Coles puts more eggs in convenience basket

Sue Mitchell
Apr 29, 2019
AFR

Coles is attempting to meet the needs of customers at different ends of the spectrum – those doing it tough and those prepared to pay for greater convenience.

Coles plans to stock more ready-to-eat meals and change store layouts so customers can shop for their evening meal faster in an attempt to boost sales to shoppers demanding more convenience.

Coles chief executive Steve Cain says the biggest challenge facing Australia’s second-largest food and liquor retailer is meeting the need for convenience while holding down prices and the cost of services such as home delivery as online sales soar.

“The challenge for us as a business is to get our fair share of the convenience basket, which we’re not achieving at the moment,” Mr Cain told investors on Monday after unveiling solid same-store food sales growth boosted by higher fresh-food prices.

“There’s a lot of focus going into making sure we drive transactions by having a better convenience offer,” he said.

Coles has opened a handful of small stores in inner-city locations, integrated the team developing convenience-style food and established a partnership with Uber Eats to deliver ready-to-eat and ready-to-heat meals to time-poor consumers.

It is a now expanding its range of ready-made meals and working on plans to sell meal kits while testing two new store formats where the ingredients for popular meals such as home-made pizza and spaghetti bolognese are co-located.

At the Pagewood store in Sydney, for example, Coles has launched a trial where customers can buy ready-made Sumo Salads and Coles roast chickens from the deli counter.

“We’re looking more strategically at our store base and how we need to change the layouts to make sure people can get in and out quicker with a meal for that evening,” Mr Cain told The Australian Financial Review.

“We’ve clearly got to increase the size of the offer . . . getting the range and the location right is going to be key in terms of moving forward,” he said.

More details of the new convenience strategy will be revealed on June 18, when Coles holds its first investor strategy update since the $20 billion demerger from Wesfarmers int November.

Coles is also stepping up investment in distribution and e-commerce and doubling down on costs after Mr Cain warned investors in February it would take at least a year to return to profit growth.

Coles’ earnings rose 125 per cent between 2009 and 2016 but have fallen 19 per cent over the past two years as sales growth has slowed and margins have come under pressure from rising costs.

Higher prices for fresh foods and stronger demand for fruit and vegetables inspired by Fresh Stikeez helped Coles lift same-store supermarket sales 2.4 per cent in the March quarter.

Promotional fatigue
The result was in line with analysts’ forecasts but is likely to fall short of same-store sales at Woolworths, which are expected to grow 2.8 per cent to 3.3 per cent.

The latest result was well below the 5.1 per cent same-store sales growth in the September quarter, which was boosted by the highly successful Little Shop promotion.

“We didn’t expect it to be of the same magnitude,” Mr Cain said. “What is quite apparent is there might be some promotional fatigue out in the marketplace.”

However, growth eased after the Fresh Stikeez promotion ended, with same-store sales so far in the June quarter heading towards the 1.5 per cent (New Year’s Eve-adjusted) growth delivered in the December quarter.

“Those non-price promotions are good initiatives, the challenge always is to come up with the next one,” said Credit Suisse analyst Grant Saligari.

Food prices rose 0.9 per cent, boosted by higher prices for fresh fruit and vegetables such as apples and capsicums, meat and bread. But excluding fresh foods and tobacco, prices fell 0.9 per cent as growth in Coles’ lower-priced own brands offset drought-driven price rises for national brands.

‘Tale of two cities’
Mr Cain wants to lift own-brand penetration to about 40 per cent from 29 per cent last year.

“It’s growing significantly faster than the rest of the business,” he said, with more than 190 own-brand products launched during the quarter.

Mr Cain said there was a “tale of two cities” amongst consumers.

“There are quite clearly a lot of families doing it tough at the moment, which is we why we continue to focus on keeping prices low. There’s no evidence anyone is out there spending potential tax cuts.”

While Coles was approving some price rises sought by suppliers, it did not want to return to the situation of 10 years ago when prices routinely rose 3 or 4 per cent a year, he said.

At the other end of the spectrum, consumers demanding greater convenience were prepared to pay more to have food and groceries delivered fast. Online sales rose 27 per cent,

Coles has been trialling higher delivery fees to improve the profitability of its online business and encourage more shoppers to “click and collect”.

Including sales from seven refurbishments and a net two new stores, Coles’ total supermarket sales rose 3.2 per cent to $7.27 billion.

In liquor, same-store sales rose 0.9 per cent, adjusted for New Year’s Eve, and total sales rose 4.3 per cent to $735 million as sales of spirits outpaced demand for wine.

Coles’ joint venture with KKR’s Australian Venue Co, announced last month, was expected to be completed on Monday. Under the joint venture, AVC will take over the running of Coles’ 87 Spirit Hotels venues in Queensland.

At Coles Express, fuel volumes continued to plunge, but the pace of decline eased after Coles’ partner, Viva Energy, started to cut pump prices after their new fuel supply agreement came into effect on March 1.

As a result of the fall in volumes and new supply agreement, under which Coles no longer retails fuel, Coles Express sales plunged 32 per cent to $874 million.

Coles hopes fuel volumes and convenience store sales will start to improve as pump prices, which have been the highest in the market, become more competitive.