Woolworths fighting multiple flanks

Behind the headline numbers in Woolworths' third-quarter results is further confirmation that the already tough conditions in the grocery sector are, if anything, deteriorating.

When Metcash announced its major restructuring earlier this month, flagging the demise of the corner store in the process, it was obvious that the already tough conditions in the grocery sector were, if anything, deteriorating. Beneath the headline numbers in today’s Woolworths third-quarter sales announcement is further confirmation.

At face value the Woolworths numbers appeared okay. Sales for its continuing operations (excluding its consumer electronics division, which is on the market) were up 3.9 per cent, with the core Australian food and liquor division’s sales up 2.9 per cent and the Big W discount division’s sales up 1.4 per cent.

On a comparable stores basis, however, food and liquor sales were flat and Big W’s sales fell 0.9 per cent after declining 1.3 per cent in the first half of the year. Woolworths has an aggressive new store opening program and that, rather than the productivity of its existing stores, is generating the relatively modest sales growth.

There are external factors at play. Consumers have become highly defensive and cautious in their spending. The wet and cold weather has been unkind to the supermarkets. In the quarter, Woolworths was cycling a spike in sales last year when the Queensland floods and cyclones sparked some panic buying and inflated produce prices. In the latest quarter Woolworths said produce deflation was close to 20 per cent.

While Woolworths claimed growth in customer numbers, units sold and market share, a 1.2 per cent decline in its shelf price index and deflation in average prices of 4.4 per cent for the quarter muted the impact of those volume gains on sales growth.

Separate to the external influences would be the impact of the continuing, indeed escalating, grocery wars as Woolworths slugs it out with a resurgent Coles and Big W battles to hold its position in one of the toughest segments of retailing, the discount department store sector.

Tjeerd Jegen, managing director of Woolworths' Australian supermarket business, referred to a continued investment in price, particularly in grocery, general merchandise and liquor. That’s an oblique reference to the price-driven competition with Coles.

Big W, which has also had to respond to the surprisingly successful and disruptive price and volume-driven strategies of Kmart as well as the fragility in consumer confidence and spending, experienced price deflation of five per cent in the quarter.

Metcash’s job losses, restructuring charges and write-downs were at least partly attributable to being caught in the cross-fire between the two grocery giants. As Metcash’s Andrew Reitzer said, it is impossible for milk bars and small supermarkets to compete with the major chains’ $2-a-litre milk and their heavy tit-for-tat discounting of other staples.

This week a new front in that ever-intensifying battle opened, with Coles launching an over-hauled FlyBuys program to combat Woolworths' Everyday Rewards loyalty program.

Woolworths chief executive Grant O’Brien described the third-quarter outcome as "pleasing" but said the group remained cautious about the sales outlook for the fourth quarter, particularly given consumer and business uncertainty about the impact of the carbon tax and interest rates.

The carbon tax is coming whether retailers, or anyone else, like it or not but there is some prospect of relief on the interest rate front, with the Reserve Bank widely expected to cut official rates at next month’s board meeting.

It isn’t possible to predict whether that would be sufficient to spark some sales momentum for retailers – consumers might simply do what they’ve been doing since the global financial crisis erupted and bank any gains – but the big retailers have been crying out for lower rates in the belief that it will help boost their sales.

Woolworths’ hardware chain, Masters, is still in start-up mode so it isn’t possible to draw meaningful conclusions from its performance other than to say that its sales contribution is starting to become material. Home improvement sales were up 29.4 per cent to $211 million in the quarter with ten of the planned 150-store network now operating.

Similarly, Woolworths' push into online offerings is in its infancy, but the group said it had total online sales growth of 108 per cent in the quarter, or 45 per cent if Cellarmasters were excluded. At last sight the group’s online sales were less than one per cent of its overall sales, but the offshore experience says there is potential for them to become quite material and to confer some competitive advantage.