at BIG W and big losses at Masters, which is forecast to lose $166 million this year, compared with losses of $139 million in 2013.

Alternatively, Woolworths could be building a war chest for promotional pricing to better respond to discounter Aldi, which is adding more branded groceries to its range.

Woolworths has recently stepped up deep discounts such as half-price specials. This week, for example, it has cut the price of Heinz baked beans from $2.10 to 90¢ Cadbury Freddo Frogs from $4.93 to $2.00 and Vaalia yoghurt from $6.18 to $2.75.These short term promotions are often funded partly or entirely by suppliers to boost volumes.

Mr Woolford said suppliers’ input costs had risen, particularly for dairy and wheat.

However, the price increases in May and June had been driven by Woolworths, rather than suppliers, and had not been always been copied by Coles.

“A range of suppliers have not actually raised their prices, yet Woolworths shelf prices are higher,” he said.

A Woolworths spokesman said the retailer would continue to offer the lowest prices every day across its 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."