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27 April 2015

Coles' Every Day Value strategy to come under scrutiny

Coles' decision to shift towards everyday-low pricing will be put to the test this week, when the food and liquor chain releases its first quarterly results since adopting a hybrid promotional strategy late last year.

Analysts believe same-store food and liquor sales growth at Coles slowed from 4 per cent in the December quarter to 3.8 per cent or 3.9 per cent in the three months ending March, and top-line sales grew around 5 per cent, buoyed by new stores.

Less than 10 per cent of the major supermarket shoppers are loyal so high/ low (pricing) clearly helps shift shoppers between retailers.

Andrew Reeves, George Weston Foods

While 3.8 per cent same-store sales growth is solid and is more than twice the rate forecast for Woolworths, analysts believe the Wesfarmers' subsidiary has failed to widen the gap with Woolworths because of its decision to promote lower everyday prices for branded and private label goods over high-low pricing, which is favoured at Woolworths.

Announcing the shift in strategy last November, Coles managing director John Durkan said Every Day Value would fuel growth by building customer trust in value and encouraging them to fill their trolleys, rather than do top-up shops to take advantage of weekly specials.

Feedback unenthusiastic
However, analysts said feedback from suppliers had been less than enthusiastic and they were seeing little volume growth despite cutting prices and moving to an EDLP program. "It's not driving volume and that's always the challenge with an EDLP strategy," one analyst said.

Last week George Weston Foods chief executive Andrew Reeves told The Australian Financial Review that the baker had cut the price of Abbotts Village and Tip Top bread by about 30 per cent as part of Coles' EDLP program, but had seen no improvement in volumes in Coles.

"In a category like bread where demand is very stable and inelastic intuitively EDLP would make some sense," Mr Reeves said. "But the facts are so far in Coles the bread category has actually gone backwards through this period of EDLP. Volumes and revenues have both gone backwards, so intuitively while the EDLP model in bread may work it doesn't seem to be doing the job at the moment."

According to Nielsen data, about 40 per cent of groceries are purchased on special or promotion each week and in categories like bread it is as high as 60 or 70 per cent.

Customer loyalty is low, with only 8 or 9 per cent of consumers shopping at the same supermarket chain every week, so retailers have traditionally used deep discounts to lure shoppers from rival chains.

Low loyalty
"Less than 10 per cent of the major supermarket shoppers are loyal so high/ low (pricing) clearly helps shift shoppers between retailers," Mr Reeves said. "(With EDLP) you lose that ability to stimulate demand through your promotional program."

Coles has told suppliers it remains committed to Every Day Value and Mr Durkan defended the strategy last week. "It's good for our consumers – they get trusted pricing every single day, they know that price is not going to change," Mr Durkan told the Financial Review. "Getting trusted pricing does not happen overnight – it takes years of investment."

However, Coles' latest weekly catalogue devotes only one double-page spread to Every Day Value. The other 33 pages promote discounts ranging from 20 per cent to 50 per cent for key brands like Finish, Pantene, Nescafe, Pepsi Max and SunRice.

​Former Kellogg's ANZ managing director Jean-Yves Heude, who now advises grocery suppliers, is sceptical about the ability of EDLP strategies to attract consumers away from other retailers.

"It's not something that works in my view because consumers become blasé – promotions are the way you create impulse purchases," Mr Heude said.

Woolworths' plans
Woolworths, meanwhile has stepped up the level of discounting after announcing plans in February to invest more than $500 million into prices and service to regain lost market share and overcome perceptions its prices were higher than Coles.

Woolworths trimmed online prices in March to bring them into line with store prices and has been offering deeper price cuts on key brands and "back basket", or low profile, grocery products in the last few weeks.

According to a Macquarie Equities report last week, Woolworths' prices are now 2.3 per cent cheaper than Coles, based on the online prices of a basket of products.

Analysts believe the recent price investment will have had little impact on Woolworths' sales growth in the third quarter. Woolworths same-store sales are forecast to grow about 1.3 per cent, compared with 1.2 per cent in the December quarter, the lowest for many years.

However, Citigroup believes Woolworths' same-store sales growth will rebound to more than 2 per cent in the fourth quarter and the sales growth gap with Coles will narrow as Woolworths' price cuts hit the mark with consumers.

"We have a firm view based on industry feedback that the most important change for Woolworths is restoring deep discounts on high profile items," said Citi analyst Craig Woolford.