Coles keeps Woolies honest

Chanticleer is Australia’s pre-eminent business column.

Feb 18, 2020

AFR

Those who believe the country’s two big supermarket chains are lazy and complacent oligopolists using their market power to exploit trodden down consumers should look at the latest Coles interim profit results.

These show a company in the midst of a intense competitive fight with its archrival, Woolworths, investing for the long term while meeting the fast changing needs of customers.

Customer satisfaction is running at 88.5 per cent and Coles customers are buying larger baskets of goods with more expensive price tags.

This is a function of the changes made by supermarket chain to its range of groceries and to its fresh-food offering. The bushfires and smog meant more Coles customers were eating at home, which helped sales growth.

When you strip out some of the noise in the result it is clear Coles chief executive Steven Cain has delivered one of the best half-year performances for several years. Also, he is maintaining market share in the face of competition from Woolies.

His predecessors set a high bar as shown by the fact the latest half includes the 49th successive quarter of comparable sales growth.

Total sales revenue in supermarkets rose 3.3 per cent to $16.6 billion in the six months ended January 5, and total sales also climbed 3.3 per cent to $18.8 billion. Comparative sales growth was up 2.2 per cent and sales per square metre rose 1.6 per cent to $16,800.

While the liquor business was weak the explanation is pro-consumer. The company is changing its range of wines and now has 55 new exclusive liquor brand lines which have won 248 medals and awards.

Liquor sales rose 3.3 per cent to $1.7 billion in the half but earnings before interest and tax fell 9.9 per cent to $67 million. But Cain was confident this trend would be reversed when the review of stock was completed.

The core of Cain’s strategy is to fund fresh capital investment through a $1 billion cost-saving program to be delivered by June 2023.  The cost out program involves cutting staff (450 left in the half), new transport hubs and optimisation of pallet delivery.

The cost out in the first half was $95 million. Chief financial officer Leah Weckert said the company was doing much better than anticipated and the cost out this financial year would be about $150 million.

Gross operating capital expenditure during the half was $316 million.

The Coles gross profit margin rose by 31 basis points to 24.7 per cent thanks to “a more efficient supply chain and strategic sourcing”.

One of the tailwinds for full-year profit property divestments. Cain had forecast a benefit of more than $100 million. He now says it will be between $130 million and $180 million this financial year.

The result was hit by a $20 million impairment to cover the underpayment of workers in supermarkets and liquor.

The company paid a dividend of 30¢ a share, which was in line with expectations.

Coles has managed to balance the competing priorities of customers and shareholders with a result that delivered what was promised while reaffirming the wisdom of the company being spun out of Wesfarmers.