Coles reports positive sales but remains cautious

Jason Pallant, marketing lecturer with expertise in retail and consumer services at Swinburne Business School, told Inside Retail that some of the changes in consumer behaviour will likely continue in the long term.

“General food retailing is still far up on where we would expect it to be based on long-term [ABS] trend data. In contrast, cafes and takeaway food has suffered big declines, and while it has improved nationally in the past two months it is still behind trend data,” Pallant told Inside Retail. 

“Part of this is obviously because of restrictions forcing many to be takeaway only, but there has also been a change in consumer behaviour to focus more on cooking at home and stocking the pantry. We need to expect some of that behaviour to continue long-term, although I expect a spike in restaurants as restrictions ease, particularly in Melbourne.”

Covid-related costs at Coles amounted to approximately $200 million in the second half of the year. And while Coles’ supermarket sales have remained strong for the first six weeks of FY21, these costs are expected to remain high in the months and year ahead. 

David Burns, food and beverage strategy consultant and founder of DJB Food Group, told Inside Retail that things could get tricky for Coles.

“The challenge will be managing Covid-related expenses as hospitality starts to open up again, as some of the eat-at-home spend moves away from supermarkets back into the hospitality industry,” Burns said. 

“It is likely that these costs will remain for some time even without the elevated revenue line. Any increased Covid costs will need to be offset with cost decreases elsewhere in the business.” 

Cost challenges

Speaking on a media call following the full-year results announcement, Coles Group chief financial officer Leah Weckert said the majority of the $170 million incurred in Q4 could be described as “semi-fixed costs”.

These related to store changes, such as the addition of a store greeter at every store, sneeze guards at the checkout and the implementation of a more thorough cleaning routine, she explained. 

“The second-biggest bucket then is the “Thank you” payment that we gave to all our store team members and DC team members as well,” Weckert said. Announced in May, the payment saw the retailer award staff members a bonus of up to $750 in recognition of their hard work during the pandemic. 

Unused annual leave also added to Coles’ Covid-19 costs, as many staff opted to continue working due to domestic and international travel restrictions and the uncertain economic environment. 

“We would typically see a certain run rate of annual leave which draws down on the provision; when we’re not drawing down on that provision, then we’re paying it as salary costs … We would be thinking about that as more of a one-off because our hope is that that could reverse as the restrictions start to lift,” Weckert said.

Key learnings from Covid-19

A spokesperson for workplace relations and safety lawyers HR Legal said the incidental costs associated with the pandemic were proving to be a common challenge for businesses.  

“These include adjustments to operational procedures such as additional cleaning costs and PPE, but also extending to labour costs, commercial building leases and on-costs associated with the running of stores where in-person shopping has decreased,” HR Legal said. 

Looking to the future, HR Legal expects employers will continue to encourage staff to take leave where business is slow. 

“We may also see other costs increase associated with bolstering occupational health and safety personnel, together with increased costs devoted to health and safety training. Employers may encourage more flexible work arrangements to reflect the need for agile and versatile workforces. 

“No doubt, businesses will review the key learnings from Covid-19 and we expect they will build in pandemic-related costs into budgets for the foreseeable future.”  

Where to from here?

According to Pallant, the difficulty now for Coles and other retailers is balancing short-term needs and uncertainty with longer-term strategic investments.

“There has obviously been a lot of investment this year in increasing online and click-and-collect offers as well as changing checkouts in many physical stores,” Pallant said. “These have been necessary but need to also be balanced with a longer-term strategic view so as not to fall behind in a post-Covid world.”

The uncertainty of what lies ahead was echoed by Coles CEO Steven Cain last week: “I don’t think anyone knows what’s going to happen in six months’ time.”