Coles to grow supplier direct deals

Coles is looking to lock in a string of contracts directly with its fresh food suppliers after its $2 billion deal to buy milk straight from the dairy co-operative Murray Goulburn.

The supermarket giant, which is owned by Wesfarmers, announced earlier this month that it had secured a 10-year deal to buy milk directly from Murray Goulburn which would be branded as Coles milk in NSW and Victoria.

It also includes a five-year supply agreement with NSW co-operative Norco. The deal comes amidst ongoing prices wars by the major supermarkets with Coles, Woolworths and Aldi all selling milk for $1 litre.

Woolworths announced a similar deal in March but with a much smaller pool of suppliers. Wesfarmers boss Richard Goyder said on Thursday that Coles was looking at making more deals directly with its fresh food suppliers.

“Things like this milk arrangement that we announced last week is typical of what we’re doing in the fresh area which is going more direct, writing longer term buying arrangements,” he said.

He said it also gave suppliers the capacity to invest in their production which resulted in better prices for customers. Mr Goyder’s comments came as Wesfarmers posted a 5.7 per cent lift in quarterly sales to $12.17 billion.

The increase was led by a 6.6 per cent increase in Coles total food and liquor sales to $6.49 billion. Comparable sales, which strips out store closures and openings, for the supermarket chain were up 5.3 per cent.

The ongoing price war with Woolworths had led to prices falling by 1.3 per cent over the quarter and 1.7 per cent over the year but the number of items sold increased.

Discount department store Kmart’s sales for the quarter jumped 3.6 per cent to $842 million driven by low prices and improved product availability.

Home improvement chain Bunnings continued to perform well with sales increasing by 6.7 per cent to $1.858 billion due to its focus on customer service, improved product range and falling cost of doing business.

Sales at department store Target increased by 1.0 per cent over the quarter due to the back to school bonus and warmer weather in January and an early Easter. However, Goyder said Target sales were hit by a warmer than average autumn when it had started to introduce winter stock.

Despite warmer autumns becoming a regular occurrence Mr Goyder said they would not consider introducing winter stock later as it would mean they would be behind trends in other stores.

CMC Markets market strategist Ric Spooner said the result was in line with expectations considering improved consumer confidence at the start of the year.

“But I think looking forward now, given the signs that we’ve had of a retreat of confidence in March and April, markets will be a little cautious on the retail sector until they get more evidence on recent sales,” he said.

Wesfarmers shares closed 33 cents higher at $42.22.

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