The grocery wars continue

groceryNeither Coles or Woolworths signalled an intention to ease up on investing in lower prices last week.

That much is nothing new, and while both businesses remain convinced that the market is rational, sacrificing bottom line gains for top line success is clearly the new normal in the sector.

But a new battlefield is quickly emerging, and it is likely to define how well Australia’s supermarket giants can respond to those competitive pressures.

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Woolworths, which is transitioning from turnaround to transformation after spending around $1 billion on price and service, has signalled heavy investment in data and digital programs in the second half to capitalise on growing demand for online and general convenience.

Group chief Brad Banducci was unapologetic about increasing Woolworths’ cost line to pursue improvements in IT infrastructure and digital processes last week, outlining the investment as required future proofing for the business as it looks to maintain the upper hand over Coles and stave off international entrant Aldi.

“[CODB] did grow quite materially during the half,” he said.

“We’re still continuing to invest in improving our business, better stock loss, new availability routines, new investments in data and digital – [these] are investments that we’re increasingly starting to cycle but they’re still there.

“We are seeing exciting opportunities, not just in customer experience but also in improving underlying efficiency.”

Coles, which is attempting to regain momentum from its rival, is following suit.

Last week, parent Wesfarmers announced the creation of a ‘data excellence’ unit to pursue digital opportunities across the group, while Coles’ managing director John Durkan pointed to online as one of the standout opportunities in the market.

“Some of the stuff we’re doing from an online and digital perspective is pretty strong,” Durkan said of the most innovative work the business has embarked on so far in the financial year.

“Some of the work we’re doing with [personal shopper service] Airtasker and click-and-collect, as well as other work going on we haven’t talked about, will stand us in good stead over the next 5-10 years.”

Coles currently offers click-and-collect in 280 sites, 800 stores will have the service by the end of the financial year and new dark stores are opening on the back of double-digit online sales growth.

Wesfarmers’ data unit follows Banducci’s decision to form WoolworthsX, a digital innovation unit that’s overseen the rollout of instore pickup to a thousand stores, last year.

While digital initiatives like click-and-collect, pick-up and faster online delivery times are poised to drive the top-line in the coming years, both businesses also hope that investing in underlying infrastructure and analytics capabilities now will prime them for bottom-line savings in the coming years.

Savings they’ll be able to invest back into price, or even return to shareholders.

Not all is equal in the grocery sector

All is not currently equal in the supermarket sector though. As a resurgent Woolworths’ charts its next stage of digital investment, Coles still has some momentum to claw its way back.

Woolworths moves into the second-half of FY18 having booked comparable food sales growth of five per cent in the December quarter, more than three times Coles’ 1.3 per cent comps over the same period.

Crucially though, Woolies managed to lift earnings by 11.1 per cent in the first-half, compared to a 14 per cent decline in earnings at Coles.

This was achieved despite Woolworths lowering fresh prices by 0.7 per cent in the December quarter, compared to a 0.2 per cent increase quarter-on-quarter at Coles, according to a recent UBS pricing study.

In what was Woolworths’ first interim profit growth in several years, Banducci said that Woolworths will increasingly look to find the balance between shareholder interests (earnings), and those of customers (lower prices), but said the company’s digital investments would ultimately help it to meet all of those demands.

I’m sensitive to the needs of our investors [but] we see so much more work we need to do on the customer,” he said.

“Cost-out without changing process is not sustainable, but cost-out with improving process [is].”

Stock loss improvements drove Woolworths’ earnings surge in the first-half, but Banducci did concede that further savings may be harder to come by, and that earnings would likely moderate in the second-half.

Woolies’ comparable sales growth is also expected to slow in the coming months, as it begins to cycle trading periods after it embarked on its billion-dollar price and service investment.

Coles, on the other hand, is signalling improvement, with Durkan telling shareholders last week that comparable sales would incrementally improve in Q3/4.

“I’m confident that our continued efforts to lower prices, invest in customer service, improve our fresh food quality, and increase our convenience offering will continue to build trust with customers and build growth for the long term,” Durkan said.

Coles’ 1.4 per cent comparable sales in food in the first-half were lower than Woolworths, but ahead of analyst expectations, and Durkan was keen to spruik the chain’s strongest transaction growth in six quarters over the holiday quarter.

Although UBS analyst Ben Gilbert said that while Coles’ like-for-like sales had improved, the uplift appeared to be driven by price and easing deflation.

“The result needs to be adjusted for a [circa 30 basis-point] timing benefit and the improvement appears to have been driven by easing deflationary pressures across categories such as dairy,” Gilbert said.

UBS pegged Coles’ real like-for-like sales as slowing by 0.7 per cent quarter-on-quarter in the second quarter.

 

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