Correct weight for Coles in a Woolworths challenge

Wesfarmers' focus on productivity – rather than the store expansion preferred by Woolworths – appears well suited to current retail conditions, with considerable scope for growth still sitting in the strategy.

The divergence in strategies between the two big supermarket groups becomes more pronounced with every quarter’s sales announcements.

Last week Woolworths released its third-quarter numbers, which showed sales in its core food and liquor businesses were up 2.9 per cent over the same quarter last year. On a comparable stores basis, however, the division’s sales were flat.

On Tuesday Wesfarmers’ Coles business announced a 4.1 per cent increase in third-quarter sales. On a comparable stores basis they were 2.7 per cent higher. It is, Coles said, the 15th consecutive quarter of comparable sales growth.

The difference between the two rivals’ strategies has become a talking point in the market. Woolworths is growing its sales base by aggressively adding to its store numbers. It has added about 27 new supermarkets to its Australian business so far this financial year. Without that expanding store footprint its sales would be flatlining.

Coles has been closing almost as many stores as it has been opening. For the year-to-date it has added a net six stores, opening 12 and closing six. It has also re-branded two Bi-Lo stores. Its focus has been largely on the productivity of its existing store network rather than network expansion, with the real pay-off coming from a continuing store refurbishment program that is building both sales and profitability.

There are those who believe that is a finite strategy but, with less than a third of a supermarket network that was very run down when Wesfarmers acquired it re-formatted, there remains considerable scope for internal improvement. Wesfarmers has made it clear it is more interested in improving the profitability of the business than in its absolute size.

The continuing momentum within the supermarket chain is quite impressive when one considers the conditions. Like Woolworths, Coles cited severe (it said 25 per cent) price deflation in fresh produce in the quarter, as well as its own re-investment of some of the productivity gains in lower food and liquor prices. Underlying volume growth, it said, remained strong and demonstrated the continuing strength of the turnaround in the business.

For the year-to-date, the supermarket and liquor business has grown sales 4.6 per cent, or a still highly creditable 3.9 per cent on a comparable stores basis.

Wesfarmers would also have been well pleased with the performance of its home improvement business, where sales grew 4.3 per cent in the quarter, with store sales up 4.7 per cent and comparable store sales up 2.6 per cent. For the year-to-date sales are up 6 per cent and store-on-store sales growth is 4 per cent.

The Bunnings business has been going through a period where it has been finessing its offering – and accelerating the expansion of its store network – to counter the recent launch of the Woolworths/Lowe’s Masters big box hardware chain. So far Bunnings hasn’t yet faltered despite the nascent competition and difficult weather and economic conditions.

The two Coles’ siblings, Target and Kmart, found the going a bit tougher, with Target’s sales down 4.4 per cent for the quarter (6.1 per cent on a comparable stores basis and 3 per cent for the year-to-date) and Kmart’s up 1.2 per cent for the quarter and down 0.6 per cent year-to-date.

Target has been hard hit by the retail recession that has impacted discount department stores most. It is also, however, fine-tuning its retail strategies and now appears more focused on improving its profitability than in defending its sales base. New managing director Dene Rogers said improving the profitability of promotions had been a focus and with tight inventory management had had a "notable" positive impact on the business.

Kmart is pursuing an idiosyncratic strategy for some time, one which has proved very disruptive to its competitors and suppliers, by focusing on a much smaller range of stock and then very aggressively pricing it to drive volume.

Kmart’s Guy Russo said today that customer transactions and volumes were continuing to grow and that a focus on inventory management and improvements in the store offer had improved performance across its product range.

Kmart was able to generate double-digit earnings growth in the first half of this financial year despite slippage in the dollar value of its sales, a remarkable feat which signals the effectiveness of its strategy. The second half might prove tougher, given that retail conditions have been worsening.

Wesfarmers’ Richard Goyder referred to the "good progress" of all the group’s retail brands in improving customer service, enhancing their offers, delivering better value and managing their inventories effectively. He said they were well positioned for trading in the final quarter.

The Wesfarmers’ retail strategy might be introspective and focused more on productivity than growth in their sales bases but, for the moment at least, that appears to suit the difficult conditions retailers generally are experiencing.

Longer term, Woolworths may be able to leverage the increasing gulf in scale between the two supermarket businesses but the Coles’ strategy of focusing on renovating what it has ahead of pursuing scale appears to be paying off in the meantime.