Coles Faces Cost Squeeze as ASX Supermarket Volumes Firm

Highlights

• Supermarket volumes have kept growing, with online orders carrying a rising share of the basket.
• Supplier costs, fuel and freight remain the pressure points, and the overnight oil surge sharpens that story.
• A competition ruling on a regional site has added a reminder that expansion faces closer scrutiny.

Coles Group Ltd (ASX:COL), the national supermarket and liquor operator whose store network reaches into almost every Australian suburb, sits at the centre of a familiar tension. Volumes through the supermarkets have kept growing, helped by an online business that continues to take share of the weekly shop. Yet the cost side of the equation has become steadily less friendly, and an overnight surge in crude oil has just reinforced the point. Australian shares opened lower on Tuesday after a weak Wall Street lead, and the consumer aisle is once again where the inflation debate is being fought.

Volume growth is the underlying story

The most important thing about a supermarket result is whether people are putting more items in the trolley, not simply paying more for the same ones. Volume-led growth is a sign of genuine demand and of a network that is winning traffic rather than merely riding price inflation. Recent trading commentary has pointed to comparable growth in the supermarkets division being supported by volumes rather than price, which is the healthier configuration.

Behind that sits a long programme of investment in supply chain automation, in refreshed store formats and in the digital experience. Online grocery has moved from a convenience niche to a structural part of the business, and the economics of fulfilment, whether from a store or from a purpose-built facility, now matter enormously to the profitability of the whole enterprise.

Where the cost pressure is coming from

The counterweight is a cost base that keeps creeping. Supplier costs have been rising as manufacturers pass through their own input inflation. Fuel and freight are embedded in every truck movement between distribution centres and stores. Wages, energy and rent all add to the burden. The overnight lift in crude prices adds another turn of the screw, because diesel is the lifeblood of grocery logistics.

Supermarkets operate on famously thin margins, which means a modest lift in the cost of distribution is not a rounding error. It has to be absorbed, offset through efficiency, or passed to the shelf. The first two options are limited. The third is politically fraught in an environment where grocery pricing is the subject of intense public and regulatory attention.

Liquor is the softer end of the portfolio

The liquor business has been the weaker element. Australians have been drinking less, trading down within categories, and treating alcohol as one of the more obvious places to economise when the household budget tightens. That is a structural shift as much as a cyclical one, driven by changing habits among younger consumers and by a broader focus on health.

For a retailer, the challenge is that liquor typically carries a better margin than a comparable dollar of grocery sales. When the mix moves away from the higher-margin end, the blended result suffers even if total revenue looks steady. Rebuilding that mix takes time and is not entirely within the retailer's control.

Competition scrutiny is intensifying

The regulatory backdrop has grown more demanding. A decision to block plans involving a regional site earmarked for a supermarket and liquor store was a pointed reminder that expansion by the largest chains is no longer a routine matter. Concentration in Australian grocery has become a live public policy question, and the competition regulator has shown a clear willingness to intervene where it believes a local market would be harmed.

That matters for growth. Supermarket networks expand through new sites, and new sites in attractive catchments are scarce. If the approval pathway becomes slower or narrower, the growth algorithm shifts away from new stores and toward getting more out of the existing footprint through renewal, range and online.

The defensive case, and its limits

Groceries remain the textbook defensive category, which is why the sector is usually treated as a haven when the broader market wobbles. People keep eating regardless of what Wall Street did overnight. Within the ASX 200, staples-facing names have generally been treated more kindly than the discretionary end when sentiment sours.

But defensiveness is not the same as immunity. The sector has its own vulnerabilities: political attention on pricing, regulatory constraints on expansion, a cost base exposed to fuel and wages, and a customer who has become extremely price aware. Those tracking ASX Consumer Stocks have learned that the defensive label protects against volatility more than it protects against margin pressure.

What comes next

The near-term markers are relatively clear. Does volume growth continue, and does it continue to be volume rather than price? Does the online channel keep scaling toward genuine profitability rather than simply taking share? And can cost of doing business growth be contained at a pace slower than sales growth, which is the fundamental arithmetic of retail profitability?

The oil price complicates all three. It lifts the cost of getting product to the shelf, and it reduces the money left in the customer's pocket after they have filled the car. Supermarkets have navigated worse. But the notion that groceries offer a straightforward refuge from an inflationary cost shock deserves more scrutiny than it usually receives.