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Price war shows no signs of slowing down

ColesPrice competition among Australia’s big supermarkets has intensified in recent months, with Coles moving to pull forward its investment timeline to match aggressive price decreases from its major competitors.

Speaking to investors and media on Wednesday, Coles managing director John Durkan said that upon witnessing price adjustment from major competitors over “quite a number of weeks” the grocery giant made the decision to intensify its investment in lower prices.

“Given the changes we’ve seen in the market we decided to pull forward investment in our offer, putting downward pressure on our EBIT margin,” Durkan said.

The decision represents additional investment in shelf prices on top of Coles’ long term strategy to lower prices incrementally several times per year.

When asked whether the move was a response to slowing sales or aggressive investment from Woolworths and Aldi, Durkan pointed to price adjustment from its major competitor over the last six to nine months, later clarifying that they didn’t consider the decision to be a short term reaction.

“We have a plan in terms of customer investment that we are aiming to stick to, but if we see competitive forces then we will obviously make sure we are in the right place,” he said.

Most of the additional investment occurred in the second quarter, according to Durkan, who indicated that the company expects the trend to continue into the second half, with the third quarter being flagged specifically.

Coles reported a 0.2 per cent decrease in revenue for 1H17, underpinned by a 2.6 percent EBIT drop to $920 million. Coles was one of two Wesfarmers brands restraining the conglomerates otherwise positive 13.2 per cent profit increase for the half.

Initial indications were that inflation in soft commodities might begin to ease price competition in the grocery sector this year, driving stronger sales for supermarkets. But while Durkan acknowledged higher meat and veg prices, he said that the company is unlikely to shift from its current strategy.

“We’ve seen some strong cost price inflation […] but we are seeing that offset in other areas,” he said.

The decision was met with scepticism by some shareholders, one of whom expressed concern for Coles’ ability to generate future earnings in the wake of continued price pressures.

“What I’d like to see with a step up in competitiveness, ultimately as shareholders, is a step up in productivity,” Durkan was told.

“If there’s going to be a step up in competitiveness without that step up in productivity, the industry is doomed from an earnings perspective.”

Durkan pointed out that SKU reduction measures alongside other “simplicity savings” were helping to offset continued price investment, unapologetically committing Coles to always remaining competitive on price in the market.

“We’re going through a short term cycle and short term being defined by consumer sentiment more than anything else,” Durkan said. ”We’ll bring our costs down and invest back into our customers.”

Coles is combining their price investment strategy with disciplined capital management, which will see the grocery giant pass up store opportunities that aren’t able to meet strict sales per square metre expectations in the medium term.

Despite the fall in revenue and shelf margins, comparative transactions, basket size and sales density were all up, driving continued comparable sales growth in the second quarter.

“A key component of our investment in our customer offer is through our shelf margin,” Durkan said. “However, I don’t want to give the impression that our investment in customer offer is one dimensional.”

Durkan added that incremental service investment was up 60 per cent over 1H16, noting that Coles doubled down on a commitment to keep all checkouts open over Christmas.

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