Woolworths outpaces Coles in third quarter

Woolworths_MarrickvilleMetro_Store Front

Woolworths will look to lead on range as rival Coles tightens its merchandising strategy, while also maintaining price competitiveness as certain high volume products like roast chicken and bread begin to rationalise.

Speaking to analysts on Wednesday morning, Woolworths Group chief Brad Banducci said that Australia’s grocery market hadn’t become any less competitive in the third quarter despite a moderation in deflation versus a year ago.

“We’re still seeing a very competitive market in terms of pricing, it hasn’t become less competitive, it may have become slightly more rational in the context of bread and roast chicken,” he said.

“Both us, Coles and to the same extent Aldi, are continuing to work very hard to deliver value for customers,” Banducci later told reporters.

Woolworths’ Australian food comparable sales increased by 4.4 per cent for the 13 weeks to 1 April, its sixth consecutive quarter of stronger comp growth than rival Coles, which booked a 1.3 per cent in Q3 Easter adjusted food and liquor comps last week.

Banducci said that Woolies is increasingly looking to localise its stores and ranging to appeal to a diverse range of consumers, while expanding its online offer nationally to meet demand for convenience.

Increasing share of wallet from premium shoppers by improving quality and range in fresh as well as expanding its every-day-low-price (EDLP) strategy to appeal to value conscious families were highlighted as opportunities for the business as it looks to pivot from turnaround to transformation under new boss Claire Peters.

Comparable sales were down slightly on the 5 per cent increase in the second quarter but Banducci said the business had performed well in March by focusing on execution and running its own race amid Coles’ Sports for Schools program.

Australian food revenue increased by 4.7 per cent to $9.6 billion for the third quarter, underpinned by comparable transaction growth and the timing of Easter.

Easter-adjusted Australian food sales were up 4.2 per cent,  while comparable sales increased by 4 per cent, in line with market forecasts.

Cycling Q4 will be ‘painful’

Woolworths didn’t provide Q4 sales guidance on Wednesday or update the market on April trading, but Banducci said it would be a challenge to cycle the 6.4 per cent Easter adjusted Q4FY17 comparable food result.

“We had this very material [produce] inflation [associated with Cyclone Debbie] and we’re now in quite dramatic deflation, it has softened somewhat in Q3 vs. Q2, but that is still our big concern,” he said.”As we look out to Q4 its hard to believe that we still won’t be in material produce deflation.”

Average prices fell 1.3 per cent in the third quarter, a moderation from the 2.5 per cent decline experienced in the prior corresponding period, aided by inflationary pressure in chilled perishable products such as cream and butter, which alongside inflation in Avocados and Bananas partially offset broader fruit and vegetable deflation of 5.4 per cent.

Around 450 new products were added to Woolworths’ EDLP program during the quarter as part of the supermarket giant’s ongoing efforts to change the shape of its pricing strategy.

Customers to shape the future

Asked whether Woolworths could maintain its momentum over Coles, which is working to improve its performance, Banducci said that Woolworths’ success would be measured by its ability to satisfy customers.

Woolworths’ voice of customer (VOC) scores improved year-on-year, with both overall satisfaction increasing from 71 per cent to 81 per cent and store-controllable VOC up from 74 per cent to 84 per cent, despite the so-called January blues.

Continued investment in online will be a necessary part of meeting developing demand for convenience, Banducci said, with sales up around 30 per cent for the third quarter, bringing e-commerce to around 3 per cent of its Australian Food business.

While still a small part of the wider operation, Woolworths has been focusing heavily on improving its digital offer, commissioning two new customer fulfilment centres during the quarter.

Banducci said Woolworths is being careful not to extend its logistics capabilities beyond demand as developing interest in grocery pick-up versus delivery creates investment uncertainty. Woolworths Supermarkets currently fulfils around 20 per cent of its online orders via in-store pick up but that figure is closer to 50 per cent for Endeavour Drinks.

Upgrade program evolves

Woolies was boosted by the completion of six store renewals and 20 upgrades during the quarter, as well as one metro store opening. Two supermarkets closed.

Banducci said on Wednesday that Woolworths upgrade program, which involves making smaller and less disruptive store changes than a fully fledged renewal, was evolving over time.

“We’ll take each store and optimise for what that store needs to best service customers,” he said. “Going forward we want to be much more thoughtful on what we do where.”

Banducci said Woolworths upgrade and renewal programs will eventually morph as the business looks to be more flexible about how it updates its network and update stores in a less disruptive way.

Woolworths is slated to complete 80 renewals in FY18 and around 100 upgrades. Renewals cost between $4-6 million while upgrades vary more but sit around $0.8-2 million.

BIG W declines, Endeavour Drinks strong

Woolworths Group sales increased by 4.3 per cent to $14.2 billion for the third quarter, up 3.4 per cent when adjusted for Easter.

Troubled discount department store chain BIG W’s sales increased by 3.2 per cent to $770 million, but when adjusted for the timing for Easter were down 1.3 per cent. Easter adjusted comparable sales declined by 1.2 per cent.

Endeavour Drinks experienced another strong quarter aided by the timing of Easter, with sales up 6.9 per cent to $2.04 billion and comparable sales growth of 6.1 per cent. Easter-adjusted total sales growth was 4.3 per cent, while comps were 3.3 per cent.

NZ Food comparable sales increased by 3.5 per cent, with total sales up 3.4 per cent to $1.6 billion.

UPDATED 13:00 AEST

More to come.

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