Coles is continuing its bombardment of Woolworths with a remarkable run, writes analyst Michael Baker .
In the battle of the big supermarkets, Coles - once much laughed at, much scorned, much written off - is continuing its bombardment of Woolworths with a remarkable run of market share gains.
In this case, while Woolies can be thought of as the main target for Coles' fusillade, the damage is being inflicted on the smaller independent food retailers, particularly the ones that co-habit with Coles in the shopping centres it anchors or on the suburban strips where there is a Coles supermarket.
Advertisement: Story continues below Coles outperformed Woolworths in same-store sales growth by 6.2 per cent versus 2 per cent in the first quarter of fiscal 2011, ending September. The company says it has 1.5 million more customers going through its stores every week compared with two years ago. These are not just existing customers shopping more frequently, because Coles has 700,000 more members of its Fly Buys program than it did a year ago.
Not only is foot traffic up but basket size is up too.
Although Coles' recovery undoubtedly has the Woolworths brains trust twitching uncomfortably, and rightly so, it is the independents who may well be bearing the brunt of the Coles onslaught for now.
Sales data is not yet available for September, the final month of the first quarter, but for the July-August period non-supermarket food retailers experienced a sales decline of 4.3 per cent according to Australian Bureau of Statistics data.
The independent food sector saw sales fall by 3.5 per cent.
This, while Coles was achieving +6.2 per cent comparable-store sales.
These results, together with the fact that Coles has been making noises about material improvement in its produce sales in particular, suggest that a significant component of Coles' market share gains have occurred because many more people are now buying in its fresh department.
This is a departure from past practice when they just shopped the middle aisles and bought their produce at the independent retailer across the mall or down the street.
Richard Barwick, a retail analyst at Hunter Green in Brisbane, believes that Coles have made some real steps forward in the fresh department.
The new management team at Coles acknowledged early on that fresh penetration was one of their weakest points," he says.
"Consequently they have focused efforts on lifting penetration via better in-store presentation, improved management of aged stock and sharper prices. Evidence of success is becoming increasingly apparent.
Coles' progress is not just a wake-up call for the independents. From the perspective of shopping centre landlords operating properties with Coles as a supermarket anchor, the retailer's new-found mojo is a mixed blessing.
Its ability to attract crossover customers from Woolworths should sit well with the landlord where Coles is the sole anchor.
Even where Coles is co-anchoring a centre with Woolworths the former's ability to offer stiffer competition should be regarded as a positive.
There is paradoxical downside though. Coles' greater ability to entice its existing customers to shop for fresh in the supermarket instead of the small food retailers (the green grocers, butchers, bakers and so on) in the same mall would not sit well at all. Those small food retailers are basically rent cows, paying as much as 20 per cent of the shopping centre's total specialty store occupancy costs. And they are hard to replace.
The past inability of Australian supermarkets to put the small food specialties to flight has been perhaps the single biggest missed opportunity for both Woolworths and Coles. The fact that Coles may now be on the offensive and getting to fresh is good news for Wesfarmers investors, but really bad for the independents and a little unsettling for shopping centre landlords, some who might one day find themselves nostalgic for the status quo under the old Coles.
The Coles turnaround is no longer imagined, but real and possibly enduring. However, to some extent it is the result of the law of numbers if you are starting from a very low performance base you will be able to make quick gains for a time by taking down the low-hanging fruit.
Hunter Green's Richard Barwick says: As the turnaround at Coles gains traction, I think we should expect to see them post some very strong growth rates. There is little doubt in my mind that Coles will grow its sales materially faster than both Woolworths and the independents, at least for a year or two but possibly for longer.
For Woolworths and the independents, a chill wind is blowing through the food sector.
WES Price at posting:
$33.37 Sentiment: Hold Disclosure: Held
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