Woolies hungry to close fresh-food gap

Blair Speedy
The Australian
April 20, 2012

WOOLWORTHS’ newly installed supermarkets boss, Tjeerd Jegen, is determined to reclaim the title of best-performing retailer after more than two years of being beaten by arch rival Coles on sales growth in existing stores.

Woolies’ food and liquor division reported sales growth of just 1.1 per cent in the second quarter of this financial year, excluding the benefit of new store openings — its slowest quarterly sales growth from comparable stores in 13 years.

The result was less than one-third the 3.7 per cent increase reported by Coles, and the10th consecutive quarter in which Woolies’ comparable-store sales growth has lagged behind.

“It’s a very big concern — the universal measure of strength in retail is comparable sales growth, and it’s not good that we’ve had such a big gap between us and Coles,” Mr Jegen told The Australian yesterday.

Woolworths supermarkets are still much larger and growing faster in absolute terms than their Wesfarmers-owned rival, reporting food and liquor sales of $19.6 billion in the first half of the financial year, up $799 million from a year earlier, compared with Coles’s $13.4bn, up $619m.

But Mr Jegen said these numbers gave him no comfort.

“You tend to forget the size of the company quite quickly, because every time we don’t satisfy customers it hurts. I’m not at all focused on the size of our business — scale helps, but it also brings complexity,” he said.

Analysts expect Woolies’ third-quarter sales numbers, due for release today, to include comparable-store sales growth of between zero and 0.75 per cent, compared with an expected 3 per cent at Coles, which reports along with Wesfarmers’s other retail businesses next week.

Mr Jegen, who quit as chief executive of Tesco Malaysia to join Woolies in October last year, said it was his mission to end the run of underperformance.

“My personal agenda is growth, and we will do that by growing our fresh food offer and providing value to our customers.

Fortunately, Australia’s population is still growing, so we can open new stores . . . but we have a definite ambition to up our comp store sales growth,” he said.

Woolworths’ share of the packaged grocery market is about 42 per cent, however its share of fresh food is only 34 per cent — a gap Mr Jegen wants to close.

However, he dismissed suggestions from some analysts that Woolies was increasing prices on some low-visibility items to boost margins, a tactic that would deliver comparable-store sales growth providing the price rises weren’t so steep as to drive customers away.

“I review our price index every week — we’re not increasing prices, I can assure you. We adjust prices every week but there is no co-ordinated effort to increase them,” he said.

Mr Jegen also defended plans to open 39 new supermarkets this financial year, at a time of downbeat consumer spending, to bring its portfolio to 879, saying the new stores were all located in sites with strong population and economic growth.

However, he conceded the store opening program would result in a small decline in sales per square metre as new stores got up to speed, diluting another measure on which the company outperforms Coles.

Woolies generated $16,157 in sales revenue for every square metre of floor space in the past financial year, some 13 per cent more than Coles, allowing it to offset fixed costs such as rent, utilities and staff wages over a larger revenue base.

Mr Jegen said a short-term fall in this metric should not be taken as an indicator that the company’s performance was in decline.

“Every new store you open for the first three years will have lower sales per square metre than the existing base, so yes it will dilute — but that’s not unusual,” he said.

Mr Jegen predicted an end to the price deflation that had dogged the market for more than a year, saying much of the impact was due to comparisons with last year’s fresh produce prices, which skyrocketed in the wake of flooding that wiped out many crops.

“Price deflation is a significant one-off, but that’s coming off now, so I don’t see deflation in the longer term in the Australian market — I think inflation will come back again,” he said.

However, he stopped short of calling an end to the discounting war with Coles, which reached a fever pitch last year.

“We have a contract with our customers to offer them the best value . . . if the market goes down we will go down with the market,” he said.

Mr Jegen said he didn’t share the downbeat outlook of chief executive Grant O’Brien, who has warned the next three years will be “no better than the last three” while forecasting net profit growth of just 2 to 6 per cent this financial year, well down on the double digits of the past decade.

“I don’t think we need to be gloomy — sometimes I listen to the radio and some radio stations seem to think we live in North Korea, but I think this is a very lucky country. I talk to my family in Europe and the concerns there about the price of their house and job insecurity, there’s nothing like that in Australia,” he said.