Coles at a clip but rival revs up

In the latest updates to the supermarket wars, Coles is continuing on its merry way but Woolworths may have rejoined the race via some original thinking.

Coles’ first quarter sales performance was, as has become the new norm, stellar, with food and liquor sales up 4.9 per cent and 3.7 per cent on a comparable stores basis. However, while it again out-performed arch-rival, for the first time since Ian McLeod and his team began generating momentum at Coles, Woolworths appears to have clawed back some ground.

A week ago, when Woolworths reported its September quarter numbers, its Australian food and liquor business had sales growth of 4.6 per cent and comparable stores growth of 2.3 per cent, so at face value Coles out-performed it yet again.

That 1.4 percentage point out-performance in comparable stores sales growth was the first narrowing of the gap between the two chains since McLeod’s turnaround got properly underway. A quarter earlier the differential in growth was 1.7 percentage points.

It would be premature to read too much into the numbers for a single quarter, particularly as we have yet to see what happened to the two chains’ margins, but the quarter was notable for a divergence in Woolworths’ tactics for countering the aggression McLeod has injected into Coles.

During Coles’ renaissance it has continually blind-sided Woolworths with novel promotions that Woolworths was forced to emulate.

In the September quarter Coles mounted an aggressive promotion using its fuel discount offer. Instead of simply matching and copying his rival, as Woolworths would have done in the past (where it played a futile and losing game of continual catch-up), O’Brien responded with in-store price promotions. That resulted in a decline in Woolworths’ fuel volumes and sales whereas Coles increased its fuel volumes and sales. If O’Brien had miscalculated his response the result could have been a widening of the performance gap between the two supermarket giants. The fact that the growth rates closed a little suggests that he didn’t and will encourage Woolworths to respond to future Coles’ initiatives more creatively than it has in the past.

However, it will take the release of the groups’ earnings to get a better sense of whether there has been a trade-off of margin (in either direction) involved in the sales numbers. Also, Coles actually reduced its store numbers in the quarter whereas Woolworths has been aggressively expanding its network.

The other key Wesfarmers’ retail business, Bunnings, produced strong headline sales growth of 4.7 per cent (5.1 per cent including property income) but more modest 2.5 per cent comparable stores sales growth, albeit off a very strong performance in the same quarter a year earlier.

It does have an aggressive store opening program (countering the incursions of the new Woolworths and Lowe’s Masters chain), which may have affected the comparable stores numbers given that it takes time for sales in new stores to ramp up. Bunnings opened six new stores in the quarter, three of them its large-format stores.

Target, in the midst of a major restructuring, produced a 2.2 per cent increase in sales but a 4.1 per cent decline in comparable stores sales which the business attributed to the pulling forward of its mid-year toy sale to June while Kmart lifted its sales 3.1 per cent and comparable stores sales 2.2 per cent.

The discount department store end of the market is exceptionally competitive and driven by discounting and Target is exposed to the most vulnerable segments of it, although Woolworths’ Big W appears to be lifting from its recent low-point and recent Reserve Bank rate cuts may boost retail sales in future. Kmart’s focus on volume and margin growth rather than absolute dollar sales growth makes its numbers difficult to interpret.

It will take more than one quarter of narrowing sales growth to conclude Woolworths has lifted its game and has improved its performance relative to Coles. The latest quarter will, however, give both McLeod and O’Brien something to ponder over and O’Brien will at least be relieved that his decision to do his own thing when Coles ramped up its fuel offer didn’t backfire.

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