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What Domino’s, Coles and Qantas are telling us about inflation
In his 35 years with Domino’s, CEO Don Meij hasn’t seen inflation numbers this high. Food, equipment and packaging expenses, which account for nearly half of Domino’s cost base, grew twice as fast as network sales over FY22.
The pizza retailer has been hit by a trifecta of cost pressures including more expensive ingredients, staff shortages and higher energy bills. Domino’s tried to offset the cost pressure via selected price increases and implementing a six per cent delivery fee. However, it’s yet to fully kick in.
On the contrary, Coles improved its gross margin modestly demonstrating an ability to pass on higher input costs to customers. This is all the more impressive given the supermarket chain received a 5-fold jump in the number of suppliers requesting price increases. Unfortunately, inflation managed to creep its way into Coles’ own cost base, leading to a relatively smaller increase in total supermarket earnings.
Qantas has experienced a similar increase in its cost base due to a “massive labour shortage”, per CEO Alan Joyce. To encourage staff retention, he announced Qantas had set aside $200 million to reward employees in addition to added staff travel benefits.
Not over yet
Coles CEO Steven Cain is cautious on his outlook for inflation, noting continued price pressure in July from packaged groceries, supply chain and wages. He subsequently believes inflation won’t abate until early 2023. Coles will join Domino’s by implementing further price increases in the coming months.
While the pandemic is largely in the rearview mirror, its effects still linger. Qantas revealed sick leave rates across the airline remain more than 50 per cent above pre-pandemic levels, which is resulting in fewer on-time departures and more lost baggage.
Fortunately for businesses, green shots are beginning to germinate. Energy prices, including petrol, are inching lower. Global food prices are also retracing. Domino’s noted that wheat and cheese prices are back to normalised levels, albeit admits the situation remains uncertain.
More jobs than workers
One area of frustration concerning both businesses and policymakers is a shortage of labour. Cain, Joyce and Meij are all acutely aware of the problem noting staff shortages from butchers and IT staff.
“Everybody in Australia that I speak to is experiencing high levels of turnover,” Cain says. “They’re experiencing longer times to fill roles. There are some sectors that are very challenged like technology and so on.”
For the first time in history, Australia now has more job vacancies (480,100) than to unemployed people (473,600). Unemployment has fallen to an exceptionally low level of 3.4 per cent, and given Cain’s observations, there seems to be a mismatch between the skills of the unemployed and the needs of employers.
Cain’s comments will be setting off alarm bells at the Reserve Bank of Australia. Should wage increases become entrenched, this could lead to a wage spiral where salary increases spur further inflation.
How to navigate the storm clouds
To protect portfolios against inflation, investors are best looking for companies with pricing power, according to Luke Durbin, Australian portfolio manager at Oracle Investment Management.
“If customers have little other choice, love the brand too much, or if it is too expensive or cumbersome to switch, customers will simply absorb the increased prices.”
Despite the difficult FY22, he is giving Domino’s the benefit of the doubt given its history of execution.
“Domino’s have stated they’ll pass on costs by introducing higher value, more premium pizzas while leaving the value $5 pizzas range alone.”
Durbin believes Coles should be able to pass on most cost increases due to their goods not being discretionary.
He is less excited about Qantas, which has a “commodity product” and customers who are “incredibly price conscious”.
“I believe they will be at the mercy of market pricing so any attempt to pass on costs will be difficult beyond the normal market pricing mechanisms.”
