Coles' same-store food sales rise 5.1pc, fuelled by Little Shop, plastic bags

Coles' same-store food sales rose a faster than expected 5.1 per cent in the September quarter, the strongest growth in almost three years, as consumers flocked to Coles supermarkets for miniature plastic groceries and free plastic bags.

However new Coles managing director Steven Cain has confirmed analysts' fears that the strong performance will not be repeated in the second quarter.

"We certainly won't be repeating the same level of sales growth in Q2," Mr Cain told analysts on Monday.

"The most important part of Q2 is to come with Christmas, we think we have a much better year lined up re new products," he said.

"We will be heading back more towards what we saw at the end of the fourth quarter versus Q1," Mr Cain said.

"We expect to come from the 5 per cent we've seen this quarter more towards that 2 per cent Q4 number."

Selling fuel? 'We'd look at it'

Mr Cain also indicated Coles, which is experimenting with a fuel-less convenience store format, would be prepared to sell its struggling fuel business, where volumes continue to fall rapidly because Coles Express prices are too high under its uncompetitive fuel supply agreement with Viva Energy.

"Our approach going forward will be like the Wesfarmers one - if someone comes along and offers the right price for the business clearly we'd look at it," he said.

Coles' 5.1 per cent same-store food growth for the three months ending September beat analysts' forecasts between 4 per cent and 5 per cent and exceeded 4 per cent supermarket industry growth for the fiscal year to date, suggesting Coles clawed back lost market share - particularly in fresh foods - after underperforming for two years.

The gains were driven by strong growth in average basket size, units sold and transactions as Coles launched its successful Little Shop promotion, handed out free renewable plastic bags for 60 days after banning single use bags, and improved out-of-stocks.

It was a significant improvement on the 1.8 per cent same-store food sales growth in the June quarter and 0.3 per cent growth in the year-ago period.

Online sales rose more than 30 per cent and Coles is on track to exceed $1 billion in online sales this year after cutting online prices to match prices in-store and rolling out click and collect to more than 1000 locations.

Easing deflation also helped, with food prices rising for the first time in ten years, up 0.6 per cent, compared with 0.6 per cent deflation in the June quarter and 2.3 per cent deflation in the September quarter 2018.

Higher grain prices and lower livestock supplies as a result of the drought pushed up prices for bread and meat and fresh produce costs rose after heavy deflation in the same period a year ago.

Excluding fresh foods and tobacco, underlying prices fell 0.8 per cent as Coles continued to reduce prices for packaged groceries, shifting away from discounting towards lower every day shelf prices.

Analysts believe Coles' same-store food sales grew faster than those at Woolworths for the first time in seven quarters. Woolworths is expected to reveal same-store food sales growth of around 1.5 per cent when it reports first quarter sales on November 1.

Woolies to regain the lead

However, analysts say Coles' outperformance is unlikely to last and Woolworths - which has fought back this quarter by ramping up discounting - will take the lead in the second or third quarter 2019.

Citigroup, for example, believes Coles' same-store sales growth will slow to around 2.5 per cent in the June-half, falling below that at Woolworths.

Coles' total supermarket sales for the September quarter rose 5.8 per cent to $7.7 billion. Coles opened four supermarkets but closed four during the quarter, taking the number of stores to 809, and completed five refurbishments.

Wesfarmers managing director Rob Scott said the sales result - the last before shareholders vote on the proposed $20 billion demerger of Coles on November 15 - was pleasing.

"It demonstrated the ability of the Coles team to continue to focus on improving in-store execution while preparations continued for the proposed shareholder vote on the demerger of Coles," Mr Scott said.

Mr Scott and Mr Cain made no comment on margins or earnings during the quarter.

Rather, Coles noted that it incurred additional costs employing more staff to help shoppers navigate the new plastic bag regime and boosting its investment in FlyBuys, while a new enterprise agreement which came into effect in April pushed up labour costs.

Mr Cain also indicated consumers bought more packaged groceries than they needed to secure Little Shop miniatures. . "There are some areas of packaged grocery where there may have been some forward purchasing to stock up," he said.

Citigroup analyst Bryan Raymond said rising costs could dampen operating leverage, so earnings may grow at a slower rate than sales.

Coles' supermarkets out-performed the liquor and convenience operations.

In fuel and convenience, same-store convenience store sales rose 3.4 per cent (vs 4.6 per cent in the June quarter and 0.2 per cent in the first quarter 2018) as Coles improved its food-to-go range.

However, comparable fuel volumes slumped another 15.9 per cent after falling 15.8 per cent in the June quarter and 21 per cent in the September quarter 2018. Coles is rapidly losing market share due to an uncompetitive fuel supply agreement with Viva Energy. Higher fuel prices during the quarter further dented demand.

Coles has been in discussions with Viva for two years to improve the terms of the supply deal but Viva, which floated in July, has been unwilling to budge.

In liquor, same-store sales growth slowed to 1.3 per cent in the September quarter from 2.0 per cent in the June quarter and compared with 1.6 per cent in the year-ago period.

Total liquor sales, including hotels, rose 2.1 per cent to $744 million, with 21 stores refurbished, including the next evolution Liquorland format. Five store closures offset five new stores, taking the network to 900 liquor stores and 87 hotels.

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