Competition catches up with Coles

Increased competition, a tough Target turnaround and Masters’ fire sale have all weighed on Wesfarmers’ figures.

Westfarmers CEO Richard Goyder in the fresh fruit and vegetables isle of a Coles Supermarket at Claremont in Perth.

Once Woolworths started to get its act back together, it was inevitable that the intensity of competition in the supermarket sector would rise significantly and that the previously remarkable rate of growth in Coles’s sales would slow. That moment appears to have arrived.

With Woolworths ploughing more than $500 million into lower prices and better service last year and new chief executive Brad Banducci’s game plan having arrested what had been an inexorable sales decline, Coles’s John Durkan was well aware that the battle for sales would get tougher.

Yesterday’s first-quarter sales results for Wesfarmers’ suite of retail brands reflect the increased competition for supermarket sales, as well as the disruption generated by the liquidation of Woolworths’ failed Masters hardware business and the degree of difficulty involved in the attempt to turn around Wesfarmers’ own ailing Target discount department store operation.

The Coles food and liquor business generated 2.9 per cent sales growth for the quarter, with comparable stores growth in the food business of only 1.7 per cent. That rate of comparable stores’ sales growth has been trending down for the past three quarters — it was 5.3 per cent in the second quarter last year.

While the more modest overall rate of growth in Coles’s supermarket sales still equates to growth in market share, it does tend to confirm the growing impression that Banducci has steadied Woolworths and is forcing Coles and Aldi to respond with their own price reductions.

The first indication that the raft of changes to Woolworths’ supermarkets Banducci has introduced might be gaining traction came in August, when the group said it had experienced a 0.3 per cent increase in comparable store food sales in the first eight weeks of this financial year.

Durkan described Coles’s sales performance as satisfactory given the market conditions, where growth has slowed and competitive intensity had increased. Coles has been dialling down its levels of promotional activity to focus on expanding the range of products covered by its “Every Day” pricing strategy. Durkan has made it clear that Coles isn’t going to make the mistake that plunged Woolworths into turmoil and try to protect its margins. It will continue to invest in lowering prices and improving its offer. Within the food and liquor division, there were also some encouraging signs that the reworking of Coles’s liquor business is gaining some momentum.

The business, in the early phase of a multi-year transformation program, experienced its fourth consecutive quarter of comparable store sales growth. It may never be able to challenge Woolworths’ Dan Murphy’s, but there is still a lot of upside in liquor for Coles if it simply improves the business’ performance.

The major shift in strategy at Woolworths is also having an impact on another of Wesfarmers’ star retail businesses, with Bunnings generating headline sales growth of 7.4 per cent and growth in comparable stores sales of “only” 5.5 per cent. While most retailers would be happy with those levels of growth, Bunnings is used to double-digit sales growth.

Its chief executive, John Gillam, however, knew that the second half of 2016 was going to be a tough period: the liquidation of Masters and the dumping of ­inventory in the market at discounted rates was going to have an adverse impact on his business.

The disruption caused by the demise of Masters is unavoidable, with Bunnings option for responding rationally quite limited. It will, however, be a relatively short-lived experience.

In Britain, Bunnings generated sales of $554m in the quarter, with Gillam saying trading had been steady as his team repositioned the business. He described progress in the business, acquired earlier this year, as “pleasing” and said that on a like-for-like basis customer transactions had increased 8.4 per cent.

Kmart produced another stellar sales performance in the quarter, with headline sales growth of 11.2 per cent and comparable stores sales growth of 8.2 per cent. Unfortunately, Target, now grouped with Kmart under Guy Russo in Wesfarmers’ department stores division, continues to implode. Target’s sales were down 17.1 per cent — 21.9 per cent on a comparable stores basis — although an element of the explanation for the extent of the comparable stores sales decline was the cessation of Target’s toy sale, which it said impacted the result by about $75m.

As Russo says, it is very early in the latest (and one suspects final) attempt to turn Target around. Russo is shifting the brand to an “everyday low” pricing strategy and away from promotions. He’s rationalising not just the stores’ pricing but their product range while cutting costs. But he concedes that while there has been progress on the restructuring, there is poor underlying trade momentum.

Target was never going to be a quick or easy turnaround, if indeed the brand can be regenerated. So one quarter’s sales numbers are relatively meaningless in terms of trying to evaluate whether the latest attempt by Russo and his team to find a profitable market niche between the deep discount and full-service department stores is likely to be any more successful than the previous efforts of their predecessors.