Ringing up Coles' sales attack

Wesfarmers' supermarkets strategy is pulling in big increases in customer and transaction numbers, and it appears there's plenty of scope to continue.

The most striking aspect of Coles’ first-half sales results, apart from the obvious and flattering comparison with arch-rival Woolworths, is that when its sales growth is seen in the context of the price deflation occurring, Coles is clearly driving very big increases in customer numbers and transactions.

It was largely that volume growth that enabled Coles to generate earnings growth at three times the rate of its sales growth last year and it would appear that, while the rate of sales growth might have slipped back a little over the course of the latest half, the underlying transaction volumes still have real momentum.

While most of the attention has been on Coles’ continuing price attacks on Woolworths, only about a quarter of its supermarkets are operating under what appears to be a very successful new format – there appears to be considerable scope for further structural improvement to the Coles’ offer and its eventual sales base.

While the first-half food and liquor sales growth of 4.9 per cent – 4.3 per cent in the second quarter – might not appear particularly impressive it did modestly outstrip Woolworths’s 4.3 per cent.

More significantly, on a comparable stores basis, Coles recorded growth of 4.4 per cent for the half where Woolworths could only achieve a 1.5 per cent increase in sales. In the second quarter, comparable stores sales growth for Coles was 3.7 per cent against Woolworths’ 1.1 per cent.

The two groups calculate price deflation differently, but Coles’ estimate of 2.1 per cent for the half and Woolworths’ 3.7 per cent do point to the intensity of the competition between the two dominant chains and the impact of Coles’ targeted and very visible assaults on the pricing of a succession of key products.

Both claim to have won market share in the half. Either Woolworths has miscalculated or someone else is taking an absolute hammering. It is apparent, however, that Coles is still gaining share. It now has 14 consecutive quarters of solid comparable stores growth in an overall market that has been quite weak.

Coles and Bunnings, which grew sales 6.8 per cent in the half and comparable stores sales 4.6 per cent, were again the stand-outs within the Wesfarmers portfolio of retail brands. The Bunnings performance will be encouraging for Wesfarmers as it prepares for the escalation of Woolworths’ presence in the hardware segment.

Like Big W earlier in the week, both Target and Kmart have been shedding sales in a very tough environment for all department store operators. Competition among the discount retailers has been particularly intense.

Big W reported a first-half sales decline of 1.3 per cent and a 2.8 per cent fall in comparable stores sales.

Target’s sales were down 2.5 per cent for the half (3.5 per cent on a comparable stores basis) and Kmart’s slipped 1.3 per cent (1.4 per cent on a comparable stores basis); although Target did say there was a noticeable improvement in customer numbers in December after changes to its marketing campaign, while Kmart reported record growth in unit sales and customer numbers.

The discount stores, including Big W, do appear to be attracting customers and achieving volume growth, but only through heavy discounting that has more than offset that volume growth.

The continued pressure on the discount department stores illustrates just how tough conditions are for retailers at present. Oddly, however, those same conditions and the acute focus on value they have created among consumers appear to be leveraging the impact of the repositioning of the Coles brand and business.

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