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Coles Group reported its slowest sales growth in at least seven years as customers deserted the Australian retailer’s supermarkets and Kmart stores.

May 18, 2007

By Robert Fenner

Sydney – Coles Group reported its slowest sales growth in at least seven years as customers deserted the Australian retailer’s supermarkets and Kmart stores.

Coles, which is targeted for a takeover by Kohlberg Kravis Roberts (KKR), said yesterday that sales had increased by 0.6 percent to A$8.41 billion (R48.7 billion) in the 13 weeks to April 29 from a year earlier.

Coles is ceding market share to larger rival Woolworths, whose sales in the period climbed 8.8 percent.

Coles put itself up for sale in February, after a rebranding strategy failed to narrow the performance gap with Woolworths. It has since attracted a A$19.7 billion offer from Wesfarmers that KKR said it might top.

The third-quarter figures show the challenge in turning around the supermarket business, where Coles gets 60 percent of revenue.

“Coles’ fresh food offerings just aren’t as good as the opposition’s and it’s not surprising it has lost market share,” said Tony Pearce, a fund manager at Legg Mason Asset Management. “It emphasises the problems that have been endemic at Coles but also shows they are fixable.”

Coles sales were expected to rise 3.2 percent, according to the median estimate of four analysts surveyed by Bloomberg.

Wesfarmers agreed to Coles’ conditions for examining its financial records and would gain access from next Friday, said chief executive John Fletcher. KKR was now examining the records, with the Coles board calling for final bids from June 25.

“Setting a timetable is a good thing because the last thing we want is to see it drag on,” said Pearce.

Fletcher reiterated his forecast for annual net income of A$787 million, unchanged from the year earlier.

Coles food and liquor sales rose 3.2 percent to A$5.1 billion in the quarter, as the company increased promotion of its profitable private label groceries. Sales from stores open at least a year rose 0.8 percent, compared with 3.7 percent growth at Woolworths.

“Their core supermarkets business is … not performing,” said Grant Saligari, an analyst at Commonwealth Securities. “The sooner the uncertainty around the business is resolved, the better it will be for their operations.”

Fletcher halted his plan to convert his Bi-Lo discount supermarkets into the more expensive Coles format after customers chose to shop elsewhere following the revamp of 60 percent of the 202-store chain.

Sales from fuel and convenience stores, which trade under the Shell brand, fell 7 percent to A$1.4 billion on lower fuel prices and the closure of outlets for refurbishment.

At Kmart discount department stores, sales fell 3 percent to A$843 million on lower discounting. Sales from stores open at least a year fell 3.2 percent. Target discount store sales rose 2.3 percent to A$704 million on demand for women’s clothing. Officeworks sales increased 4.7 percent to A$332 million. – Bloomberg