nt retailers. The second and more significant consequence has been a massive increase in shoplifting and shrinkage levels. Coles has rolled out self-service checkouts across its network and arch rival Woolworths is not far behind. The move to self-service cut costs in stores by reducing the number of staff required on checkouts and has been sold as providing customers with quicker service. However, there are indications that shrinkage levels are eating sharply into the savings on staffing. IRW understands there have been numerous instances of customers walking out the door with trolley loads of goods when staff have been distracted or the stores are too busy. Mystery shopper visits to stores have also revealed their vulnerability to shoplifting, with the self-checkout actually enticing customers who would never before have considered stealing goods. How Coles is tracking Coles released its third quarter sales last week, with revenue growth slowing. The chain blamed the later timing of Easter for the 1.2 per cent increase on the comparable period in 2016. Sales for the third quarter were $7.6 billion, with like-for-like food and liquor sales increasing just 0.3 per cent in the quarter. Meanwhile, the year-to-date comparable sales increase is a sluggish one per cent, depressed somewhat, according to Coles, by a 0.5 per cent food and liquor price deflation for the quarter and 0.8 per cent for nine months of the 2017 financial year. John Durkan, Coles managing director, said the business has now recorded 24 consecutive quarters of price deflation, with the price of groceries falling as much as 2.2 per cent in the latest quarter after excluding tobacco and fresh produce. Of course, the price deflation is in large measure an operating decision of the chain, as it cuts prices as part of its competitive strategy. However, Durkan said price deflation during the quarter was lower than recent periods, due to the impact of supply-driven fresh produce inflation, which reached its highest level in over three years. Commenting on the third quarter results, Durkan said the sales growth achieved for the three months to March reflected Coles strategy to continue to invest in the customer offer in a period of lower growth. “On an Easter adjusted sales basis, our sales growth in food was broadly in line with the second quarter trend.” “It is necessary that we continue to proactively invest in the customer offer throughout this period of lower growth and increased competition to ensure we maintain our market leading customer offer,” Durkan said. “This was evident throughout the quarter, whether that was through the addition of family essentials, like our three-star mince and Coles brand cheeses to everyday value, or by offering our award-winning hot cross buns to customers at an incredible price. “This enduring customer focus will ensure Coles is positioned well for the long term,” Durkan added. From the hunter to the hunted Coles has turned in the past year from the hunter to the hunted in its jousting with Woolworths, which is expected to reveal higher growth rates when releases its third quarter results this week. Coles is starting to feel the pinch from Woolworths investment in price reductions, new marketing strategies, store upgrades and inventory revamps. But both the dominant retailers are also being squeezed by the ever-expanding Aldi and Costco membership superstores and face the prospect of further heavyweight competition from Amazon and German grocery discount chain, Lidl. Richard Goyder, Wesfarmers CEO, is confident that the company’s businesses won’t be damaged by the entry of Lidl and Amazon to the Australian market, however, employees in some of those businesses are not so sure. Declining confidence Morale in Coles stores has slipped markedly, as staff are pressured by management for better results in the wake of the Woolworths resurgence, moderate though it is at this stage, and certainly at a higher cost to the bottom line than is the case with Coles profitability. Woolworths is only one of the factors weighing on staff morale, however, with Coles employees face-to-face with the customers who are increasing the share of their grocery spending in Aldi or Costco stores. Some Coles staff are certainly spooked by the physical entry of Amazon to the Australian market and the prospect of Lidl also rolling out competitive stores. Customer loyalty has declined for Coles, with the expansion of Aldi’s store network addressing the vital convenience factor in the choice of a supermarket as much as the price competitiveness. Significantly though, customer loyalty has also been eroded by the deletion of favourite products on Coles shelves, with staff telling customers that those products are no longer available, when you can find them sitting on the shelves at Woolworths or an IGA supermarket. The problem with self-serve checkouts The self-serve checkouts have also seen customers scrimp on their purchases at Coles or simply shop elsewhere more often or always. Research has unsurprisingly found that a majority of customers like to be served by a staff member rather than scan and pack their own goods (unless, of course, they can discount the cost of their basket of goods by overlooking the odd item or two on the scanner). Consumer research by Canstar Blue found that queues in supermarkets are the most frustrating aspect of supermarket shopping. Self-service checkouts may have sped up the processing of goods, but they have not necessarily reduced frustration levels. Excluding prices in the 2016 survey of 3,000 shoppers, the Canstar research found that supermarket customers’ main complaints about supermarkets were queues, in part due to reduced lanes where self-service systems were installed, out of stock products, blocked aisles and misbehaving children, and the self-service checkouts. Neither Aldi or Costco have self-service checkouts and Aldi management has indicated it has no intention of introducing them in stores, preferring to use a longer conveyor belt system at staff-operated checkouts to speed up transactions. Aldi claim their manned checkouts are the best in the industry. Many of its products are also unsuited to self-service checkouts because they have multiple barcodes on their packaging. Aldi said it is also mindful that the overwhelming majority of its customers want to be served by a person. As Coles and, for that matter, Woolworths, have found out to their detriment, customers are relatively happy to use self-service checkouts for a handful of items but often can’t be bothered processing a trolley load. Customers therefore either line up in the limited number of lanes that still operate in stores or simply do the trolley load shop elsewhere. For Coles, there is the added problem of shrinkage which is now understood to be at a level that will require changes in the system. A change in plan Coles certainly has some work to do in achieving it customer relationship objectives, with incentives no longer having the impact they have had in the past. The regulatory constraints on fuel discounts were a significant blow to both Coles and Woolworths, while the Flybuys program may still be yielding some valuable data, but is not exciting customers. Despite several revamps of the Flybuys loyalty program, a business journalist in the print media recently found she qualified for a $10 shopping voucher after spending $1,700 in Coles stores. That level of loyalty reward is really insulting to customers if they do the sums and is more likely to be a negative rather than a positive in customer relationships. Coles opened six new supermarkets and renovated two stores in the third quarter while closing one store. The chain also opened nine new liquor stores while closing two outlets and trialling a new branding, Liquor Market, on a former First Choice store in Ringwood Melbourne. Durkan claims the turnaround strategy in the liquor business is performing in line with expectations. “Liquor continues to see growth in both headline sales and transactions, but there still remains much opportunity for improvement as we progress our customer-led strategy.” Liquor sales in the third quarter on a comparable store basis were flat although, on year to date, like for like sales are apparently up 1.0 per cent.