Fine-tune focus working for Woolworths

More active on expansion and still in the process of some operational recalibrations, Woolworths has nonetheless managed to deliver a result proximate to its great rival's.

When Grant O’Brien inherited the leadership of Woolworths almost 16 months ago he didn’t outline radical changes to a successful model but rather better execution of its detail. He’s continuing to deliver on the promise.

While inevitably the focus on the big supermarket groups is on comparisons of their relative growth rates, in which Coles continues to outpace Woolworths, O’Brien would be well pleased with the performance of his core businesses and his Australian food and liquor businesses in particular.

Woolworths first half sales numbers, released a day after those of its rival Wesfarmers (Reborn Coles gives Wesfarmers wings, January 30), showed a 5.6 per cent increase in sales from continuing operations, or 4.8 per cent if petrol were excluded. Within the core Australian food and liquor division sales were up 4.7 per cent, compared to Coles’ 5 per cent, and comparable stores sales were up 2.4 per cent, compared to Coles’ 3.8 per cent.

Apart from the fact that these are sales numbers, not earnings, comparable stores sales comparisons are distorted by the fact that Woolworths is engaged in a far more aggressive expansion program than Coles, which has only embarked on space-driven dimension to its growth strategies relatively recently and relatively cautiously. Woolworths added a net 15 stores to its supermarket network in the half.

It is also the case that under O’Brien Woolworths has changed its tactics. Where previously Woolworths had been continuously wrong-footed by Coles’ creative and aggressive promotions, O’Brien made it clear from the outset that he was committed to being less reactive and differentiating his offer.

That change of strategy played out in the half.

In the first quarter Coles used fuel discounts to mount a very aggressive promotion. Instead of copying Coles, Woolworths devoted its efforts to in-store price promotions. That impacted its fuel sales (petrol sales were down 2.8 per cent in the half) but helped narrow the relative growth rates in comparable stores sales, where Coles had established and maintained a significant lead once Ian McLeod and his team were up and running. That reduced gap in relative growth rates, about 1.4 percentage points, was held steady through the half, validating the shift in tactics.

Woolworths says that it increased market share, customer numbers, basket sizes and items sold during the half, with a 4.6 per cent increase in average weekly customer numbers, to 20.2 million. O’Brien cited effective promotional activities, the leveraging of customer data capabilities and a return to inflation in produce as influences over the outcome.

The other big division, Big W, also had a reasonable half, with total sales growth of 3.6 per cent, although comparable stores sales growth was a more modest 1.6 per cent and second quarter sales were down 1.4 per cent.

If one considers Big W a blend of the Kmart and Target offers, its performance was broadly in line with their aggregated sales growth, albeit well off the pace set by the radically-repositioned Kmart.

Competition, the severe pressure on consumer electronics and what Woolworths says was reduced loss-making promotional activity were factors in the second quarter sales outcome.

It’s not been an easy couple of years for discount department stores (other than Kmart, whose volume-driven model has been part of the problem confronting competitors) although conditions do appear to be stabilising.

One of O’Brien’s emphases has been to grow Woolworths' online presence, which was less than 1 per cent of sales when he took over. While the impact of multi-channelling is still immaterial in the context of Woolworths' scale, online sales from its continuing operations (Dick Smith was sold during the half) were up 40 per cent.

The group’s experience has been that online sales growth is far higher than sales growth in its physical network, as is the average customer spend. Offshore supermarket operators are generating 4 or 5 per cent of their sales online. With annualised sales of more than $50 billion, the online potential for Woolworths is obviously very material.

While the jury is out on their eventual returns, the 25 Masters stores Woolworths has now opened in its attempt to attack Wesfarmers’ Bunnings home improvement business generated $637 million of sales for the half, a 54.6 per cent increase on the corresponding period. Woolworths says it was pleased with the performance of the business.

There is no doubt that sales will continue to soar as Woolworths and its US partner Lowes pursue their five-year, 150-store, $3 billion or $4 billion network rollout. The real test of the credibility of that strategy won’t come for some time, when the rollout is closer to completion and a clearer sense of the returns on investment the sortie into hardware is generating emerges.