By Catie Low
Coles will cut promotions to stamp-out shopper distrust in the supermarket giant as intense competition forces it to invest in service and every-day low prices to stay ahead of the game.
The Wesfarmers-owned supermarket chain has been under pressure from Woolworths' $1 billion investment in prices as well as Aldi's expansion into South Australia and Western Australia. But chief executive Richard Goyder signalled it was close to the bottom of its current sales growth slump.
Comparable sales growth, a vital measure of retail wellbeing has fallen for four consecutive quarters at Coles as Woolworths claws back customers it abandoned to its fruitless foray into large-format hardware.
"All things being equal we expect to see a rebuild in the sales momentum," Mr Goyder said.
"I think Coles is in pretty good shape at the moment in terms of customer perception, the investment in our stores, in pricing and in service."
Mr Goyder said the food and liquor sales growth rate had slowed, falling from 4.4 per cent in the third quarter of 2016 to 0.3 per cent in the same quarter this financial year despite increased investment in the period.
"We are pretty confident as we cycle the national roll-out of Aldi and the really significant price investment that Woolworths made, that we will see those growth numbers return to the business," Mr Goyder said.
The strategy to move more products across to every-day low prices was about cementing trust in Coles pricing, according to Mr Goyder who said the business was as "promotionally heavy" as it had ever been.
"There are more [promotions] than we would like ... because it ultimately breeds distrust," Mr Goyder said.
"We can't move the entire range of every-day low prices ... but there are some products that move around dramatically and we would like to move away from that."
Coles boss John Durkan revealed the chain had invested more in reducing important basket items such as mince, chicken and cheese to new every-day low prices in the quarter to "stay ahead of the curve".
"This is a proactive decision to invest in price and service, the cost savings will come later," Mr Durkan said.
Coles vowed to continue investing in reducing prices irrespective of what its competitors did but Mr Durkan said it would be executed incrementally, especially when it was investing ahead of securing cost savings to fund the price cuts.
"We are never going to do it in one big hit, it will be in a measured way and eventually the cost savings will pay for the price reductions."
Citi analyst Bryan Raymond said Wesfarmers' third-quarter sales result suggested the Woolworths turnaround was still hurting Coles and this was likely to weigh on the chains' like-for-like sales growth into the future.
He said the slump in Kmart's like-for-like sales growth to its lowest level since the first quarter of 2015 was not enough to offset Target's "continued double-digit sales declines.
But there's "light at the end of the tunnel" for the troubled Target business, according to Wesfarmers as sales of children's wear and menswear gain traction.
Third-quarter sales at the discount department store chain crashed by 18.1 per cent to $555 million but department stores chief Guy Russo claimed full-price sales were "significantly higher in the period".
This provoked outspoken Bank of America Merrill Lynch analyst David Errington to ask why Kmart hadn't revealed the level of discounting in the previous corresponding period, a quarter when like-for-like sales spiked by 12.3 per cent.
Wesfarmers admitted Target's sales were "pretty poor" but Mr Goyder said a lot of the "hard restructuring work" had already been done.
He said it wouldn't necessarily show up in the next quarter but forecast an improved sales trajectory as well as better margins and profitability.
"I've always been confident we can get Target right but there's still a bit of work to go on that and getting the offer right is now really important."
Bunnings was the star of the sales result, posting a 7.7 per cent jump in third-quarter sales for its Australian and New Zealand business and a cautiously optimistic outlook for the UK business.
Total Home Improvement sales spiked by 23.1 per cent in the quarter and Bunnings' comparable sales were 6 per cent stronger in the Australian and New Zealand region.
Alphinity Investment Management's Bruce Smith said the Wesfarmers sales result needed to be considered in the context of the high, comparable sales rates it was cycling from a year earlier.
"It's fair to say it was a touch soft in every division but it's important to remember that this is just the top line and what matters will be earnings and they're still months away," Mr Smith said.
"The only really bad ones were Target and petrol, Target is being radically restructured and in petrol Wesfarmers is in conflict with its supplier."
He warned the Coles result would "flatter" Woolworths' third-quarter results, which would be cycling the low-water mark for the resurgent supermarket business.