“Depending on Covid-19, depending on vaccine rollout and its efficacy, and a number of other factors, sales in the supermarket industry may well moderate significantly, or even decline, in the second half of FY21 and into FY22,” Cain said at the half-year results presentation.
Comparable supermarket sales growth has continued to moderate and in the first six weeks of the third quarter was 3.3 per cent.
“We’re going to see reduced immigration for quite some time,” Cain said. “This reduced immigration has underpinned population growth for decades, and has been a major contributor in driving supermarket sales in that period.”
Cain also suggested that recent improvements in both unemployment numbers and consumer confidence, may be partly offset by a reduction in fiscal stimulus measures.
Leaning into local
The continued trend towards local shopping was evident in the first half, with Coles reporting that neighbourhood stores performed strongly, while CBD stores remained “subdued”.
While Australia dealt with smaller outbreaks of Covid-19 and lockdowns in some regions, Coles took a hit, as many consumers steered clear of larger supermarkets and shopping centres. Cain said there was a “marginal improvement” in shopping centre store performance during the second quarter.
“Going into Covid, we were, I think, leading the market. What we’ve seen is, as there’s lockdowns, we lose share faster than anybody else … As we saw market share improving through to Christmas, certainly in our analysis, the majority of that delta is due to local shopping, rather than anything to do with online retailing.”
Coles made numerous efforts to localise its offer, introducing a “tailored offer” for customers with more than 340 range changes completed during the half. It also rolled out self-serve coffee machines to 99 per cent of the Coles Express network, which drove a strong uplift in coffee sales.
Mary Winter, insights director for branding agency Principals, highlighted the importance of keeping pace with increasing community sophistication in food culture and product design.
“There is no doubt that people want big companies to feel part of the local fabric. The concept of local is generating more feelings of warmth and importance. The need for a sense of localness is making people feel secure in stressful times,” Winters told Inside Retail.
Cain is hopeful, however, that there will be a gradual return to large store shopping.
“We’ll see some reversal of the local shopping trend as customers become more confident shopping in larger shopping centers, and to some extent, CBDs,” he said.
Getting better at online
B2C e-commerce sales grew 61 per cent for the half, driven by strong growth in Victoria across Click & Collect and home delivery.
Ben Hassing, chief executive of e-commerce, who joined Coles from Walmart eight months ago, highlighted plans for a more unified shopping experience.
“Our omnichannel customer spends 2.1 times more in total with Coles than the customers that only shop online, or those that only shopped in Coles stores,” Hassing said.
“This is a fast growing customer segment for us. The year over year growth in total spend with Coles is much higher as well. We are working to build our digital capabilities to be more integrated and customer focused.”
This omnichannel approach will see Coles merging its content and commerce websites on Coles.com.au in the second half of 2021.
“That’s going to provide a seamless experience for the customer. We’re also delivering omnichannel enterprise capabilities that give us a 360 degree view of customers, orders and more,” Hassing said.
Investments in user experience during the first half led to significant improvements in Coles’ “Perfect Order Rate” and customer satisfaction.
“A perfect order is when we provide customers with all of the 50 or more items that they ordered without any substitutes, zero damages and no returned items; and that we delivered them within the time window that they expect. Our Perfect Order Rate nearly quadrupled in the last three quarters … and we’ve nearly tripled the Coles Online [net promoter score] NPS,” Hassing said.
Coles also introduced Click & Collect Rapid, which ensures groceries are delivered in under 90 minutes.
“It appears they have invested heavily in improving the experience of customers, increasing capacity in stores, getting customer order picked correctly (Perfect Order Rate) and customer satisfaction with fresh food,” Gary Mortimer, a professor of marketing and consumer behaviour at Queensland University of Technology, told Inside Retail.
Turnaround in fuel and convenience
Mortimer pointed to a “big turnaround” in fuel and convenience, with Coles Express delivering a 10.5 per cent sales increase and 14.3 per cent growth in EBIT.
Looking ahead, Cain expects that increased movement as restrictions ease will help restoration of fuel volumes “closer to pre Covid-19 levels”.
Liquor was a big winner for Coles this half, up 15.1 per cent, thanks to Covid-19 restrictions and a refreshed liquor strategy, the aim of which is to place Coles as a “simpler, accessible, locally relevant drinks specialist with a differentiated offer”.
This included the opening of three “dark stores” to increase capacity, streamline order fulfilment and improve delivery speed, supporting 90 per cent e-commerce growth for the segment.
Liquor sales remained elevated for the first six weeks of Q3 with comparable sales growth of 12.5 per cent. Coles said this segment will also be cycling elevated sales due to Covid-19 which will present challenges given the fixed cost nature in this part of the business.
Customer satisfaction up
In the minds of consumers, Coles is doing alright. Customer satisfaction is up 3.9 percentage points to 89.8 per cent, and peaked to record levels of 90.1 per cent in Q2.
“The community is sensitive to how large companies are responding to customer needs in a crisis. Companies need a clear narrative around profit in terms of efficiency, innovation and shareholder return that never takes advantage of locked down customers,” Winters said.
“In times of stress, big retailers that support people in their everyday lives perform very well. It’s about being perceived as putting people first. On this, the supermarkets have done well in 2020.”
The results come 18 months into Coles’ Smarter Selling strategy, which is aimed at more sustainable business growth.
“They are not ‘buying sales’ though discounting, but rather cutting costs, which is a more sustainable approach to growth,” Mortimer told Inside Retail.
“Their Own Brands delivered $5.7 billion of sales in the half, an increase of 9.8 per cent compared to the prior corresponding period – with the introduction of another 1200+ new products. Calculating the proportion of private label sales, it indicates Own Brand now represents 32 per cent of their revenue.”
Mortimer also pointed to cost savings from the removal of weekly paper catalogue deliveries, the use of Artificial Intelligence to reduce meat markdowns and the increase of loss prevention measures such as entry gates and public view monitors at self-service registers.
While Coles put in a strong performance overall, analysts at IBISWorld say it’s lagging behind competitors.
“While Coles’ results show an improvement, they represent an underperformance relative to the wider supermarkets industry. The overall industry grew by 10.3 per cent over the same period, indicating that Coles is lagging behind its major rivals Woolworths and ALDI,” IBISWorld senior industry analyst Tom Youl said.
Revenue across the supermarkets industry is expected to grow by 4.9 per cent in 2020-21 to reach $119.9 billion.
Youl said major supermarkets will need to innovate and use new technologies to attract customers and boost market share over the next five years.
“These firms are anticipated to increasingly invest in supply chain automation, mobile applications and online platforms to expand their consumer reach,” he said.