Now Woolies' CEO has a fresh headache

Woolworths' shares got hammered today after the retailer revealed disappointing first-quarter sales growth in its core Australian food and liquor business. If Grant O'Brien is right, his business is being damaged by perceptions.

In trying to explain why the food and liquor business produced comparable stores sales growth of only 2.1 per cent in the 14 weeks to October 5, O'Brien cited softer and below-expectation sales in August and September. He also said Woolworths needed to improve consumer perceptions of its price competiveness.

The 4.89 per cent ($1.76 a share) hit to the Woolworths share price was presumably the market's response, not necessarily to the numbers themselves (it wasn't that long ago when anything above 2 per cent sales growth would have been seen as a reasonable outcome for the business) but to their comparison with the numbers Wesfarmers' Coles business produced last week.

Coles lifted its comparable store sales by 4.3 per cent in its first quarter.

Since O'Brien became chief executive of Woolworths in late 2011 the group's food and liquor business has demonstrated steady improvement and has gradually reduced the gap in growth rates between itself and the resurgent Coles business to the point where it had almost eliminated it.

Had Coles also experienced a slowdown in sales growth the Woolworths numbers could have been explained by the economic context; as part of a broader slowdown in consumers' grocery spending. The fact that Coles produced more than double the growth rate of its arch rival, however, says there must be another explanation.

Actually, it is possible that the economic backdrop could be part of the explanation.

More than two years ago Coles started a new marketing campaign, the famous/infamous “Down, Down” campaign featuring the ageing UK rock band Status Quo. The “prices are down” theme of the campaign has been pushed relentlessly and consistently since the campaign launch.

Woolworths is acutely aware that, while it still “owns” the fresh grocery segment Coles is now generally perceived to have lower prices for “dry” groceries. It appointed a former senior Coles executive, Tony Phillips, as its chief marketing officer earlier this year and launched its own “Cheap, Cheap” campaign in September (along with 85 cent bread) to try to counter the Coles' messaging.

The point at which perceptions and reality began to meet appears to have been in the aftermath of this year's federal budget, although it took some months to be reflected in the food and liquor businesses' growth rate.

If consumers are feeling confident, Woolworths' “fresh” advantage works in its favour. If, however, they are anxious about the outlook for the economy and their finances their perceptions of Coles' pricing gives it the advantage.

It would seem from Woolworths' experience that they may have become somewhat more conservative in recent months, with its sales growth rate beginning to taper in the final quarter of last financial year and then deteriorating further in the first quarter of the new year.

It wasn't only food that disappointed -- liquor apparently also experienced tougher conditions, but that was part of a broader softening of the market rather than Woolworths-specific.

It also hasn't helped that both Woolworths and Coles have reduced their shopper docket promotional activity after giving undertakings to that effect to the Australian Competition and Consumer Commission. Woolworths was cycling much more aggressive promotional activity a year earlier in the first-quarter comparisons.

It takes time to change brand perceptions so, even if the “Cheap, Cheap” campaign and the associated big reductions in the prices of staple items has the effect O'Brien desires it could be a while before it impacts the relative growth rates of the Woolworths and Coles supermarket businesses.

The fading growth rate within his core business is a headache he doesn't need, with the Big W discount department store group undergoing another transformation program amidst the malaise in discount department store retailing generally, the group's hotels business experiencing “challenging” conditions in its key Victorian and Queensland markets, and the loss-making Masters hardware business also being remade in an attempt to eventually create a profitable model.