Increase in trading terms to hurt Coles: Luscombe

Posted by Daniel Palmer on 20th April 2009

Woolworths Chief Executive Michael Luscombe, fresh from announcing another strong sales result, has suggested that a change in the trading terms offered to suppliers of Coles could hurt their rival.

Coles reportedly increased trading rebates by four per cent earlier this year without offering suppliers any benefits beyond maintaining their shelf space. The chain said the savings would be passed onto their customers but a number of suppliers were agitated by the move, according to reports.

“Significant suppliers have signified to us that they’re not very happy, they are not going to comply and they’re looking to work with us to grow their business within our supermarkets,” Mr Luscombe said on Friday, according to The Age.

Arnott’s could be one of the companies referred to, given reports at the time of the Coles move suggested Australia’s dominant player in the biscuit sector had shifted all of their promotional spend to Woolworths.

Mr Luscombe indicated that Woolworths, too, were looking to reduce the costs of the goods they sell but believed they could come to a more appropriate compromise with their suppliers.

“We always seek to negotiate really well on behalf of our customers to get the price we can for our customers, but we also recognise that you need to have those negotiations in a win-win situation where, if we ask for something, we give something in return,” he claimed.

Strong supermarket sales

Woolworths last week announced third quarter comparable store sales for their food and liquor division rose by an Easter adjusted 8.8 per cent, as consumers seemingly chose to reduce their spend at restaurants and eat at home more often. Given their ability to overcome deteriorating economic conditions thus far, Australia’s largest supermarket chain believes they can maintain growth in the upper single digits for the rest of the year.

Coles, meanwhile, is reportedly progressing well as they look to turnaround years of underinvestment. Analysts expect sales for the third quarter to be up by as much as six per cent, which would still lag Woolies but represent a major step forward given it would see sales growth rise above the rate of inflation for the first time this financial year.

Rivalry? What rivalry?

Australia’s two largest supermarket operators have been appearing to play down any rivalry they may have by scarcely referring to each other this year. Mr Luscombe’s reference to Coles and their suppliers was a rare indication that he even knew Coles was still in operation and he notably only mentioned the independents and Aldi when specifically discussing sales results; while Wesfarmers Managing Director Richard Goyder said last month that Coles’ major competitor was in fact the local grocer, butcher and fishmonger and not Woolies.

“Everyone thinks Woolworths is our biggest competitor, but our biggest competitor is right outside our front door,” he told the Pastoralists and Graziers Association (PGA).

Continued investment

Woolworths will continue to keep the pressure on Coles, though, with investment in their supermarkets to continue at a higher rate than ever before. They plan to spend around $2b annually, a figure that Coles is unlikely to match given Wesfarmers has flagged spending of $1b annually for the five year turnaround plan.

Woolworths also has a much-publicised $4 billion investment chest, some of which may be put toward international expansion. There have been rumours that they either dismissed a recent invitation to make an offer for a Chilean supermarket chain or were outbid. Coles may be hoping they do look overseas in the hope that it might distract them at home.