By Byron Kaye and Archishma Iyer
(Reuters) - Top Australian grocer Woolworths Group Ltd posted a bigger than expected rise in third-quarter sales as shoppers bought more of its cheaper house-brand products to cut costs amid spiralling living expenses.
The March quarter update illustrates the impact on non-discretionary consumption patterns in the country after a year of interest rate hikes failed to squash inflation.
It also shows the delicate challenge facing the central bank: despite the rate hikes, inflation remains well above its target range, but the spending patterns show that the financial strain is spreading through the suburbs.
Woolworths, which together with smaller rival Coles Group (OTC:CLEGF) Ltd sells two-thirds of Australian groceries by dollar value, said Australian food sales jumped 7.6% in the three months, besting analyst forecasts of about 6%, as it passed on supplier costs to customers.
Average store prices grew slower, at 5.8%, and the Sydney-based company said more shoppers turned to its own-brand products for staples like rice and oil, for which sales surged 9.1%. Woolworths doesn't report profit in quarterly results.
The Reserve Bank of Australia, which is tasked with setting interest rates to keep inflation between 2% and 3%, was expected to hold rates steady for a second month later on Tuesday after a period of global banking instability. Economists and politicians have said, though, that inflation has slowed from a late 2022 peak.
"There are a lot of moving pieces right now as people change the way they shop due to inflation," said Woolworths CEO Brad Banducci on an analyst call.
Budget conscious families who "live in the suburban catchment are under more pressure than they have historically been," he added, blaming higher mortgage and rent costs primarily.
These "saver families" were returning to modest favourites, such as roast chicken with vegetables and "the old spag bol", slang for spaghetti bolognese, to cut spending. The grocer was also selling more coffee beans as shoppers opted against buying coffee in cafes, Banducci said.
Woolworths shares dipped 0.5% by mid-session, in line with the broader market, as analysts welcomed a better than expected sales result but noted that persistent inflation would weigh on the company's costs.
"There are signs of moderating inflation but it remains elevated," said Jefferies analysts in a client note.
($1 = 1.5103 Australian dollars)