At long last Coles Myer is in top gear, well except for the stuttering
Myer department stores. But why is Woolies still more profitable?
Fuelled by fuel, Coles Myer is showing archrival, Woolworths just how
to leverage off a discount petrol offer. Third quarter sales figures
revealed a 23.6 per cent jump in headline sales figures, for a 16.6%
growth for the first nine months of the year.

That was four times the headline figure for Woolies’ second quarter and
more than twice the rate of growth in top line sales for the first nine
months. Clearly Coles is firing.

Driving the headline figure has been the petrol joint venture
delivering more sales to supermarkets from the 548 Shell stations
around the country in the scheme.

But strip out the impact of petrol and the convenience stores and look
at the improvement in comparable sales growth figures and the
difference between the two groups is more apparent.

‘Same store’ numbers are the true reflection of how well a retailer is
growing and managing its business. And the only true comparison between
these two retail giants is in their supermarket-liquor operations,
where the battle is being fought daily and shows no signing of being
won or lost.

Here Coles’s momentum is apparent. The third quarter saw same store
sales grow by 5.1 per cent, up from four per cent in the second
quarter. At Woolies, a different picture, with same store sales slowing
to grow at only 2.3% in its third quarter and three per cent for the
year to date, down from 3.3% in the first half.

There’s no doubting Woolies has lost drive and Coles is accelerating.
After the initial boost from petrol, Woolies has been delayed in its
attempts to go bigger with the Caltex joint venture.

Now that’s fixed up, Roger Corbett is no doubt hoping Woolies can
restart sales. Otherwise Coles will get away thanks to the Shell
Coles Express joint venture.

The absence of a comparable petrol offer can explain some of the
growing difference between the two companies, but strip its impact out
of the equation, and the difference comes down to the relative
attractiveness of the respective retailing offers.

Some analysts say the drought is boosting the value of fresh food sales
at Coles, and that’s true. But that should also apply to Woolworths and
while it is doing well in fresh food, the growth isn’t the same, so the
price effect from the drought doesn’t seem to be a deciding factor.

Woolies has a more efficient logistics chain and is continuing to spend
through its “Project Refresh”. Coles is later than Woolies in revamping
its logistics chain, so the gains aren’t apparent yet. But if Coles can
get the same sort of gains Woolies boasts of, then the difference
between the two should grow.

But apart from supermarkets, Coles’s other business are doing well.
KMart and Officeworks experienced sales growth of 4.3% in the quarter
and 6.3% for the year so far, while Target saw sales grow 6.5% in the
quarter and 6.3% per cent for the year.

Woolworths’ Big W business however did better, growing quarterly sales
8.2% per cent and 8.4% for nine months to the end of March. Big W
is run by Marty Hamnett, an outside contender for Roger Corbett’s job
when he retires in the next year.

But Coles can’t be too happy though with the Myer department store
business. It remains a drag on growth. No doubt they say it is early
days, but with sales up only 0.2% in the quarter and 0.3% in the nine
months, it is not stunning, or anything to boast about. In fact
it’s downright poor, but seeing the revamp is still a work in progress
and Dawn Robertson is running this show and is the best tip to replace
John Fletcher as CEO, then the board will give Myer more time to show
results.

It does seem to be a way of flogging a dead horse and David Jones has
more momentum in its business. But the board should be impatient
seeing Myer has absorbed a lot of management time and capital in the
past and this time around.

Making a department store work in modern retailing terms is tough and
it’s holding back the profitability of the entire group, but John
Fletcher argues a break-up of the group is no longer an option.

If you compare the growth of each company then Coles will easily top
Woolies this financial year. Sales growth will be stronger and the
absolute value of sales will be larger. But then why are Coles’s
profits still less than Woolies?

Woolworths re-affirmed its guidance for a 12 to 15 per cent rise in
earnings when issuing its third quarter sales figures in April. That
would put earnings after tax at around $680 million to around $720
million with the best guess around $700 million.

Coles Myer today reaffirmed its full year figures in the range of $558
to $568 million after tax. That’s a big gap in favour of Roger Corbett
and shows just how far John Fletcher and his team have to go in making
the various businesses more productive and profitable.

The revamp of Woolworths’ logistics chain has clearly played a big part
in making the company more efficient. Its stock turns are still much
faster than Coles, hence the financing costs of running its huge
inventory are non-existent.

It emphases just how much of a financial millstone Myer remains for the
group and how important this revamp under Dawn Robertson has become.
And why, if she can pull it off, she is the best candidate for the
CEO’s role when John Fletcher goes. But the results have to appear soon.

On the market the Coles and Woolworths’ shares rose modestly as
investors continued to be attracted to their defensive qualities and
not what’s going on in the shops.

That’s why Woolies has regained the $12 mark and Coles remains firmly above $8.00.

Peter Fray

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