Coles growth slows, naturally

Coles sales growth may appear to be slowing. That's a product of past success.

For the past four years, supermarket giant Coles has managed to provide the illusion that it has rival Woolworths (WOW) on the ropes.

Its sales growth has outstripped its rival in every quarter for the past 16 quarters, usually delivering newspaper headlines that Coles again has "beaten" Woolies.

But for most of that time, Coles merely has been engaged in a game of catch-up after years of chronic underperformance that saw the group eventually raise the white flag and put itself up for sale.

Under Wesfarmers management (WES), it quickly reversed the slide with an aggressive grab for market share.

When you are coming from so far back in the field, it is relatively easy to pile on growth at a quicker pace than your established and much bigger rival, a concept many armchair analysts appear to have overlooked (see John Abernethy's Woolworths produces the goods).

As time wears on, however, and the more successful you are at stealing market share, the incremental percentage growth figures become more difficult to attain as the growth is struck against an ever increasing base.

Hence the market reaction to this morning's quarterly sales growth numbers from Coles. The stock opened 2.4% lower at $41 before recovering to $41.84.

On a comparable basis, food and liquor sales grew 3.4% to $8.9 billion; still a fair clip given deflation of 2.5%. Clearly, though, investors have become accustomed to growth at a significantly higher pace.

Where Coles genuinely has Woolworths under pressure is in home improvement.

Its Bunnings division, the clear market leader, is streets ahead of Woolworths' expensive foray into the field with its Masters stores. And the gap, judging by this morning's numbers, appears to be widening.

Bunnings total store sales jumped 10.4% to a whisker under $2 billion as it threw itself headlong into the challenge laid down by Woolworths with a roll-out of new stores and refurbishment of existing properties. On a comparable basis, sales lifted a massive 7.1%.

Woolworths has yet to hand down its quarterly sales. But home improvement, where it already has admitted problems and indicated it was overly optimistic with its forecasts, is the area that will be most keenly watched.