June 17, 2019 / 10:47 PM / a month ago

Australian grocer Coles eyes $685 million in savings, shares jump

SYDNEY/BENGALURU (Reuters) - Coles Group Ltd, Australia’s second-biggest grocery chain, on Tuesday unveiled a plan to cut A$1 billion ($685 million) in costs over the next four years, as it looks to technology to offset rising labor and energy costs.

In its first major strategy update since being spun off last year by conglomerate Wesfarmers Ltd, Coles said it planned to automate manual tasks and reduce duplication to tackle rising costs.

Coles shares jumped more than 5% in early trading on Tuesday to a record intraday high since its standalone listing in November, well ahead of a slightly firmer overall market.

Australia’s supermarket sector is grappling with intense competition as sales and margins get squeezed by cautious consumers and rising costs, while economic growth slows in Australia.

The long-dominant duopoloy of Coles and larger rival Woolworths Ltd has meanwhile faced fierce competition from discounters like Germany’s ALDI Inc.

“The outlook for traditional bricks and mortar supermarkets is that sales densities could well decline in the medium term if action isn’t taken,” CEO Steven Cain told reporters on a call.

“Maintaining our share would be a terrific result given the competition that we face over the next five years or so,” he added.

A week earlier, the 105-year-old grocer said it was cutting 450 jobs from its head office as part of an attempt to rein in overheads.

On Tuesday, Cain said the company hoped to develop new revenue streams to keep up with a fragmenting market, and would consider selling meal kits for delivery as Woolworths said it was doing.

Coles would also try to grow its A$400 million-a-year food export business to capitalize on rising demand from China for Australian food, Cain said. Coles makes about A$40 billion a year in total sales.

The company’s strategy briefing was “more tweak than reset”, Macquarie Group analysts wrote in a research note.

The company said it expected underlying supermarket sales growth in the quarter to end-June to be at the higher end of the range between the second and third quarter results. Underlying supermarket sales grew 2.2 percent in the third quarter and 1.5 percent in the second quarter.

Reporting by Byron Kaye in SYDNEY and Nikhil Kurian Nainan in BENGALURU; editing by Richard Chang and Richard Pullin

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