Coles steps up investment to back its ‘Down Down’ cheaper prices push

Coles has as much as tripled its investment in lowering grocery prices this year as it slugs it out with rival Woolworths.

Casey Donovan shoots the new Coles Down Down ad with Status Quo.

Coles says it won’t allow rival Woolworths to steal a march on it when it comes to offering low grocery prices to shoppers, and will accelerate a $65 million investment in prices made in the first half to as much as triple through the second half of 2017.

The gap had already begun to open up, especially in fresh food, where Coles was now cheaper than its competitors, the Wesfarmers-owned supermarket giant said today.

The return of Coles’ “Down Down, prices are down!’’ television advert, this time featuring Australian Idol star Casey Donovan, will also underline the chain’s commitment to bringing down prices in the face of heated competition from Woolworths and Aldi.

Addressing analysts at the Wesfarmers (WES) strategy day today, Coles boss John Durkan said the $90 billion groceries sector had become much more competitive this year and Coles would react by investing more capital into store staff, the customer offer and ultimately cheaper shelf prices.

It means Coles will invest $195 million in the second half in prices as well as other aspects of the customer offer.

Coles had already pumped nearly $65 million into lower prices and a better customer offer in the first half of 2017, generating most of Coles’ EBIT decline for the period.

The rate of that investment to produce lower prices for shoppers had increased notably in the third and fourth quarters of 2017.

“We have always maintained that we are going to be competitive,’’ Mr Durkan told analysts.

“At the half year we talked about an underlying investment of about, all in the second quarter, of $65 million … we said at that point in time it was likely to continue and whilst I don’t want to give you guidance you can imagine that for the second half it will continue and double, in that sense, it has probably closer to tripled rather than doubled in terms of that level of investment in the second half.

“It remains today as strongly as it did in the third quarter, it’s a high degree and high level of investment,’’ Mr Durkan said.

Coles has faced a resurgent Woolworths in recent years, with its much larger rival recently posting faster same-store sales growth than Coles for the first time eight years.

Woolworths has benefited from more than $1 billion of investment in lower prices to bring it in line with Coles, which since 2009 had beaten Woolworths and become fixed in the minds of many shoppers as being cheaper.

Mr Durkan told analysts that Australian household budgets remained under pressure and that Coles’ proactive investment in the customer offer — across prices, staff and products — was necessary in the current environment.

Coles was also strengthening its customer offer ahead of the potential entry of new market participants, Mr Durkan said, which could mean Amazon.

He said Australia was suffering “crazy prices” in terms of grocery brands that were cheaper overseas than in Australia.

He welcomed the return of the “Down Down” TV ads featuring Donovan, saying the adverts were very successful and helped cement the message in shoppers’ minds that Coles was cheap and competitive on price.

“Down Down has been going for seven years now, so it’s a well-trodden path for us … and what we have certainly seen in the last 12 months is our competitors match our prices,” Mr Durkan said.

“It took us five years of changing the perception of Coles being very expensive back in 2008, took us until 2013 to see perception measures change. These are long ingrained behaviours that require consistent investment and the minute you don’t do that the minute the customers work that out.’’

Outgoing Wesfarmers chief executive Richard Goyder also spoke to analysts, opening the strategy day, by arguing he remained confident that the Perth-based conglomerate’s retail arms, which include Coles, Target, Kmart and Bunnings, could repel any new players entering the local market including US retail giant Amazon.

“Every day we are dealing with new competitive threats. New regulatory threats.

“New competition is not new to the business and never will be new — competition sharpens us up and Masters certainly sharpened the team at Bunnings,” Mr Goyder said.

“A lot of people are worried about Amazon and the impact of Aldi. Since Aldi came into the Australian market more than 10 years ago it has built a national market share of north of 10 per cent, Coles’ market share has increased over that time.

“Sometimes it is easy to look at new competition and say the world is coming to an end, if you look at a business with good people, good brands and good cashflows that is not a bad starting position to take on new competitors.’’

Mr Goyder, who will hand over the reins to Wesfarmers to new CEO Rob Scott in November, admitted Target remained a problem and that its financial performance “is not where we’d like it”.

Wesfarmers’ new hardware business in the UK was still finding it tough and would likely lose money in the second half of 2017 and push those losses also into the first half of 2018.