- Coles is likely to list as a separate company from Wesfarmers on the ASX in late November.
- Industry analyst IBISWorld says Coles is expected to invest heavily in capital over the next five years.
- The supermarket needs to make up ground lost to Woolworths.
Coles, which will soon be a stand alone company when it is spun off by Wesfarmers, will need to capitalise on the momentum gained via the Little Shop campaign to gain ground on industry leader Woolworths, says industry analyst IBISWorld.
Wesfarmers is likely retain 15% ownership of Coles when it is listed on the ASX, probably in late November.
“Coles has been a significant cash generator for Wesfarmers over the past decade but has begun to stagnate, losing market share to Woolworths over the past three years,” says IBISWorld Senior Industry Analyst Tom Youl.
“To regain lost ground and prepare for incoming threats, AmazonFresh and (German hypermarket chain) Kaufland, Coles is expected to invest heavily in capital over the next five years.”
Wesfarmers announced today that headline sales at Coles supermarkets’ rose 5.8% in the September quarter, helped by the Little Shop promotional campaign. Comparable food sales increased 5.1%.
The Little Shop campaign gave out free grocery miniatures collectibles for every $30 spent. They were a hit with children.
The Coles numbers are way ahead of its full year sales growth of just 1.1% on a comparable basis and is now challenging its main competitor, Woolworths which in August reported full year comparable sales growth of 4.3%.
Ten years ago Coles’ price discounting strategy resonated with consumers and supermarket division revenue increased sharply.
However, Woolworths also invested heavily in price discounting on top of store refurbishments in 2016 and 2017, and has wrestled back most of the market share initially lost to Coles.
IBISWorld’s Youl says the onus is now on Coles to respond to competing strategies and plans for performance growth.
The company has suggested it may invest up to $1 billion in store and on consumer experience upgrades, as well as operating efficiency improvements. Coles is planning to build two automated distribution centres.
“While this can be seen as a response to Woolworths’ automated warehouse, set to open early 2019, these cost-reduction measures are also in response to industry disruptors, AmazonFresh and (German hypermarket chain) Kaufland,” he says.
“These players are expected to offer low prices, further pressuring supermarket profitability.”
IBISWorld says the the supermarkets and grocery stores industry is expected to turnover $103.4 billion in 2018-19, and grow at an 2% a year over the next five years.
“While a forecasted rise in disposable income will likely provide opportunities for industry players, Coles must reinvigorate its branding and pricing strategies in order to bring lost foot traffic back to its stores,” says Youl.
Even after the demerger from Wesfarmers, Coles is expected to remain one of the biggest companies in Australia. The company currently employs 112,000 staff.
However, IBISWorld analysts believe there will need to be more strategic work done in order to cement long-term growth as a new entity.
“The benefits of the campaign was two-fold, as Woolworths reported a downturn over the same period, with an estimated growth rate of 1.3% compared with 3.1% in the last quarter of 2018,” says Youl.
“Nevertheless, while the Little Shop campaign has been a success, it remains to be seen if Coles can translate this won battle into winning the war.”
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