Coles is expected to absorb a hefty price rise by its baker, food products group Goodman Fielder, for its "dollar bread" product following extended negotiations between the two parties.
Goodman Fielder's shares surged 3.5¢ to 74.5¢ on Tuesday on the news that it had "successfully negotiated a private bread contract", which is believed to be with Coles, for the retailer's Smart Buy Bread and own-brand bread, which covers its "dollar bread" product.
Goodman Fielder has supplied Coles with its private label bread for the past two years, and on Tuesday finalised an 18-month extension.
The baker did not reveal details of the contract, although it did say earlier this year that it needed a price rise to continue supplying Coles beyond the end of this month, when the contract was to finish.
Last year, the price of Goodman Fielder's own branded bread products rose about 8 per cent.
Analysts said Goodman Fielder has won a price rise of about 10¢ a loaf from Coles, which is about half the increase achieved last year by rival George Weston Foods from Woolworths for its private label bread, although the Goodman Fielder deal has "rise and fall" provisions that offset much of the difference between the two contracts.
Industry sources said Coles is expected to absorb the price rise, for the time being at least.
"The low-priced bread and milk offering are key offerings for Coles," one industry source said.
For Goodman Fielder, the new contract overshadowed a profit downgrade, with the group now expecting a pretax profit of between $195 million and $200 million, down slightly from median analyst forecasts of about $202.5 million for the year to June.
"This result includes a significant increase in direct marketing expenditure," Goodman Fielder said, which will position the group for growth in the approaching financial year.
High mortality rates at its Fiji poultry unit, the second largest of its Asia-Pacific division businesses, will slice as much as 20 per cent off profits in the unit, it said.
In the year to June 2012, the Asia-Pacific division's pre-tax profit was $62 million, which could fall to about $50 million this financial year.
Goodman Fielder has about 60 per cent of the Fiji poultry market. Operations had stabilised, it said, amid optimism the difficulties would be resolved in time for the Christmas sales period.
"Management is seeking to resolve the virus that has hit the flock," one analyst said. "It is trying to rebuild the flock, although there is a question mark whether it can do so for the Christmas period.
"This issue will linger into the next financial year.
"The new Coles contract is a clear indication of management getting some runs on the board at last," the analyst said.