It looks like part of the reason is that Coles has stopped shooting itself in the foot.
When Woolworths started its revival a few years back which began with cutting food and grocery prices, Coles initiated a competitive response – lowering prices further.
The second stage of Coles’ response was to cut costs, including taking staff out of stores and reducing the range of products. But the plan didn’t work particularly well and allowed Woolworths to increase its sales growth lead.
Woolworths appears to be humming along well but the big rate of like-for-like sales growth it experienced in the fourth quarter last year of 6.4 per cent will be near impossible match in the 2018 fourth quarter.
In the 2018 third quarter Woolworths posted a sales gain of 4.5 per cent but there is an expectation that this rate will slow to between 2 per cent and 3.5 per cent in the fourth quarter. Raymond expects Coles to ink sales growth of 1.7 per cent in the fourth quarter and Woolworths to come in at 3.3 per cent.
The wild card in the supermarket sales race will be the extent to which Coles can do better than just avoiding self-harm and actively use promotions to pull some customers back from Woolworths.
Raymond points to Coles’ launch of a Little Shop campaign in the first quarter of 2019. It involves giving little gifts (like toys) to shoppers who spend a certain amount. Woolworths did it last year with great success.
It relies on the pester power of children who push parents into shopping at the store with the loot.
“Little Shop is a collectable campaign which has been run successfully in several countries, including the Netherlands in 2012, New Zealand 2013 and 2014, and South Africa in 2016 and 2017.
“From mid-July until the end of August, Coles will give away a miniature-branded product for
every $30 spent. Suppliers have funded a large portion of this program, with
minimal incremental investment by Coles, as funding is redistributed from other
sources,” Raymond told investors.
“Little Shop could boost 1Q19e like for like sales by 50–100 basis points,
narrowing the gap to Woolworths further.”
But whether this delivers any long-term market share benefits to Coles depends on the execution of the strategy. Coles cannot afford to disappoint the shoppers it lures with a poor service or a lack of product on the shelves.
The bigger picture for the sector generally, however, is quite positive with the share prices of Woolworths and Coles-parent Wesfarmers rising steeply over the past three months, albeit both share prices were a bit softer on Friday.
The consensus appears to be that rational grocery pricing will feature in the near to medium term – particularly in the run up to Coles being spun off as a separately listed company.
Elizabeth Knight comments on companies, markets and the economy.
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