Wesfarmers chief executive Richard Goyder has been "softening up" investors ahead of Coles' interim result as the supermarket chain braces for arch-rival Woolworths to snatch the lead in quarterly growth for the first time in 30 quarters.
The discussions with investors and analysts are believed to have taken place in the past few months, where Coles boss John Durkan said Woolworths' $1 billion investment in cutting its prices was inevitably going to alter the competitive field.
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"[Mr] Durkan has been pretty open saying that if you spend $1 billion on price, of course there's going to be an impact," one analyst said.
"Richard Goyder has told people Woolworths' like-for-like [sales growth] will be better than Coles and there's no doubt in my mind Woolworths will have crossed Coles.
![There's no suggestion that Coles is going to sit back and let Woolworths build a big lead.](/web/20170119103435im_/http://www.smh.com.au/content/dam/images/g/r/d/n/k/z/image.related.articleLeadwide.620x349.gttj6t.png/1484747496919.jpg)
"Having said that, Coles is competing with second-quarter like-for-like sales growth of 5.3 per cent from the same time last year and Woolworths is competing with a negative 1.2 per cent result."
Mr Goyder told Fairfax Media on Wednesday that Wesfarmers' conglomerate structure meant there were inevitably parts of the operation that were under pressure and others that were going well at any one time.
Coal power
He said the increase in coal earnings from a loss in fiscal 2016 to "what we expect to be a strong profit this year is helpful for our shareholders and helpful for the overall business".
Wesfarmers on Wednesday upgraded the expected performance of its coal business, which it now expects to earn between $135 million and $140 million before interest and tax for the six months ending December, compared with earlier guidance of "broadly breakeven".
![Coles has outperformed Woolworths' same-store sales performance since 2009.](/web/20170119103435im_/http://www.smh.com.au/content/dam/images/g/k/l/z/7/h/image.related.articleLeadwide.620x349.gttj6t.png/1484747496919.jpg)
"It means we can do the right long-term things with our businesses, whether it's Target, or indeed in supermarkets, or in home improvement," Mr Goyder said.
"We can put in place long-term strategies and not worry about short-term earnings."
![Richard Goyder, managing director of Wesfarmers, has been warning investors Woolworths could beat Coles' second-quarter ...](/web/20170119103435im_/http://www.smh.com.au/content/dam/images/g/r/0/a/p/g/image.related.articleLeadNarrow.300x0.gttj6t.png/1484747496919.jpg)
There's no suggestion that Coles is going to sit back and let Woolworths build a big lead, or pull back on its promotional program and this is backed up by supplier reports that both of the major chains are "very tough" to do business with at the moment.
Retail analysts suggest the likely soft Coles growth figure is a re-setting of the ultra-competitive supermarket sector as Woolworths slowly rebuilds its competitive edge.
![Claire Peters, new MD for Woolworths supermarkets.](/web/20170119103435im_/http://www.smh.com.au/content/dam/images/g/t/s/e/s/t/image.related.articleLeadNarrow.300x0.gttj6t.png/1484747496919.jpg)
Lower limit
Analysts suggest Coles could lag Woolworths by as much 0.5 per cent on the basis of same-store sales growth, with Citi head of research Craig Woolford suggesting it could come in as low as 0.5 per cent on a like for like measure compared to 1.7 per cent in the first quarter.
Mr Woolford said Coles found it difficult to lap a very successful Christmas from last year, when its execution was far superior to competitors.
"We see downside risk to our 1.6 per cent second-quarter 2017 estimate for comparable store sales growth at Coles," Mr Woolford said. "Comparative store sales could be as low as 0.5 per cent."
Coles has outperformed Woolworths' same-store sales performance since 2009 as Australia's biggest supermarket chain grappled with mounting losses from its disastrous foray into hardware through its now defunct Masters Home Improvement chain.
Based on conversations with Woolworths suppliers, Morgan Stanley analyst Tom Kierath claims the chain's same-store sales growth will accelerate to 1.5 per cent compared to an increase of just 0.5 per cent for Coles.
"If you look at the promotional program at Coles, it's still pretty aggressive and they are adding more products to their every day low pricing strategy and they're reducing their range a lot ... so that's going to fund a lot of the investment in price," Mr Kierath said.
But he warned the battle between Coles and Woolies was ultimately a zero-sum gain as the two majors squabbled over the same pool of shoppers and battled to preserve profitability.
"I wouldn't call this a price war but it's just going to be harder for them to grow and maintain their margins," Mr Kierath said.
Morgan Stanley has retained its underweight rating on Woolworths based on expectations the "margins will disappoint".
New appointment
Woolworths chief Brad Banducci announced former Tesco Thailand chief operating officer Claire Peters would join the supermarket as managing director of Woolworths supermarkets from July.
The appointment will free Mr Banducci from the day to day issues for the important supermarket business but Woolworths said he would continue to play "an active leadership role".
The appointment took some market watchers by surprise with one analyst questioning whether it suggested Mr Banducci needed to take on a bigger role in the attempted turnaround of troubled discount department store Big W.
One analyst said the key question was how would Coles respond if Woolworths did pull ahead in the second quarter and whether it would alter any aspects of its strategy.
"I'm not saying that Coles welcomes this but they are alert to it and there's no indication that they [Wesfarmers] are getting rattled by that," he said.
"The challenge for Wesfarmers is Bunnings will be a little comparatively softer on the back of Masters, Coles will be softer particularly in food and then resources is quite good for the next quarter or two but then pricing could come off.
"Woolworths' petrol deal is also really interesting and the opportunity there is to fund investment in its stores."
JPMorgan estimates the proceeds from Woolworths' proposed $1.8 billion sale of its petrol business to BP will be used for store upgrades in fiscal 2018 and 2019 and to "drive the sustained improvement in food like-for-like sales growth".
"We expect the primary focus will be to drive store renewals, with the company expected to invest at least $2 billion for several years,"JPMorgan analyst Shaun Cousins said.
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