Coles Q1 sales strong as turnaround momentum gathers pace

Posted by Daniel Palmer on 23rd October 2009

The Managing Director of Coles, Ian McLeod, has today informed investors of the improvements made at Coles as the company continues to see momentum in their business gather steam.

Speaking at an investor briefing in Sydney today, Mr McLeod said that food & liquor sales rose 7.3 per cent in the first quarter, with comparable sales up 6.1 per cent.

Coles store design

The news comes in the same week that major rival Woolworths reported food & liquor sales rising 7.8 per cent and comparable store sales 5.8 per cent. The figures highlight that the gap between the nation’s largest retailers may be beginning to close after years of Woolworths benefitting from a lack of investment in the Coles business.

Coles added that inflation for the first quarter was “flat”, while Woolworths had recorded a 2.1 per cent inflation figure.

Volume growth

Mr McLeod advised that the result was driven by solid volume growth, with consumer transactions up a robust six per cent. This represented the fourth straight quarter of growth.

The volume surge was led by their fresh food department where volumes rose by double-digit numbers. The retailer attributed the improved fresh performance to a greater focus on Australian produce, a more direct supply chain and an in-store “market atmosphere”.

It is interesting to note that four of the five largest supermarket operators in the country have given trading updates this week with all highlighting their fresh food department as an area of growing strength and a key sales growth driver. It appears that all agree with the sentiment of Wesfarmers boss Richard Goyder who earlier this year said that, with only fifty per cent of their customers purchasing fresh food from their stores, their was a great opportunity for development.

“Everyone thinks Woolworths is our biggest competitor, but our biggest competitor is right outside our front door,” he said in March. “In a world where convenience is so important, why is that less than 50 per cent of our customers trust us on fresh produce? That is an issue we need to deal with.”

Efficiency improvements

For the better part of a decade leading up to the Wesfarmers purchase in late 2007 it was widely regarded that underinvestment was strangling the competitiveness of the Coles business. The Woolworths investment in supply chain efficiency dwarfed that of their rival, but results over the past year and a half suggest that Coles may have turned the corner.

The cost of grocery overstocks has been slashed to less that one-fifth of what the cost was at the start of 2008, yet gaps on shelves have also fallen as their supply chain and ordering systems reap efficiency improvements.

The store renewal is also continuing apace with Coles reporting that the customer response has been “very encouraging”. There are now over 20 renewal stores in operation, with a further 50 planned for the coming Financial Year as part of their gradual rollout.

Private label

One of the key drivers of profit growth for all the major supermarket chains over the past couple of years has been higher private label sales and Coles is set to extend their range in the near future.

Mr McLeod reported that they were continuing to get advice from their customers regarding their private label offering having earlier this year changed the name of their mid-teir private label brand from ‘You’ll Love Coles’ to simply ‘Coles’ on the back of feedback from a panel of over 1,000 mothers. They have also introduced an on-pack promise of “100% satisfied or 100% refunded” for private label goods.

The company is now proceeding with a repackaging of their whole range of more than 1,600 product lines – to be completed by March 2010. A new Christmas range, endorsed by chef and Coles ambassador George Calombaris, is also in the works.

Trading outlook

Mr McLeod was cautious about the coming year, despite “encouraging progress on (the) renewal strategy to date”.

“Consumer sentiment (is) improving but customers remain value conscious,” he informed investors. However, he was confident they were in the process of “creating a solid foundation for future growth.”

The news has been well received by the market, with Wesfarmers shares up over 6% in late morning trade.