Despite consumers’ changing spending habits, Coles delivered a positive result on Tuesday, with sales at the Australia supermarket chain slightly up year on year. And while net profit was slightly down from FY22, this still resulted in more than $1 billion being added to the business. Unlike much of the retail sector, however, Coles is confronting a number of challenges beyond rising prices and softer spending as it heads into FY24, including a spike in theft and ballooning transformation cost
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Despite consumers’ changing spending habits, Coles delivered a positive result on Tuesday, with sales at the Australia supermarket chain slightly up year on year. And while net profit was slightly down from FY22, this still resulted in more than $1 billion being added to the business.Unlike much of the retail sector, however, Coles is confronting a number of challenges beyond rising prices and softer spending as it heads into FY24, including a spike in theft and ballooning transformation costs. According to Coles’ newly minted CEO Leah Weckert, who took over from long-time leader Steven Cain last quarter, the continued pressure from organised crime, as well as an increase in theft by customers who can’t afford to buy food, led to a 20 per cent increase in stock loss year over year. “The vast majority of our customers are doing the right thing, but we are seeing stock loss emerge as an industry-wide issue that is not unique to Coles,” Weckert told media on Tuesday. “What we’re really focusing on now is putting in place a number of initiatives that will help us to address the issue, including security solutions in store, such as security guards, as well as some technology solutions around things like trolley locks and smart gates.”Weckert noted that the theft had increased across Coles’ entire store network, and that the business is working on solutions it can implement in all 846 of its locations. Coles flagged the issue earlier this year, as did Woolworths, but attempts to address the problem, whether by increasing security or dropping prices, haven’t stamped it out completely. A slow transformationAnother ongoing issue for Coles is the growing cost of its warehouse automation project in partnership with UK-based grocery technology company Ocado. Coles initially expected to spend $150 million to retrofit two of its warehouses by the end of FY23, but the cost of the project has now ballooned to an estimated $400 million, with the first next-gen warehouse set to be ready for an ‘incremental ramp up period’ at the end of FY24. The Victorian warehouse isn’t likely to be ready until mid-FY25, and, at this point, Coles doesn’t expect to see the full benefit of these fulfilment centres until FY26. The cost of the delays seems to have been passed largely onto Coles, putting further pressure on a business already dealing with a higher-than-usual cost of doing business due to the ‘retail recession’ hitting Australian businesses.Bank of America’s David Errington noted on an earnings call that the investment community was caught off guard by the rapid increase in the cost of doing business across the retail sector, and that Coles seems to be having a “tough time” in terms of cost management. “Other than Smart Selling, what can you do to mitigate this?” Errington asked, referring to Coles’ cost-cutting program, which has saved the business $1 billion over the last four years. The business’ chief financial officer Charles Elias said that the program will evolve over the next four years to save Coles a further $2 billion. “We’ll be looking at all aspects of our operations and the Smarter Selling-type initiatives we had in the first four years are the sort of programs that we’re going to have to roll out to offset these pressures on inflation,” Elias said. Is inflation embedded? For now.The third issue hitting Coles, and the sector more broadly, is consumers’ changing spending habits. The supermarket has seen customers reducing their overall spending, buying in bulk and freezing meals to offset the increased price of groceries. The price of food grew 6.7 per cent in FY23, according to the Australian Bureau of Statistics. The concern, according to some analysts, is that a higher inflation rate could end up ‘embedded’ into the economy, but Weckert said she expects overall prices to return to a lower base.“We’ve seen a [price] moderation between Q3 and Q4, and we actually have a number of areas that are now seeing deflation, such as fresh produce, and red meat,” Weckert said. “There are other categories which are still at elevated levels of inflation, like dairy and bakery, which have been driven by increased global wheat prices and the price of milk. “While they continue to be at elevated levels, I think we’re going to continue to see an inflationary environment.”
