Coles chief executive Leah Weckert said customers had been cooking more at home, spent less on beer and liquor and bought cheaper and smaller Easter chocolates during its third quarter.
"The most significant thing we saw in the quarter was a step down in customer sentiment when the Middle East conflict began," she told a briefing on Friday.
"All of those conversations we're having with suppliers is indicating that that's a market-wide impact that we've seen, and certainly conversations I'm having with peers overseas, they're also seeing that there."
Coles has been streamlining its operations to cut costs, rolling out more promotions and bringing together food and liquor discounts in suburbs where its supermarkets and Liquorland businesses are co-located.
Coles on Friday reported a 3.1 per cent lift in quarterly sales to $10.7 billion, mostly driven by its 860 supermarkets, which generated $9.8 billion.
Supermarket price inflation - excluding tobacco - moderated to 0.8 per cent in the three months ending March 29.
That compared to 1.7 per cent in the second quarter, reflecting deflation in fresh produce due to abundant supply across key fruit and vegetable categories.
Price inflation for packaged groceries also eased, because of more promotions across some non-food categories, such as cleaning and baby products.
But this was partially offset by inflation in red meat prices.
"However, consistent with prior periods, the full impact of the increased beef and lamb livestock cost of goods was partially absorbed as part of our investment in value for customers," Coles said.
"Our focus remains on continuing to provide customers with a compelling value proposition that supports their everyday needs, coupled with inspiration as more customers shift from eating out to cooking at home to help manage their household budget."
Overall, Coles was pleased with its Easter chocolate sales during the quarter.
"But what we did see was a bit of a trend of people moving into lower-price items, so you might see more volume in the smaller bunnies than the bigger bunnies than you did last year," Ms Weckert told reporters.
"Customers would definitely be making trade-offs from an affordability perspective, but overall, still very strong sales for Easter."
Sales at Liquorland fell 3.9 per cent to $781 million, with convenience sales remaining resilient and warehouse stores suffering a more pronounced impact.
Coles' view is the weakness in its liquor business, which has been underperforming for a few years, is mostly cyclical and related to the overall market rather than to Liquorland itself.
"Liquor is just a more discretionary category than something like food," Ms Weckert explained.
"And so people will make decisions to cut back in that space to make way for the increased lines in their budget that they might see on things like mortgages or energy or groceries."
Coles also noted its e-commerce sales grew by a strong 24.8 per cent in the quarter to $1.3 billion.
Online shopping now makes up 13.6 per cent of all sales, rising from 11.3 per cent a year ago.
Coles shares were up 1.4 per cent to $22.42 in morning trade.
On Thursday, rival Woolworths warned sentiment among shoppers had plummeted since the US and Israel attacked Iran on February 28, sparking a Middle East conflict that has sent the cost of crude oil - and petrol - higher.
Its tracking shows 44 per cent of customers are experiencing real budget pressures and struggling to make ends meet.
Woolworths reported $18.1 billion in total quarterly sales, up 4.5 per cent from a similar period a year ago.
27°C