Woolworths’ fast turnaround puts pressure back on Coles

A surprisingly rapid improvement by Woolworths now has rival Coles under pressure, a new supplier survey suggests.

Woolworths boss Brad Banducci can see his company’s investment paying off. Pic: Renee Nowytarger.

Pouring more than $1.5 billion in lower prices and a better in-store experience seems to have finally paid off for Woolworths.

According to a new report from UBS, the turnaround of the nation’s biggest supermarket chain is accelerating at a faster pace than most anticipated, while arch rival Coles is losing momentum.

Furthermore, a recent fightback by Coles to also up its investment in lower prices and a better in-store experience might have come too late to stop Woolworths’ competitive march. That could put Coles in a poorer strategic place until Christmas.

UBS analyst Ben Gilbert has released the investment bank’s latest supplier survey, using the deep dive into the supermarket sector’s pricing, in-store strategy and corporate culture to reveal “material improvement’’ at the once laggard Woolworths and heightening risks of a downturn at Coles that could see it report negative like-for-like sales momentum.

The survey found that Woolworths (WOW) recorded improvements across all 26 subcategories and lifted its overall score by 0.5 points to 6.7 (out of 10) and that crucially Woolworths’ score has overtaken Coles for the first time since August 2012.

The most notable improvements, according to UBS, were in morale, pricing strategy and promotional effectiveness. While positive trends were expected, given a more than $1.5bn investment in price and store offer by Woolworths since last year, the speed and magnitude of the improvement is a surprise and suggests sales are likely to be “stronger for longer”.

The UBS suppliers’ survey has traditionally had a strong correlation to the actual sales generated by Woolworths and Coles, and sounds an ominous warning to Coles chief executive John Durkan as he battles a resurgent Woolworths.

Just recently Woolworths reported stronger like-for-like sales in the second quarter of 2016-17 than Coles — the first time it had beaten Coles in eight years.

Mr Gilbert said in a note to clients today that he now believes Woolworths’ momentum will accelerate until the fourth quarter of 2018.

“The results of our survey, coupled with industry feedback, suggest the Woolworths turnaround will continue and likely at a faster pace than what the market is expecting,’’ Mr Gilbert said.

“We believe Woolworths is turning around faster, sales momentum is continuing (despite tougher comparables) and Coles has yet to formulate a strategy to regain momentum.

“This survey highlights that Woolworths has taken a step ahead of Coles from a supplier viewpoint, not only in its relationship with suppliers, but also from a strategic perspective.

“This, in our view, suggests Coles needs to evolve its strategy to regain the ascendancy, which could be done any number of ways, the most obvious (albeit costly) being price.”

He said Coles would need to spend more on price, labour, loyalty and marketing as well as store presentation and the in-store experience, to regain the momentum from Woolworths.

Reflecting the need to catch up, Mr Durkan announced at Wesfarmers strategy day last month that his supermarket had tripled its investment to just under $200 million, net of cost savings, into lower prices and a better in-store experience in the second half to drag same store sales higher in the face of Woolworths’ recent improvement.

Mr Gilbert said: “We would note Coles has signalled a response, with John Durkan revealing at Wesfarmers’ strategy day a potential tripling in investment in the second half — a shift in tone from around four months earlier.

“However, the risk now is investment will need to accelerate further, given much of the ‘investment’ so far is associated with negative operating leverage versus unplanned discounts, in our view.

“Coles management have done a great job, but the reaction to the step-up in investment at Woolworths appears to have come six months too late, with a competitive response (based on public statements) not coming until early this year.

“We believe momentum at Coles is unlikely to improve materially until Christmas, which will be a key test as to who is best positioned to outperform over 2018.”