Woolworths gets half the job done

There was an upbeat tone to Grant O'Brien's commentary on Woolworths first-quarter sales performance, with references to ‘'momentum'' and ‘'progress". We'll have to wait to see whether there was a price paid for that momentum.

At face value the numbers were, relative to the group's recent past, encouraging.

In the core Australian food and liquor business sales were 4.6 per cent, Big W's sales were 6.2 per cent higher, hotels 17.3 per cent, online sales 30 per cent and the newish home improvement division's sales are now entering meaningful territory and recording the growth rates expected in a chain being aggressively rolled out.

On a comparable stores basis, however, the food and liquor division's sales were a more modest 2.3 per cent higher, which reflects the aggressive network expansion strategy Woolworths has been pursuing, while Big W was cycling a weak quarter a year ago. Its sales, aided slightly by the opening of a new store, were a more moderate but still encouraging 3.2 per cent ahead of those generated in the first quarter of 2010-11.

There were signs last year that O'Brien, appointed chief executive a year ago, is starting to have an impact on the group and that in particular the greater levels and stronger execution of promotional activity within Woolworths' supermarkets were starting to be reflected in its sales outcomes.

In Big W, within that segment of department store retailing that has been hit hardest by a combination of the downturn in discretionary spending and the disruptive but highly successful deep-discounting model adopted by rival Kmart, there have also been gradual signs of improvement, aided towards the end of last year by the Gillard government's financial-year-end cash splash.

As this year unfolds the impact of the Reserve Bank's rate cuts on consumers' confidence will presumably also start to be reflected in the numbers generated by the major retailers.

Until Woolworths produces its profit numbers, however, it isn't possible to determine whether the stronger sales are due to better retailing or have been bought at the cost of margin.

O'Brien did say that the food and liquor business had increased its market share, customer numbers and items sold and had benefitted from effective promotional activities and a return to inflation in produce.

Woolworths said its standard shelf price movement index for the quarter showed inflation of 0.8 per cent against the 0.7 per cent deflation experienced in the same quarter last year. Average prices, however, were 2.8 per cent lower after the impact of promotions and volumes were included. Until the net outcome from the mix of lower prices and higher volumes is known it isn't possible to come to any conclusion about margins.

The fact that its key rival, Coles, plans to ditch the my5 discount program it launched six months ago – which Woolworths immediately countered with a more straightforward offer that leveraged off its Everyday Rewards loyalty card program – does, however, tend to suggest that Woolworths is regaining its competitive instincts and skills after Coles had previously shown itself to be more nimble and creative.

The post-crisis period has not been an easy one for retailers, regardless of size or category, but with O'Brien saying that the momentum generated towards the end of last financial year had continued through the latest quarter the Woolworths sales performance and commentary at least offers the hope that the worst of the environment might have passed, at least for the moment.