Retail jousting

Now that the accounting periods of the two major grocery retailers have aligned, the reporting of quarterly sales updates happens a day or two apart, and was a feature of last week’s retail news. This ensures that the intense competition in the aisles also migrates into the management of messages for investment analysts, shareholders and the discerning public.

Woolworths lurched off of the blocks first last week with a set of sales results that continue a recent trend – low underline sales growth in its existing stores, zero food price inflation and a grim warning that shoppers remain mostly value conscious ensuring spending is “subdued”.

Woolworths food and liquor supermarket division booked a smaller lift in sales than in past quarters, which the company said was solid for the times, and paid homage to its fresh food success and growth in its private-label sales. Coles followed later in the week with a stronger lift in total sales but led strongly in underlying “same store” sales (for stores open for more than a year). Coles reckoned that food prices actually fell marginally in the period. Woolworths saw its same store number at just 2% (which was a small improvement on the prior half year) while Coles says its number is moving at more than three times that rate of growth at 6.2%.

The comparison of these indicators of store health over the past few years shows clearly how the tide is turning Coles’ way, taking share of sales from its rival and presumably other outlets. Stronger customer traffic flows and basket sizes are giving its team on the ground much needed confidence.

But this is a reversal of the pattern we saw for several years when it trailed its bigger rival for 4-and-a-half years to this time in 2009. This is like a common joust between footy fans of rival teams – one may take merit in winning on the field at present, while the other points to the scoreboard and cries “ladder!” As I’ve written before, on other scores such as the return on invested funds, retail trading margins and shop floor productivity, Woolworths retains a healthy lead.

Even though the fight has been evened up a bit between the big two, their combined sales uplift in the past quarter is still running ahead of the total growth in food sales in the economy – if you believe the numbers reported by the Australian Bureau of Statistics.

The movements in sales growth rates are interesting, but the key question that suppliers to grocery – and their nervous independent rivals - will be pondering is whether a price war escalates once again if this trend in favour of a resurgent Coles continues.

Can a price war be afforded? Pressure from rising commodity costs will gradually seep through, but the surging $A makes those effects on overall food costs uneven.
The other factor affecting how the big food players will act from here is how their other retail businesses are trading. The retail market for most other consumer goods remains tough for all with a long period of deep discounting. With food the only major part of the retail market in growth, the big players will act cautiously with their sensitive shoppers.