How Woolworths closed in on Coles' dominance

Woolworths' impressive sales growth is testament to Grant O'Brien's strategies for the supermarket chain's expansion and online presence. The success of its Masters joint venture will be the next big test.

Given the sheer volume of new supermarkets Woolworths has added over the past year, it was no surprise that its headline numbers for sales growth were impressive. On an Easter-adjusted comparable stores basis, however, the growth rate was still solid and matched yesterday’s results from Coles.

With nearly 40 more supermarkets operating in the group’s third quarter relative to the same period of last financial year, the 5.1 per cent increase in Easter-adjusted sales for the food and liquor division translated into a 3.5 per cent increase in comparable stores sales -- a rate identical to the one Coles’ reported yesterday.

By itself, that is a significant achievement, given that Coles’ growth has out-stripped Woolworths’ since Ian McLeod and his team ignited its hockey-stick-like resurgence. It’s one that reflects the measured and continuing rate of improvement in Woolworths’ food and liquor business since Grant O’Brien became chief executive two and a half years ago.

The closing of the growth rates of the two supermarket chains, however, also reflects the dominance of Woolworths’ liquor business and the under-performance of Coles’. If Coles’ liquor sales were stripped out, its food business generated comparable stores sales growth of 3.9 per cent.

There is also still a lot of potential upside within Coles. It is only just starting to expand its network after focusing on improving the productivity of its existing stores, and has converted only about half its network to new formats.

Nevertheless, the trend of quarterly uplifts in Woolworths’ food and liquor growth rates across the bigger base created by the massive expansion of the store network (29 stores were added in the third quarter alone) says that there is momentum in the group’s performance. In addition, there is further upside in its online strategies and its increased focus on leveraging its customer insights and loyalty program.

Online sales weren’t disclosed but Woolworths did say they increased more than 50 per cent and that its ‘click and collect’ sales more than doubled.

O’Brien, however, still has problems within the Big W discount department store business, where comparable store sales were down 5.9 per cent (Easter-adjusted) in the quarter. The business is undergoing a major transformation and will get a new managing director, senior UK retailer Alistair McGeorge, in June.

The discount department store sector remains fiercely competitive within a soft external environment. The impact of the volume-driven Kmart model of focused low prices has been exacerbated by the restructuring of its Wesfarmers’ sibling, Target, and that brand’s shift towards lower price points. Woolworths estimated that price deflation for the quarter was 3.4 per cent.

On Tuesday, the most impressive performance within Wesfarmers’ retail portfolio came from its Bunnings hardware business, which lifted comparable stores sales 7.8 per cent and its total sales by 12.3 per cent.

Woolworths' hardware business is still very much in start-up mode but is starting to develop some scale. With 45 Masters stores trading by the end of the quarter, the business generated $179 million of sales, up 39.8 per cent. Sales for the entire home improvement division were up 29 per cent to $374 million.

By the end of the financial year, the joint venture will have added 18 stores in the past year, which will give Woolworths and its joint venture partner Lowe’s about a third of the business’ planned eventual footprint of about 150 stores.

Whether the increasing scale and visibility of the Masters brand is reflected in any significant decrease in its losses, or even their stabilisation, however, will be the critical issue when Woolworths reports its earnings for the year.

The jury is definitely out on whether the decision to try to attack Bunnings’ dominance of the sector was a sensible one. It certainly hasn’t yet impacted Bunnings negatively.

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