Wesfarmers' fresh strategy to safeguard Coles growth

A Christmas spending splurge at Wesfarmers' big-name retail chains, including Coles, Officeworks and Bunnings, provided a much needed safety net for the conglomerate and its embattled resource division, which slumped to a $118 million earnings loss on weak coal prices in the six months to December 31.

Coles earnings before interest and tax grew by 5.6 per cent to $945 million in the half. Like-for-like food and liquor sales increased by 4.3 per cent and comparable food sales grew by 4.7 per cent in the period.

Price cuts to popular fresh lines such as chicken breasts and roast chicken were driving faster growth.
Price cuts to popular fresh lines such as chicken breasts and roast chicken were driving faster growth. 

Coles managing director John Durkan said a pre-Christmas staffing boost, which put staff on every available checkout, powered the chain's best Christmas.

And he said price cuts to popular fresh lines like chicken breasts and roast chicken were driving faster growth in the fresh sector than the broader grocery sales.

Coles' strong performance contrasts sharply with rival Woolworths.
Coles' strong performance contrasts sharply with rival Woolworths. Photo: Quinn Rooney

Investment in grocery prices was stronger in the second quarter than the first and Mr Durkan said this had driven the biggest price gap between Coles and competitor Woolworths since Wesfarmers bought the chain.

"It's a challenging market but every cent we have saved in operational leverage we have put back into the future of this business," Mr Durkan said.

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Wesfarmers managing director Richard Goyder said fresh was a core plank of the Coles growth strategy and 20 per cent of its stores were already on same-day delivery for produce as the supermarket chain works to improve the quality of its range.

Coles' strong performance contrasts sharply with rival Woolworths and its battle to restore its brand and win back market share.

Wesfarmers managing director Richard Goyder.
Wesfarmers managing director Richard Goyder. Photo: Philip Gostelow

Woolworths is expected to report a 0.5 per cent fall in its first half comparable food and liquor sales on Friday after like-for-like food and liquor sales fell by 1 per cent in the first quarter.

Broker Citi said Wesfarmers' half-year result showed Coles was winning market share at a faster rate than its competitors despite 1.2 per cent food inflation over the half.

However Citi managing director and head of consumer sector research Craig Woolford said Coles' market share gains were achieved at the cost of margins, which he estimated grew at between two and four basis points, excluding petrol, in the half.

"This lack of margin expansion reflects a clear investment in price," Mr Woolford said.

Baillieu Holst analyst Mathan Somasundaram said the decline in macro-economic conditions was likely to increase pressure on Coles and its capacity to maintain its strong sales.

"This is a pretty solid result but can they keep doing that in a declining over-all economic outlook?" Mr Somasundaram said.

Mr Goyder admitted consumer confidence seemed more "susceptible" to political or economic shocks but he said macro economic outlook for Coles was "pretty positive".

"I think consumers are quite discerning at the moment and I think they are more susceptible to mood changes," Mr Goyder said.

"We saw that with the new Prime Minister, things like the US election, any shock will have more of an impact now."

Wesfarmers' Officeworks won the half-year earnings race, sprinting 18 per cent higher to $59 million on 9.1 per cent revenue growth as sales improved across all its channels.

Earnings at Australia's dominant hardware chain Bunnings jumped by 13.4 per cent to $701 million and managing director home improvement and office supplies John Gillam revealed it would launch a handful of Bunnings Warehouse pilots in Britain in early 2017 following the completion of its acquisition of Homebase there.

Mr Gillam said "proof of concept" was critical to the success of the UK investment and he reiterated Bunnings interest in about 15 Masters stores but only at the right price.

The creation of the new department stores division, headed up by former Kmart managing director Guy Russo, is expected to result in some shifting between Wesfarmers' two discount department store brands.

Wesfarmers revealed it had rebranded two Target stores Kmart in the past year but Mr Goyder said there may also be opportunities to transform Kmart stores into Target outlets once Mr Russo had analysed the Target network.

Wesfarmers unveiled a 1.2 per cent increase in its half-year net profit to $1.39 billion on a 4.7 per cent increase in revenue to $33.5 billion.

It announced a fully franked interim dividend of 91¢, payable on April 7.

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