Both Woolworths and Coles believe they are set to gain a significant advantage over the other.
Or to put it another way, they are starting to head in different directions. We are set for an intriguing tussle, where one of them may get it wrong.
In coming years, the sharemarket will evaluate the different strategies. Suppliers will also need to make sure they are top of the differences.
Last night Tony Abbott and a large number of other parliamentarians joined the Coles family in celebrating the Coles' centenary. The Prime Minister, fresh from the mire of the Qantas-Virgin battle, must have noticed that Coles and Woolworths box under Marquess of Queensberry rules. Qantas and Virgin fight bareknuckle.
Yesterday I set out how the Woolworths $1 billion Mercury Two plan was going to work (Woolworths’ $1 billion plan to rewrite the retail rulebook, March 5).
Later in the day, Coles announced a $1.1bn plan to erect some 70 new supermarkets. In the past five years, whereas Woolworths has been aggressively opening new stores, Coles has virtually opened no new stores after taking closures into account. Effectively, the latest Coles plan is a catch up -- but it also sets a new growth path (Coles embarks on a new growth chapter, March 5).
Yet given the Mercury Two is aimed to take Woolworths’ online sales beyond 10 per cent of turnover, Coles' major investment in stores now carries a risk that did not exist when Woolworths made the investment.
Nevertheless, behind that conventional Coles strategy is much more intense strategic warfare.
Coles believes that in most supply chain areas, they have come from a long way behind to be close to level with Woolworths. The one exception is liquor, where Woolworths is still well ahead. And Woolworths’ plan is to spread its liquor supply chain and online ordering techniques throughout the group as part of Mercury Two. So that gap in liquor is Coles' first danger point.
But Coles believes that it has an advantage over Woolworths in services. In particular, the Coles loyalty program means Coles own seven million names: the combination of the Coles MasterCard, mobile phone techniques, the loyalty program and knowledge of customer purchases is enabling Coles to email millions of customers, targeting specials to them based on past buying.
And it’s working. Woolworths’ Qantas loyalty program sees Qantas owning the names, and other aspects of the program need work. Rightly or wrongly, Coles believe they have stolen a march on Woolworths in this area and it will enable them to achieve similar goals on a far lower cost case than Mercury Two.
But in Mercury Two, Woolworths chief executive Grant O’Brien has launched an entirely different online strategy to Coles. Woolworths’ click-and-collect strategy is being organised on the basis that all its retail arms and service stations will be collection points for other parts of the group.
Coles has no plans to give online customers the chance to collect food from Bunnings, Target and Kmart, and nor will their goods be available at Coles. Coles believes that apart from the supermarkets themselves, the best place to collect is at its Shell service stations. It is introducing a new approach to refrigeration at these collection points.
But it is always dangerous to let an opponent embark on a different strategy, which, if it works, will put you at a disadvantage.
The Woolworths strategy has underlined the fact that Bunnings does not have a major online presence. Most of its promotion is in-store and, on this basis, it has given Woolworths’ Masters a toweling. But now Masters will be a Woolworths and Big W pick-up point for online transactions. That spells danger for Bunnings.
Wesfarmers is organised into different businesses, so it would change the Wesfarmers culture and organisation if Bunnings were to link with Coles in online retailing.
There is no doubt that organising the Bunnings-Coles supply chains along Woolworths' proposed co-ordinated lines will be more expensive than the solo approach of Coles and Bunnings. But despite the higher cost, a combined strategy might also enable Woolworths to deliver a heavy punch to Coles and Bunnings.
Wesfarmers has appointed the current Coles chief executive Ian McLeod to a group role. One of his first tasks will no doubt be to look at whether Wesfarmers needs to consider following Woolworths in a key part of Mercury Two.