Coles making progress on road to recovery

Posted by Daniel Palmer on 21st April 2009

Coles boss Ian McLeod has today informed analysts of the rapid change taking place at Coles but remained cautious about the future despite announcing third quarter sales growth of 6 per cent – well above that recorded in the third quarter.

Mr McLeod joined with Wesfarmers Chief Executive Richard Goyder to report what is now a prettier picture at Australia’s second largest supermarket chain, but both noted that there remained “a lot more to do”.

“We have a business which has suffered from a high degree of neglect for a number of years and therefore we have a multitude of aspects of the business we need to change,” Mr McLeod acknowledged. “We’re starting to make some progress but I would stress that it’s very early days.”

Early stages

Coles’ focus in its first two years of a five year turnaround plan is on changing the culture, enhancing their stores, boosting value and consumer trust and improving their supply chain infrastructure.

Mr McLeod suggested that improvements in the culture were taking place with absenteeism down 10% since October last year and new programmes launched to entice future leaders to the organisation.

In-store improvements

Significant changes are occurring inside the store, led by their attempts to clean up outlets, reduce out of stocks and enhance their fresh offering. Mr McLeod announced a “Spring clean” had been completed at every one of their 702 supermarkets, with 700 deli scales replaced, 130,000 trolleys ordered and refrigeration replaced at over 100.

Importantly, they have began to effectively tackle the worrying issue of out of stocks, which have fallen by a third since last year. Not surprisingly, with the gaps on shelf declining the company has reported growth in the basket size of their customers.

Coles has also started a transformation of their fresh offer, highlighted at their ‘pilot’ stores such as the one in Port Melbourne. The change has been brought about by concerning statistics that show less than 50 per cent of their customers purchase their fresh produce from the retailer, leading them to question why the increasingly time poor consumer fails to demand fresh goods at the supermarket.

The focus on improving the fresh offer could be expected to draw customers away from the local grocer and butcher, something that is eventuating if the sales figures are any guide. Mr McLeod explained that the company was keen to focus on gaining market share from a wide range of competitors.

“It is a broad base of competition we are looking to capture our customers from,” he stated.

A rollout of their new stores will begin in financial year 2010, Mr McLeod advised, after a rigorous process to determine the most effective store has been completed. Around 200 stores are considered suitable for full renewal, with a ‘plug and play’ approach to mix light refurbishment with full renewal to be based on demographics and geography.

Private label

Like most other supermarket chains around the world, Coles continues to promote the success of their private label goods.

The company, which sells the SmartBuy, You’ll Love Coles and Finest brands, said that they now had 3,900 SKUs (Stock Keeping Units) across 99 categories, with sales rising despite SKUs falling from two years ago. Growth remains in the double digits, again outstripping that of ‘national brands’ for the third quarter, and the company believes there is much more to come.

Mr McLeod announced that a full quality review had been conducted in the past six months, with a new product development pipeline currently being established.

Focus on value

In a move akin to that of UK retailer Sainsbury’s, the chain recently announced the “Feed your family for under $10” as they look to attract the ever value hungry consumer. The UK supermarket operator last year reaped great success from the similar “Feed Your Family for a Fiver” campaign, which was based on research identifying an opportunity to deliver simple everyday meal solutions to a set budget.

Coles has also changed their catalogue strategy, with a larger catalogue and a shift to a Thursday release – timed to entice the shoppers for the peak weekend shopping period.

Outlook

The Coles boss noted the rise of the increasingly thrifty shopper and proclaimed they were well positioned to capitalise on the subsequent change in consumer behaviour.

“It is undeniable that in these economic conditions we’re seeing a significant downturn in consumer confidence,” Mr McLeod said. “We’re seeing customers looking for value, we’re seeing customers increasingly shopping on a budget, we’re seeing them trading in to private label because they’re recognising it’s better value.”

“In recognising that, there is a change in the economic environment,” he added. “We believe we are well placed and focused in responding to that challenge.”

Reinvestment – about $1b each year – would continue in the business, but Mr McLeod warned that, despite the rapid improvement in sales this financial year (1.3% Q1, 3.8% Q2 and 6% Q3), growth was likely to stagnate at some point during a turnaround of a business that had been “neglected” for many years.