April 28, 2019 / 11:33 PM / 22 days ago

UPDATE 2-Promotion boosts sales at Australia's Coles

* Supermarket sales grow 2.2 pct in Q3 vs 1.5 pct in Q2

* One-off promotion seen driving growth

* Shares edge higher, near 3-month high (Writes through adding market reaction, analyst and management quotes)

By Tom Westbrook

SYDNEY, April 29 (Reuters) - Australia’s second-biggest grocer Coles Group Ltd posted a pickup in quarterly sales growth on Monday, though it was mostly driven by a promotion aimed at children, raising questions from traders about its future sustainability.

Cut-throat competition in the supermarket sector has for years driven deep discounting by Coles and its bigger rival Woolworths Group Ltd as they battle for market share.

Over the three months to March 24 Coles sought to repeat a boost it won last year, by refreshing a promotion offering collectable miniatures of supermarket products to children.

It lifted sales even as a housing downturn weighs on spending, but it was half as effective as it was in 2018.

“These are temporary measures with diminishing returns,” said Michael McCarthy, chief strategist at stockbroker CMC Markets

“There’s a recognition that the environment’s tough and they’re doing what they can, but these sorts of promotions can’t go on forever.”

Coles shares rose 0.2 percent by mid-session, while the broader market fell 0.3 percent.

The promotion, offering caricatures of fruit and vegetables for purchases over A$30 ($21), lifted comparable sales growth, adjusted for New Year’s Eve falling in the quarter, to 2.2 percent from 1.5 percent in the second quarter.

In the September quarter, a similar offering of miniature grocery items became such a hot commodity in school playgrounds that sets were advertised for hundreds of dollars online. Sales growth doubled to 5.1 percent.

“We didn’t expect it to be of the same magnitude,” Coles CEO Steven Cain told journalists on a conference call, citing a similar campaign launched at Woolworths.

“What is quite apparent is there might be some promotional fatigue out in the marketplace,” he said, though adding that marketing ideas, such as collectables, were more effective than traditional discounting promotions at driving sales.

Coles’ total sales, which comprises supermarkets, liquor and fuel and convenience retail businesses, fell to A$8.88 billion from A$9.05 billion last year, with sales at its fuel business slipping.

That drop, a 10.9 percent fall for the quarter, combined with wider refiner margins squeezing fuel retailers, pushed shares in Coles’ petrol supplier, Viva Energy Group Ltd , down 4 percent to a two-and-a-half-month low. ($1 = 1.4198 Australian dollars) (Reporting by Tom Westbrook in Sydney. Additional reporting by Aby Jose Koilparambil and Rashmi Ashok in Bengaluru; Editing by Stephen Coates)

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