Target's turn for an overhaul
Wesfarmers bought a rundown business with plenty of scope to pick the low-hanging fruit. But now, Coles boss Ian McLeod has to stand on a ladder to access the higher fruit and over the next few years he will probably need a cherry picker.
Keeping the sales and volume numbers strong will increasingly require investment in value - in other words, enticing supermarket customers with even cheaper goods.
During the third quarter to March 31 Coles pushed the button on its "Down Down" campaign, but as Wesfarmers boss Richard Goyder said on Thursday, these lower prices were funded by Coles.
This suggests there might be some pressure on gross profit margins, but how much will not be known until the June 30 half-year results are released.
Given the strength of the quarter's sales, there may be a push by some analysts to revise up their half-year numbers.
In the half to December, Coles grew earnings by 15 per cent.
The earnings momentum challenge will be just as difficult for Woolworths as it is for Coles.
Goyder said there were more efficiencies to get out of the supply chain and this month's agreements with dairy producers Murray Goulburn and Norco demonstrate just how deep Coles is prepared to dive to get there.
He said suppliers who had not invested in innovative new processes would have to become more efficient - a comment that appeared to be directed at some of the international dairy processors.
One area in which there remains some upside is liquor. It has often been a drag on Coles' overall growth levels but in the latest quarter it shaved off only 0.6 per cent.
Liquor is arguably a more discretionary product than groceries and has more cyclical features. At this point, the cycle is moving in Coles' favour and, within a year, liquor could become a positive contributor to the food and liquor division's growth.
Fixing liquor's structural problems will take years due to the difficulty of finding suitable locations for the big-box format needed for First Choice and supermarket co-locations for Liquorland.
Liquor has been the standout winner for Woolworths.
But Woolworths' investment in home improvement (Masters and Danks) does not appear to have put a dent in Coles' established Bunnings brand. It seems the "trade" part of the Bunnings business has been capitalising on the change in ownership upheaval being experienced by the competition.
The black sheep in Wesfarmers' retail portfolio was again Target, which found itself at the end of the quarter with too much inventory, which will need to be discounted.
This explains the unceremonious departure of Target boss Dene Rogers 10 days ago. Goyder said Target got caught with too much inventory because analysis had shown the discount department store was missing out on sales because it didn't have the stock.
Managing inventory is one of the most important jobs for retailers, and its mismanagement is a mistake that can't be tolerated.
Target's comparable store sales fell by 0.9 per cent in the quarter - not a bad result relative to other periods - but the hangover from the excess inventory will fall into the current period.
Analysts are not convinced Target has yet found the formula for success. A cyclical recovery from improved consumer sentiment would help, but Goyder says he is not seeing much evidence of stronger consumer confidence.
By contrast, Kmart had another strong quarter, playing well into the value-for-money segment of the department store market.
Goyder remains firm that Target is not for sale but how much longer it can be retained in its current form is unclear.
Frequently Asked Questions about this Article…
Coles is in its fifth year of turnaround under Wesfarmers, having lifted performance by targeting low-hanging fruit. The supermarket has recorded 14 consecutive quarters of sales growth that outperformed Woolworths. However, the article notes that sustaining that momentum will be harder going forward because the easy gains are largely done and further growth will require bigger investments.
Wesfarmers said Coles funded the recent 'Down Down' campaign, which implies lower prices were absorbed by the retailer. That suggests potential pressure on Coles' gross profit margins, but the exact impact won’t be clear until the June 30 half‑year results are released.
Coles grew earnings by about 15% in the half to December, and the quarter to March showed strong sales. Given that performance, some analysts may push to revise up half‑year forecasts ahead of the official results, but the June figures will confirm any change.
Historically liquor has dragged on Coles' overall growth, but in the latest quarter it reduced growth by only 0.6%. The article suggests the liquor cycle is moving in Coles' favour and that liquor could become a positive contributor to the food and liquor division within a year. However, fixing structural issues—like finding suitable big‑box and co‑location sites for First Choice and Liquorland—will take years.
Wesfarmers highlighted further supply‑chain efficiencies and recently struck agreements with dairy producers Murray Goulburn and Norco. The company said suppliers that haven’t invested in more efficient processes will need to become more efficient, signaling a push to improve margins through supply‑chain deals.
Target ended the quarter with excess inventory that will require discounting. That inventory mismanagement explained the departure of Target boss Dene Rogers about 10 days before the report. Comparable store sales fell 0.9% in the quarter, and the inventory hangover will affect the current period.
Kmart had another strong quarter, continuing to play well in the value‑for‑money segment of department stores. Bunnings also appears to have held its ground; Woolworths’ investments in home improvement (Masters and Danks) haven’t dented Bunnings’ established brand, and Bunnings’ trade business has capitalised on competitor upheaval.
Wesfarmers chief Richard Goyder said Target is not for sale. Still, analysts are unconvinced Target has found a winning formula, and the article notes it’s unclear how much longer Target can be retained in its current form without a clearer recovery in consumer sentiment or a successful turnaround plan.
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