Great battle of the supermarkets

Terry McCrann
Herald Sun
March 13, 2012

THE titanic clash between Woolworths and Coles for your weekly food and liquor spending is rather more complicated and indeed interesting than the one dimensional meme that has taken hold in the media, if not the public, imagination.

This is of the nuggety Scot Ian McLeod riding into town to take charge of Coles after its acquisition by West Australian conglomerate Wesfarmers – and through aggressive and innovative moves proceeded to steal the lunch of Woolies (former) CEO Michael Luscombe.

Much of that is certainly true. McLeod and Coles have been the trend-setter in – mainstream – downunder food and liquor retailing over the past few years.

This represented a dramatic turnaround of both the dynamic of supermarket retailing and the outcomes at the till, for pretty much most of the past 20 years. With Coles essentially prepared to yield more and more ground to all-dominant Woolies.

McLeod didn’t just change the conversation. He seized control of the agenda across supermarkets, and it has played out with very real – but also crucially, limited – beneficial outcomes for Coles.

The most critical point though is that success for Coles has not meant failure for Woolies. Indeed, Woolies has continued to rise.

It hasn’t been a zero-sum game. At least, not for them.

The losers have been third parties – other supermarkets, other players in the associated petrol retailing sector, indirectly other retailers which lost share of wallet, and most, most of all, suppliers to the supermarkets.

As two former prominent leaders of our biggest brewery group Foster’s, separately both said to me, unprompted: wait until the guys at SABMiller as the new owners of Foster’s “have their first conversation with Coles and Woolies.”

If Foster’s (and Lion) can’t use their brand power to maintain prices with Coles and Woolies, heaven help the small guys. As the ACCC certainly can’t. Or won’t.

The big winners have been YOU. The big two haven’t just shuffled around the available dollars. They have played out their intensified competition in real, lower prices at the check-out.

When you spend $100 in the supermarket or liquor store today, you are walking out with on average somewhere between 5 per cent (Coles) and 7 per cent (Woolies) more actual goods than you did three years ago.

With everything else rocketing in price – most obviously electricity, thanks to the insane federal government jihad on carbon dioxide – this has been great for family budgets.

McLeod has led the way with his aggressive and very public price-cutting – most notably but not exclusively with home-branded milk.

Whether this might end up being utterly devastating for our dairy industry, and so rebound on consumers, is a subject for another day.

Right now, it’s been great for consumers, as McLeod has forced Woolies to respond. Indeed, to over-respond. And it’s been great for Coles on the key metric for the retail industry: growth in same-store sales.

As the table shows, Coles has certainly been eating Woolies’ lunch on this metric. In the three years since Wesfarmers and McLeod took control, Coles increased same-store sales by 17.8 per cent.

That’s a growth rate double that of the 8.7 per cent lift from Woolies. Game, set and match?

Well, not exactly. Over this period, Woolies still managed to grow its overall sales by more than Coles in absolute dollar terms. Coles lifted food and liquor (F&L) sales by $2.2 billion, Woolies by $2.7 billion. Because as the table shows Coles was starting from a much lower base than Woolies. Back in 2008 it was 66 per cent the size of Woolies, now it’s 68 per cent the size.

Through this period Woolies has continued an aggressive program of adding supermarkets and floor space; Coles has not; its focus has been on pushing more sales through existing stores.

Its growth in comparable store sales more or less matched its growth in actual sales. It was the dramatic opposite at Woolies. Comp store sales up only 8.7 per cent, total sales at nearly double that rate.

The other fascinating aspect of what’s been playing out with price is that Woolies has — has had to? — cut its prices by more than Coles, the aggressive price leader.

Over the three years, Woolies has had to pump something like 23 per cent more actual goods through its stores to win that 15.3 per cent dollar sales increase; Coles has actually managed to get its 19.6 per cent sales increase from 25.3 per cent more volume.

The bottom line of all this is, well, the bottom line. Here, Woolies went into the fight as king and has emerged as emperor. At least, so far. But, conclusively, so far.

The most impressive take-out is that at the end of all this, Woolies has maintained strong profit growth. Operating (EBIT) profit up 28.4 per cent – nearly double the 15.3 per cent sales increase.

Indeed, over the three years Woolies increased its profit by $330 million – by almost as much as Coles’ $382 million total profit in the December 2008 half.

Through all the price-cutting, Coles winning market share, the nibbling of Aldi at the bottom end, Woolies even managed to lift its retail margin from 6.9c to 7.6c in the sale dollar.

You come back to those big numbers. Woolies F&L generated $1494 million in EBIT in the latest half. Coles which is 68 per cent the size of Woolies generated only $581 million – or just 39 per cent of the Woolies number.

Yes, McLeod has managed a minor miracle in aggressively boosting Coles’ sales, while also managing to boost its margin, from 3.4c in the sales dollar to 4.3c sales. And giving shoppers cheaper goods.

But the margin is still way below Woolies’ 7.6c in the sales dollar. And then think about the change.

Over the three years while Coles has lifted its margin by 0.9c in the sales dollar, Woolies was almost as good – going up 0.7c in the dollar.

Further, Woolies achieved that lift from a much higher starting base, and thus a greater degree of difficulty; and achieved it on much higher sales, and thus netted a bigger profit pay-off.

And so we arrive at the real bottom line. McLeod has to demonstrate he can shift Coles up the margin chain.

It is by no means clear that is even possible. How much more can he – and Grant O’Brien, Luscombe’s successor at Woolies – screw out of suppliers. I’d suggest, not much or they won’t have suppliers.

It is all very well – and let me be clear, a huge achievement which reversed 20 years of failure – to win dominating sales growth, through a combination of effectively no growth in stores, and starting and staying at a low margin.

It is an altogether different matter to shift to a significantly higher margin model. Against a much bigger competitor which does not have to boost margin and could, if it wished, give some up to really take the fight back to Coles.

Crudely, Woolies could easily survive its margin going back to, say 6.5c in the sales dollar; Coles – and McLeod – could not survive going back to, say, 3.3c in the dollar.