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Australia: Coles to bounce back after cheap fruit & veg slowed sale growth down

Coles is promising to bounce back in 2018 after cheap fruit and vegetables contributed to the supermarket's sales growth falling to its slowest rate in eight years.

The supermarket blamed price deflation of 2.3 per cent for blowing a hole in sales revenue, singling out cheap fruit and vegetables in particular as having hurt earnings due to low prices.

The Australian Bureau of Statistics on Wednesday revealed that vegetable prices fell almost 11 per cent in the quarter, as supply and prices return to normal after the impact of Cyclone Debbie.

But Wesfarmers' incoming chief executive Rob Scott, who will take the top job from Richard Goyder on November 17, said he expected sales growth to bounce back in the second half of the financial year as Coles cycles the effect of Woolworths' price-cutting campaign.

"Essentially the 2017 calendar year for us was a year in which we had to invest ahead of the curve, really around value in order to maintain our value credentials," Mr Scott said.

"That came at a cost - it came at a cost as related to sales, and it came at a cost as related to profit. But we saw that largely as a one-off adjustment in the market."

Coles managing director John Durkan said the quarter's food and liquor sales would have been in broadly in line with the previous four quarters if not for the impact of deflation on fresh produce. He said he expected sales to improve in the second half of the year provided "nothing dramatic" happened in the market.

"If there's a whole new level of massive investment by one of the competitors, we'd have to react to that, but subject to what I see now the plans we've put in place would suggest our company's comparable sales would improve from here on in," Mr Durkan told analysts.

Coles' overall result was dragged down by a 9.5 per cent fall in revenue from its convenience store business, taking its total sales 0.3 per cent lower to $9.37 billion.

Credit Suisse analyst Grant Saligari said that Coles was the major variable going forward, with Wesfarmers working on the theory that the impact of Woolworths' price cutting on Coles' sales would start to wane.

"It's always hard to predict, if you do a price adjustment, if you do a service adjustment, how long the tailwind lasts from that," Mr Saligari said.

"It's pointing to its own store renewal program as partly mitigating the renewal programs of Woolworths and Aldi."

Publication date: 11/22/2017



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