Coles dents WOW factor

Blair Speedy
The Australian
April 24, 2012

SUPERMARKET major Coles continued to outperform larger rival Woolworths in terms of sales from existing stores during the third quarter of the financial year, extending its string of unbeaten results to almost three years.

Coles, owned by retail, mining and energy conglomerate Wesfarmers, reported sales of $6.09 billion for its food and liquor division during the three months to the end of March, up 4.1 per cent on the same period a year earlier.

When the benefit of new store-openings was stripped out, sales growth for the division was 2.7 per cent, in line with market expectations and well ahead of the flat comparable-store sales growth recorded by the Woolworths supermarkets business for the same period.

Wesfarmers chief executive Richard Goyder said he was pleased that Coles had booked such a strong result despite high levels of price deflation, including a 25 per cent slump in the price of fruit and vegetables.

This was offset by strong growth in sales by volume, Mr Goyder said, as customers were lured by improvements in product quality, service and value.

Overall shelf prices at Coles fell by 3.6 per cent for the quarter, compared to 4.4 per cent at Woolworths, suggesting Woolies was seeking to claw back sales via deeper discounting.

The result marked 11 straight quarters during which Coles has beaten Woolies on comparable-store sales growth, the measure most commonly used by retailers to assess their performance.

Woolworths’s newly-installed supermarkets boss, Tjeerd Jegen, has described the continued underperformance as “a very big concern”, and promised to return Woolies to front-runner status by boosting its market share in fresh food.

Wesfarmers’s convenience store division reported sales of $1.8bn for the quarter, up 7.9 per cent thanks to higher fuel prices. Excluding fuel sales, which grew by 2.9 per cent in volume terms on a comparable-store basis, convenience sales were down 2.4 per cent, or 3.9 per cent.

Mr Goyder attributed the decline to customers shifting their purchases to supermarkets, the same factor cited by grocery wholesaler Metcash earlier this month when it announced plans to close 15 Campbells Cash and Carry outlets, which supply stock to independent convenience stores.

Wesfarmers’s hardware chain, Bunnings, reported sales of $1.74bn, up 4.3 per cent, or 2.6 per cent on a comparable store basis.
However, discount department store chain Target continued to struggle, reporting sales of $692m, down 4.4 per cent, or 6.1 per cent on a same-store basis.

Target managing director Dene Rogers said the result was affected by “improving the profitability of promotions”, suggesting Target had raised its prices during the period, while inventory had also been reduced.

“These initiatives continued to negatively impact top-line sales”, but had a “notable positive impact” on the business overall, he said.

Stablemate Kmart reported sales of $813m, up 1.2 per cent, or 1.6 per cent on a same-store basis as costumer numbers and sales volumes increased.

Peter Esho, chief market analyst at City Index, said that the Coles figures highlighted a “structural shift in the food and liquor market”, with fresh produce deflation of about 25 per cent in the quarter.

“We haven’t seen deflation of this magnitude in such a large category like fresh produce for some time,” Mr Esho said. “Despite this, Coles has managed to post comparable sales growth of 2.7 per cent (compared) with Woolworths’s zero growth for the same quarter.”

Coles had shown that it could absorb lower shelf prices by selling larger volumes, which meant that it would not relent in its price war with Woolies, Mr Esho predicted.

“The supermarket pricing war is only likely to intensify and we think both Woolworths and to a lesser extent Coles will have earnings growth pressures in the years to come. Metcash will be the largest casualty in terms of earnings performance,” he said.

Shares in Wesfarmers rose 1.36 per cent to $29.74 in morning trading today, as the benchmark S&P/ASX 200 gained a modest 0.1 per cent.

Additional reporting by Gavin Lower of Dow Jones Newswires