Reborn Coles to give Wesfarmers wings

Retail conglomerate Wesfarmers has secured solid results across the board, with the Coles consolidation now clearing the way for an expansion of its supermarket empire.

For much of the past five years the focus of the Coles food and liquor business has been mainly internal. It would now appear to be shifting into a different phase of growth.

The release of the Wesfarmers group’s first half retail sales numbers today shows the momentum within Coles’ numbers isn’t abating, with headline sales growth for the food and liquor business of 5 per cent.

The comparable stores growth of 3.8 per cent, however, points to the gradual expansion and fine-tuning of the footprint of the supermarket business, which opened 11 new stores during the half and closed six. In liquor, Coles added 27 new stores and closed 16.

Unlike Woolworths, which has been engaged in a substantial and capital-intensive rollout of new supermarkets, Coles has, for most of the period since it was acquired by Wesfarmers in 2007, been very focused on fixing what it bought rather than building out the network.

It still only about halfway through renewing the formats of the stores within that network but as the confidence has grown that the business has been successfully rehabilitated – the December quarter was the 15th consecutive quarter of comparable stores sales growth – it has begun adding new stores and therefore adding growth to the better sales density it has been extracting from the core network.

It is also starting to get some traction in what had been, relative to Woolworths, an underperforming liquor business.

The continuing success of the Coles turnaround strategy won’t be the only aspect of the sales results that would encourage Richard Goyder.

The Bunnings home improvement business, under an escalating attack from the Masters brand and big box format that Woolworths and its US partner Lowes are rolling out, generated sales growth of 5.7 per cent for the half and 6.6 per cent in the December quarter. Comparable stores growth was 3.4 per cent for the half and 4.2 per cent for the second quarter.

Bunnings’ John Gillam has been investing heavily in growing his network – he added a net five new warehouses in the half, four smaller format stores and a trade centre – at least partly to counter the Masters threat to Bunnings’ dominance of its category. That had pulled back some of the routinely stellar growth numbers Bunnings has traditionally posted but it would now appear that the significant fine-tuning of the Bunnings offer is driving very solid sales growth.

Kmart, which under Guy Russo has radically shifted its strategy in the past few years to focus on volumes and margins rather than simple sales growth, also had a strong half year, with total sales up 3.5 per cent and comparable stores sales growth of 3 per cent. In the December quarter sales were up 3.8 per cent and comparable stores sales 3.7 per cent. It, too, is adding stores to its network.

Target, with comparable stores sales declining 1.8 per cent in the half (total sales were up 1.2 per cent) is harder to read given that it is in the midst of a restructuring, that it brought its key toy sale forward into June last year and is exposed to the torrid competition within the electrical and entertainment segments.

Its managing director, Dene Rogers, however, said he was satisfied with the progress made during the half.

The overall picture provided by Wesfarmers’ retail business was encouraging, both for Wesfarmers and the broader sector.

There is an expectation that Woolworths supermarket and liquor businesses will also produce solid sales numbers but the performance of the non-food brands suggests – as discussed yesterday, Is retail really rolling again? – that there might be a wider, albeit modest, improvement in conditions for retailers emerging.

Whether that is purely volume and promotion-driven and comes at the expense of margins won’t be clear until we see earnings results from the bigger retailers for the first half but the largely positive tone of Wesfarmers’ commentary, the official retail spending statistics and some anecdotal evidence that some of the bigger retailers are experiencing some mild relieving of what was a severe retail recession, points to some slight easing of the pressures they were experiencing.