The Business Times

Australian grocer Coles declares war on costs after H1 profit drop

Published Tue, Feb 19, 2019 · 03:35 AM
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[SYDNEY] Australia's second-biggest grocery chain, Coles Group Ltd, posted a sharper-than-expected fall in half-year earnings on Tuesday and said costs were rising faster than sales, sending its shares lower.

Coles said it needed a "strategic refresh" after its first result since it was spun out of Wesfarmers Ltd last year underscored the rationale for the conglomerate's exit from a cut-throat supermarket sector where growth is slow and costly.

Sales-cost growth outpaced margins and market share slid in New South Wales, Australia's most-populous state, the grocer said, as it posted a 14 per cent fall in net profit to A$738 million (S$714 million) for the six months to Dec. 30.

"It's just going to be constant headwinds in my view in that space," said Daniel Cuthbertson, managing director of Value Point Asset Management. "It goes to show how good (Wesfarmers) are at managing a retail business and knowing when to divest."

Coles shares fell almost four per cent in early trade to a one-week low, before recovering slightly to trade 3 per cent under Monday's close, while the broader market rose 0.4 per cent.

The 104-year-old company listed last November at a turbulent time for brick-and-mortar retail.

Grocers like Coles and larger Woolworths Group Ltd are struggling to protect a once-tight duopoly from newcomers such as German discounter ALDI Inc, while a steep property downturn weighs on consumer spending.

A very successful promotion - handing out miniature replica products to children - drove a tripling of same-store sales to 3 per cent for the half, their fastest rate in two years, Coles said.

But those gains were swamped by rising labour and energy costs and the expense of removing single-use plastic bags from its stores.

"Costs to deliver products to customers are growing faster than sales and this is unsustainable and will be addressed," Chief Executive Steven Cain told analysts on a conference call.

Supermarket costs as a per centage of sales increased by 27 basis points, while gross margins improved much slower, by 15 basis points.

Cain said the firm was reviewing its strategy and would provide further details in June.

"We are going to double down on costs in the business but that won't be something that happens over the next few months in terms of better outcomes," he said.

Excluding one-off charges, supermarket earnings rose 0.4 per cent to A$602 million, well short of a Goldman Sachs' expectation for A$641 million.


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