Green leaves in Coles' fridge

Within the Wesfarmers' retail sales results released today, and those of Woolworths' earlier this week, are the first tentative signs that the retail recession might be easing. Either that or the rest of the retail sector is being ravaged by the major chains.

The alternative explanation, of course, is that the uplift in the fourth quarter was an aberration driven by the Gillard government's "cash splash" and that the sector will sink back into recession-like conditions.

Earlier this week Woolworths reported a fourth quarter lift of 3.8 per cent in its food and liquor sales, albeit a more modest 1.3 per cent increase in comparable store sales. Its Big W division, which had been struggling, produced a fourth-quarter sales increase of 4.6 per cent and a 1.6 per cent rise in comparable store sales.

In the circumstances of intense competition and price deflation those were creditable numbers.

Today Wesfarmers' retail brands reported. As has been the case for some time now, the Coles' food and liquor business grew significantly faster than arch-rival Woolworths, with full-year sales up 4.6 per cent and a solid 3.7 per cent on a comparable stores basis.

As significantly, fourth quarter sales growth of 4.6 per cent and comparable store growth of 3 per cent was achieved despite food and liquor price deflation of 4 per cent and a liquor business that is lagging the Woolworths' Dan Murphy brand and offsetting the growth rate of the supermarket division. Coles' convenience store business grew sales 6.1 per cent for the year and 4.6 per cent in the further quarter.

The Bunnings hardware business, in the midst of a surge in its network, produced annual sales growth of 5.6 per cent and fourth-quarter growth of 4.1 per cent. Kmart, which has been more focused on productivity than growth flat-lined over the year but grew sales 2.2 per cent in the fourth quarter. Target was down 1.8 per cent for the year but up 2 per cent in the fourth quarter and, on a comparable stores basis, up 4.5 per cent.

The performance of the discount department store businesses – Big W, Target and Kmart – is particularly interesting because their sector has been the most impacted by the downturn in discretionary spending and the fierce price-driven competition it has spawned. Their final-quarter performances suggest there might be some light at the end of their tunnels.

The stronger signs of life within the Woolworths portfolio towards the end of the year and the across-the-board solidity of the key Wesfarmers' brands fits with the anecdotal evidence of a modest improvement in conditions for the bigger retailers, aided by the federal government's "cash splash".

Whether that improvement in sales is due to the one-off cash dispersal, some slight recovery in the external environment or has been won at the expense of smaller retailers won't become clearer until the second-tier retailers report, we've had an opportunity to see whether the big chains sacrificed margin to win market share and we've seen whether those stronger sales outcomes have continued into this financial year.

Certainly the performance of Coles benefitted from volume growth and from the major promotional efforts of the two big supermarket chains, both of which re-launched loyalty programs and advertising campaigns towards the end of last year.

The two big retailers have also devoted considerable effort and attention to improving the basics of their businesses, which could help account for the improvements in Big W and Target.

The impressive aspect of Coles' sales growth is that it isn't being driven, as Woolworths' is, by aggressive expansion of its store network, although there is now growth occurring in that network.

Where Woolworths has been furiously growing its network – it opened 38 new supermarkets and 20 Dan Murphy's outlets in the latest financial year – Coles has been very focused on improving the productivity of its existing network. It is only a third of the way through a refurbishment and re-formatting of its 749 stores.

Interestingly, however, Coles opened more stores (19) than it closed (8) during the year, so its network is growing, albeit modestly. The net outcome was a 1.9 per cent increase in its selling space against one per cent growth in the previous year.

The battle between Coles and Woolworths tends to grab most of the attention because of, not just the scale of the two businesses, but the way in which Coles has consistently out-grown its bigger rival and chipped away at its dominance.

Wesfarmers' Richard Goyder, however, would also be pleased with the performance of the group's home improvement business, facing the accelerating roll-out of Woolworths' Masters chain.

The solid comparable stores growth at a time when John Gillam is over-seeing a rapid roll-out of new Bunnings Warehouse stores and confronting a challenger which has already built a sales base approaching 10 per cent of his own is a very respectable achievement.

The improving sales trends within Target, which is undergoing a re-positioning, expected to take several years, and the final quarter uptick in sales within Kmart would also encourage Goyder that the renovations of his group's retail brands remain on track in conditions that have been, and indeed remain, difficult.