COMMENT:

Woolworths is pinning its hopes for bumper Christmas sales on small cardboard nativity figures and children's propensity to nag their parents.

The supermarket chain last week started giving customers Christmas Pop-Outs – cardboard self-assembled Christmas-themed characters including Santas, elves, reindeer and snowmen – and while it might seem odd that a A$37 billion (NZ$39 billion) supermarket group is putting so much store in colourful sheets of cardboard, a similar promotion by rival Coles recently demonstrated the power of collectables.

Coles stole the march on Woolworths in the last quarter thanks to its "Little Shop" promotion which propelled its strongest sales growth in three years. Same-store sales – a measure that strips out the inflating effect of newly opened stores – surged 5.1 per cent, while Woolworths had its slowest sales growth in two years.

Advertisement

The Little Shop toys were plastic miniatures of everyday groceries items which shoppers would then put in a special display folder.

Why normally mundane items such as Lipton Tea, Weet-Bix, Finish dishwashing power and White King Power King, miniaturised and reproduced in plastic, were so appealing to children is a mystery best pondered by psychologists or sociologists, but there is no doubting its effectiveness.

The Little Shop promotion comes at a crucial time for Coles, boosting its sales ahead of its share market listing as a standalone entity this coming Wednesday. With owner Wesfarmers spinning off the business, Coles has come full circle – it was a stock market listed company before Wesfarmers bought it in 2007.

Last quarter's sales bump will give new Coles managing director Stephen Cain some breathing space after bucking a trend that saw Coles' same-store sales grow more slowly than Woolworths' for seven consecutive quarters and earnings fall nearly 20 per cent over the last two years.

But Cain is wisely cautioning investors that they should expect sales growth of only around half of the previous quarter's.

What's more, Coles will no longer have the financial backing of Wesfarmers – and the huge piles of cash generated by the Bunnings hardware chain. Its ability to invest in competitive strategies such as lower prices will be much more limited, which will put it on a more level playing field with Woolworths and Aldi.

Another factor boosting sales at Coles was its decision to keep giving away free plastic bags, eight weeks after Woolworths stopped supplying single-use plastic bags and started charging customers for reusable bags. It's another example of how even a tiny tweak or change can make a big difference in Australia's highly competitive and commoditised A$90 billion grocery market.

Coles initially charged consumers 15c for a bag but backtracked when it found it slowed down the number of customers it could rush through the checkout.

With the promotion over and discarded Little Shop toys bulking up Australia's landfills and its free plastic bags washing around our waterways and oceans, Woolworths is hitting back.

It is releasing three new Christmas figures a week for four weeks, and giving on away each time a shopper spends $30 or more. Woolworths will be hoping that the cardboard pop-outs prove sufficiently popular that children pester their parents into spending the full A$360 required to get the full set.

RETAIL WOES

As investors contemplate the looming float of Coles, they can look at the experience of Coles' one-time subsidiary Myer for a cautionary tale.

We have written before about how Myer's private equity owners tarted up the department store chain before floating it off for massive profits for themselves and for massive losses for investors.

Things have gone from bad to worse for Myer to the point where investors should consider whether the business has a future.

On Friday, the Australian Financial Review revealed that Myer's first-quarter sales had fallen by 5.5 per cent, and extraordinarily, its online sales were down 5.2 per cent compared with the same time last year. The figures suggest Myer's full-year profit will be well below last year's A$40 million first-half profit.

As such, the Myer board should have revealed the figures to the market under Australia's continuous disclosure rules, which require that companies inform investors of any material information as soon as it comes to hand.

Investors and regulators are asking why Myer didn't release the figures and why they only came to light when they were leaked to a newspaper. In a statement, Myer said it was complying with the disclosure rules, although it didn't dispute the facts of the story.

However, market operator the Australian Securities Exchange didn't accept the company's assurance and suspended it from trading.

The retailer is expected to make a statement and resume trading on Monday. Its delayed response suggests management and the board were caught flat-footed, and raises questions about how adequately the board is overseeing the company.

It is sure to be messy and another hit for investors.