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Alan Kohler
Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
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Supermarkets set for a tighter next round

Unloved by their chiefs, comparisons between the two big supermarket chains are, however, inevitable and intriguing. This week's earnings showed both businesses on the front foot – for different reasons.

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The first half sales results reported by the two big supermarket chains this week help provide an insight into their increasingly intense contest. Both would take some encouragement from the numbers.

Neither group is all that enamoured with the inevitable comparisons between their performances, with Woolworths’ Grant O’Brien fond of saying that it’s "Woolworths versus Woolworths" rather than "Woolworths versus Coles". Coles’ Ian McLeod, while no doubt using Woolworths as a benchmark against which to assess his business’s performance, would presumably have a similar view.

On that basis they are both succeeding. Coles continues to drive sales growth, with a 15th successive quarter of comparable stores sales growth. Woolworths has, since Grant O’Brien became chief executive, reversed the worrying trend of a declining growth rate in comparable stores sales that emerged late in the 2010-11 year and at least has it back on a solidly positive trajectory.

O’Brien would also be pleased that his departure from Woolworths’ previous tactic of shadowing Coles' aggressive promotional initiatives has had some success, with Woolworths using very targeted promotions that leverage the increasing amount of data it is collecting via its reward programs to build loyalty within a traditionally fickle base of customers for supermarkets.

The comparisons are, however, inevitable and while O’Brien’s focus on detail is having an impact McLeod and his team are riding considerable momentum and continuously improving metrics.

With only about half their stores converted to Coles’ "renewal" format, and McLeod now starting to add new stores to his group’s footprint, there is still a huge amount of upside within their portfolio.

Woolworths has narrowed the gap between the two businesses’ growth rates, with Woolworths’ total sales growth in food and liquor in the December half 4.7 per cent against Coles’ 5 per cent.

The difference in comparable stores’ growth of 1.4 percentage points is less than half what it was when O’Brien was appointed. Indeed, in the December quarter of 2011 the gap between Coles and Woolworths’ growth rates was more than four percentage points.

As some of the analysts who follow the groups have pointed out, however, a significant driver – as much as half – of the sales growth is coming from Woolworths’ very aggressive new store opening program. Over the past three years Woolworths has committed close to $6 billion in capital expenditures, the great majority of it in its food and liquor business. It plans group capex of about $2.3 billion this year.

Coles has spent about $5 billion across its retail portfolio, most of it within its food and liquor operations, but the difference between it and Woolworths is that most of its spending has been on an existing portfolio of stores that had been starved of capital until Wesfarmers acquired Coles, Target, Kmart and Officeworks in 2007 rather than on opening new stores.

In the last 18 months, net of closures, Woolworths has opened about 47 new supermarkets. Coles, over that same period, has added a net 12 new stores.

The different composition of sales growth is quite significant, at least in the near term.

When Wesfarmers acquired Coles its sales density – its sales per square metre – badly lagged Woolworths’, although Woolworths does represent a very demanding yardstick.

In 2008-09, according to a Goldman Sachs analysis, Woolworths generated almost $16,300 of sales per square metre but Coles only about $12,500 per square metre.

Since then Coles has steadily improved its yield. This weeks’ sales numbers showed that Woolworths has only marginally improved its sales density, with annualised sales of 16,549 per square metre, while Coles is now extracting $14,968 per square metre, or about 90 per cent of Woolworths’ still-stellar outcome.

The significance of the different routes to increased sales is that it is more profitable to generate extra sales from an existing store than it is to grow them by adding stores. The increased productivity of the Coles’ portfolio ought to translate to some narrowing of the margin gap between the two chains.

Over time, as the Woolworths new store opening program slows and the newer element of its portfolio matures, the impact on its margins and its returns on capital ought to wash out, while a more aggressive new store opening strategy from Coles in order to build its total sales base faster would have similar effects.

In the meantime, however, O’Brien, who is placing more emphasis on refurbishments than may have been the case in Woolworths’ recent past, is going to have to work very hard just to maintain Woolworths’ still very impressive metrics let alone grow them.

Because they are businesses in still quite different shapes and phases of development it is appropriate to do what O’Brien says he does and compare their current performance against their past.

On that basis Coles’ remains a fantastic rehabilitation story with a lot of pages left in the book while Woolworths, after a couple of flattish years, appears to be on the move again.

The Spectators

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Mitchell Neems 17 May, 7:33 PM | 8
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Bill Evans 17 May, 6:50 PM | 7
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Ben Shepherd 17 May, 5:57 PM
So far Google Glass has been underwhelmingly modeled by unfashionable white men. But Google continues to outshine its tech-giant peers in the media with its boldness to innovate.

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