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.
Parent company Wesfarmers on Wednesday said same-store food and liquor sales grew just 0.4 per cent in the three months to September 30, down from 1.8 per cent in the same period a year earlier.
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 credential," 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 comps [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.
The convenience store decline was largely driven by lower fuel sales at Coles Express service stations, which were down 20 per cent compared to the same quarter last year. Coles said it was working with its petrol station partner Viva to deliver more competitive fuel prices to arrest the sales decline.
Wesfarmers also defended its expansion of its Bunnings hardware chain into Britain and Ireland after sales there fell more than 13 per cent compared to the same period last year.
Bunnings bought the Homebase chain in January 2016 for $705 million, and is in the process of converting the business to the Bunnings brand and format, with eight pilot Bunnings stores now trading alongside its remaining 244 Homebase outlets.
Outgoing Wesfarmers' CEO Mr Goyder said he was not happy with the performance of Homebase stores, where sales had been hit by the clearance of discontinued products.
"This will certainly take longer than we would have liked, but we continue to think there's a significant opportunity for us to grow a profitable business in the UK," he said.
Bunnings UK and Ireland's revenue declined 17.5 per cent in Australian dollar terms, and sales fell 11.9 per cent when accounting for store closures. The division swung to a $89 million loss in the 2017 financial year, Wesfarmers revealed in August.
Bunnings' Australia and New Zealand business saw sales growth of 11.5 per cent to $2.96 billion.
Credit Suisse analyst Grant Saligari said that Coles and Bunnings UK and Ireland were the major variables 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."
Elsewhere in the Wesfarmers empire, sales at discount department store Kmart grew 9 per cent to $1.36 billion, while Target continued to struggle as Wesfarmers tries to revive its fortunes as a low-price fashion retailer, with sales falling 6.4 per cent to $602 million.
Officeworks sales grew 7.8 per cent to $497 million in the quarter.
Wesfarmers shares closed down 2.9 per cent at $41.49.
- This story first appeared on The Sydney Morning Herald.
