Coles' revival aimed at Target
Wesfarmers bought a rundown business with plenty of scope to pick the low-hanging fruit. But now, Coles boss Ian McLeod has to stand on a ladder to access the higher fruit and over the next few years he will probably need a cherry picker.
Keeping the sales and volume numbers strong will increasingly require investment in value - in other words, enticing supermarket customers with even cheaper goods.
During the third quarter to March 31 Coles pushed the button on its "Down Down" campaign, but as Wesfarmers boss Richard Goyder said on Thursday, these lower prices were funded by Coles.
This suggests there might be some pressure on gross profit margins, but how much will not be known until the June 30 half-year results are released.
Given the strength of the quarter's sales, there may be a push by some analysts to revise up their half-year numbers.
In the half to December, Coles grew earnings by 15 per cent.
The earnings momentum challenge will be just as difficult for Woolworths as it is for Coles.
Goyder said there were more efficiencies to get out of the supply chain and this month's agreements with dairy producers Murray Goulburn and Norco demonstrate just how deep Coles is prepared to dive to get there.
He said suppliers who had not invested in innovative new processes would have to become more efficient - a comment that appeared to be directed at some of the international dairy processors.
One area in which there remains some upside is liquor. It has often been a drag on Coles' overall growth levels but in the latest quarter it shaved off only 0.6 per cent.
Liquor is arguably a more discretionary product than groceries and has more cyclical features. At this point, the cycle is moving in Coles' favour and, within a year, liquor could become a positive contributor to the food and liquor division's growth.
Fixing liquor's structural problems will take years due to the difficulty of finding suitable locations for the big-box format needed for First Choice and supermarket co-locations for Liquorland.
Liquor has been the standout winner for Woolworths.
But Woolworths' investment in home improvement (Masters and Danks) does not appear to have put a dent in Coles' established Bunnings brand. It seems the "trade" part of the Bunnings business has been capitalising on the change in ownership upheaval being experienced by the competition.
The black sheep in Wesfarmers' retail portfolio was again Target, which found itself at the end of the quarter with too much inventory, which will need to be discounted.
This explains the unceremonious departure of Target boss Dene Rogers 10 days ago. Goyder said Target got caught with too much inventory because analysis had shown the discount department store was missing out on sales because it didn't have the stock.
Managing inventory is one of the most important jobs for retailers, and its mismanagement is a mistake that can't be tolerated.
Target's comparable store sales fell by 0.9 per cent in the quarter - not a bad result relative to other periods - but the hangover from the excess inventory will fall into the current period.
Analysts are not convinced Target has yet found the formula for success. A cyclical recovery from improved consumer sentiment would help, but Goyder says he is not seeing much evidence of stronger consumer confidence.
By contrast, Kmart had another strong quarter, playing well into the value-for-money segment of the department store market.
Goyder remains firm that Target is not for sale but how much longer it can be retained in its current form is unclear.
Frequently Asked Questions about this Article…
Coles is in its fifth year of revival under the Wesfarmers umbrella and has recorded 14 consecutive quarters of sales growth that outperformed Woolworths. The article notes strong momentum but also cautions that sustaining this level will become harder as the easy gains are exhausted and further investment will be needed to keep growth going.
Wesfarmers said the lower prices from Coles' "Down Down" campaign were funded by Coles, which suggests there may be pressure on gross profit margins. The article explains the full impact won’t be clear until Coles releases its June 30 half‑year results.
Coles has outperformed Woolworths' sales growth for 14 straight quarters, according to the article. For investors, that shows solid top‑line momentum, but the piece also warns that both supermarkets face challenges maintaining earnings momentum going forward.
The article says liquor has often dragged on Coles' overall growth but in the latest quarter it only reduced growth by 0.6%. The cycle is moving in Coles' favour and liquor could become a positive contributor within a year, though fixing structural issues (like finding big‑box and co‑location sites) will take years.
Wesfarmers' boss Richard Goyder said there are more efficiencies to be found in the supply chain. The article highlights recent agreements with dairy producers Murray Goulburn and Norco as examples of how far Coles is prepared to go to extract efficiencies, and suggests some suppliers will need to become more efficient.
Target ended the quarter with excess inventory that will need discounting, and comparable store sales fell 0.9%. The stock build led to the departure of Target boss Dene Rogers. The article notes inventory mismanagement is a serious retail mistake and analysts are not convinced Target has found a clear turnaround formula, creating execution risk for investors.
Kmart had another strong quarter, performing well in the value‑for‑money segment, while Woolworths' investment in Masters and Danks does not appear to have dented Coles' established Bunnings brand. The article suggests Bunnings—especially its trade business—has benefited from upheaval at competitors.
Yes. The article says that given the strength of the quarter's sales, some analysts may push to revise up half‑year numbers. It also notes Coles grew earnings by 15% in the half to December, providing momentum that could prompt upward revisions.
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