Coles chief executive Steven Cain last week told investors the supermarket is entering the most competitive period in its 105-year history, as it continues to work its way through a challenging retail environment. However, the group is at the beginning of a four-year transformation program. “I’d describe it as a solid start, but we’ve got a long way to go,” said Cain. Total group sales increased 3.1 per cent to $35 billion, while net profit fell 9.1 per cent to $1.43 billion – a
on – a figure inclusive of earnings from Kmart, Officeworks and Target up to the point of Coles’ demerger last November.
Due to this, Coles put forward its retail earnings before interest and tax figure of $1.32 billion, down 8.1 per cent, as better reflecting the business’s performance on its own.
“The most pleasing aspect of the results, certainly for me, was the fact that supermarkets returned to profit growth for the first time in three years,” Cain said.
“We’ve also seen 47 quarters of comparative growth in supermarket sales.”
The retail group’s private label strategy, as well, delivered strong growth. The supermarket introduced 1200 new products from its own brands during FY19, with the category growing twice as fast as the rest of the business.
According to Queensland University of Technology professor Gary Mortimer, the move to a more focused private label strategy is a way to further defend against Aldi, which held around 11 per cent market share in 2018, according to Roy Morgan.
Coles has previously stated it is aiming to have its own branded products make up 40 per cent of its product range over the next few years.
Currently, private label products make up approximately 18 per cent of Australian retail dollars, compared with around 17 per cent in the US, 41 per cent in the UK, 42 per cent in Spain and 36 per cent in Germany, according to University of Tasmania marketing lecturer Louise Grimmer.
Additionally, Coles Online turned its first profit in 20 years, with online sales growth of 30 per cent year on year. The group’s click-and-collect offering is growing significantly and is more profitable than its home delivery service, Cain said.
“Their strategic alliance with eBay is a smart move,” Mortimer said. “Expect stronger growth and profit in this channel as Ocado comes onboard with two new fulfilment centres by 2023.”
The little elephant in the room
Cain also pointed to Coles’ Little Shop collectables campaign as a strong driver of customer engagement and sales during the year, though its successor, Little Shop 2, has not been as successful.
“Little Shop 2 has again resonated with our customers, [however] cycling the comparable sales growth of last year’s highly successful Little Shop campaign will be challenging, given competitor activity in the market,” Cain said.
According to research firm IBISWorld, Woolworths’ competing Lion King Ooshie promotion and collectable campaign fatigue from consumers are likely to weigh on Coles’ revenue growth in the first quarter of FY20.
“Coles had great success with the Little Shop campaign in the first quarter of [FY19],” said IBISWorld senior industry analyst Tom Youl.
“The marketing initiative gave the company the boost it desired in its battle for market share with Woolworths.
“Although Coles will likely be buoyed by its improved revenue growth in [FY19], the company will be quietly concerned about the sales momentum Woolworths is carrying into [FY20].”
On an overall basis, IBISWorld expects revenue growth in the supermarket and grocery industry to slow to 2.4 per cent during FY20, impacted by the declining levels of disposable income and negative customer sentiment continue to weigh on household expenditure.