Price war works for Coles
Fresh food prices are starting to move up. Photo: Greg McKenzie
Last week investors were pleasantly surprised that Woolworths exceeded expectations for sales growth in the September quarter and were tantalised by the prospect its rate of growth might be catching up with Coles.
Coles put that theory to bed this morning delivering an even stronger sales number.
Putting its other retail brands to the side, Coles supermarkets and liquor business delivered same-store growth of 3.7 per cent in the quarter compared with Woolies food and liquor posting a gain of 2.3 per cent.
Coles achieved this despite the fact that the liquor division is still not firing and radically underperforming Woolworths'. While Woolworths deserves credit for getting this right, one presumes that Coles’ performance in this area will improve over time as it closes smaller and underperforming liquor outlets and scours retail centres for sites to build better ones.
There are a couple of other interesting facts worth noting. Coles total supermarket and liquor growth of 4.9 per cent was arrived at after accounting for price deflation of 3.2 per cent.
This is just another way of saying that prices were down by this amount across the supermarkets - which just goes to show that Coles is happier than ever engaging in a price war with Woolworths to attract a greater number of customers.
Right now it's concentrating its efforts on fruit and vegetables and the in-store bakeries.
But the supermarket chiefs have differing views on how the consumer is faring generally.
Woolworths chief Grant O’Brien contends that consumer confidence is returning as economic conditions stabilise.
"I don’t want anyone to rush out there and say I see the sun coming up. I can see the early signs and time is a great provider of that confidence’ he said last week."
Several other retailers have echoed O’Brien’s very tentative remarks that we may have seen the bottom of the retail cycle.
But Coles boss Ian McLeod has a slightly different take: "Our customers are as focused now on value as they have ever been with consumer sentiment still slow to recover to levels seen last year."
A value-conscious consumer works better for Coles, which has gained traction with consumers as being the cheaper of the two large supermarket chains.
Both supermarkets have been taking prices down and both say the number of transactions they are making has increased.
The bad news for customers that fresh food prices are starting to move up this quarter and this should continue through the year.
While Coles has been a more aggressive discounter, Woolworths has been building sales momentum by adding new stores - it opened a record number in 2012.
Conversely, Coles lost (a net) two stores during the quarter. This reflects its strategy of saving capital by investing money in refurbishment - and increased floor space.