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Fresh deflation hurts Coles

Richard Goyder3Wesfarmers’ owned supermarket chain Coles has continued its investment in price and service in the first weeks of the financial year to position itself for growth amid intensifying deflationary pressures in fresh categories.

Speaking to investors and analysts after taking a 0.3 per cent increase in comparable store sales to the market on Wednesday – the slowest growth since 2008 – Coles boss John Durkan underscored the impact of deflation in the first quarter.

Supply-side pressures on fresh products drove a more than two-fold increase in food and liquor deflation in Q1 to 2.3 per cent, with Durkan saying that underlying comparable growth (excluding deflation) was just north of one per cent, in line with the 2017 trend.

Durkan said Coles had spent more on price reductions and service in the last quarter than the $200 million figure he outlined in 2H17 investment at the company’s full year-result in August, but that the majority had gone into product quality, service and digital.

He reiterated his August guidance that Coles’ performance comparable sales performance would likely start to pick-up in Q3-4 as efforts to gain market share in fresh, simplify ranging and improve the circa 800 Coles’ store network sink in with customers.

“We’re tracking in line with what we said a few weeks ago [on comparable sales] and nothing much has changed in the marketplace to change that view,” Durkan said.

“The one thing I did say then [at the full year] and I’ll say again now – assuming nothing dramatic happens in the market … if there’s a whole new level of massive investment from our competitors we have to react to that,” he continued, noting that he still believes the market is “pretty rational”.

Deflation is set to tail off slightly in meat, but Durkan said that’s unlikely to bolster margins in fresh as competitors haven’t responded to easing pressure by lifting prices.

Coles has experienced strong transaction growth, which Durkan said was driven by ongoing investment in-store service. In convenience, where declining fuel volumes drove weakness, Durkan said he’s focused on ensuring a suitable return for that part of Coles’ operation and is currently undertaking dialogue with its fuel partner.

Goyder delivers his last quarterly result

Wednesday was the last quarterly earnings result Goyder will deliver as managing director before handing the reigns over to Robb Scott in November, and was also the last time he’ll tussle with Merrill Lynch analyst David Errington on an investor call.

He used the opportunity to call into question reporting quarterly earnings at all, complaining that the short-time frames associated with reporting sales in twelve-week cycles distorts the market.

That decision will be left to Scott, who on Wednesday signalled his support for the move, alongside outlining his expectation that the subdued consumer environment his predecessor called out in August had continued into Q118, with Western Australia in particular struggling with declining population numbers.

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