COLES has defended the pace of the turnaround in its underperforming liquor business, rejecting claims there has been no progress in five years.
Coles has been growing grocery sales at a faster rate than Woolworths for more than four years, but liquor sales have stagnated and liquor margins are less than half those at Woolworths, according to a report by Citigroup.
Citigroup analyst Craig Woolford estimates Coles earned just $75 million before interest and tax on liquor sales of $2.8 billion last year. Liquor margins were 2.7 per cent, while overall margins in the food and liquor business were 4.9 per cent. Yet Woolworths earned $450 million on liquor sales of $6.7 billion in 2013, a margin of 6.7 per cent.
Neither Coles nor Woolworths report earnings and margins from liquor, despite growing market pressure for greater transparency given the size of their liquor interests.
While Woolworths's liquor business has gone from strength to strength, fuelled by rapid growth in the Dan Murphy's big-box network, BWS stores and online sales, Citigroup says Coles's liquor business has made no progress.
Woolworths has grown its share of the packaged liquor market from 29 per cent to 48 per cent since 2007, while Coles's share has grown from around 18 per cent to 20 per cent.
A Coles spokesman said much work had been done since the Wesfarmers acquisition in 2007, when the new management team inherited a network of poorly-located and performing stores.
"The report draws some valid conclusions about the respective sizes of the businesses," the spokesman said.
"But the report is fundamentally flawed in not recognising the changes that have occurred in the liquor business over the last few years."'Long way to go'
Coles has closed loss-making stores, opened stores in better locations, relaunched the 1st Choice and Vintage Cellars brands, stopped selling deeply discounted beer and strengthened relationships with suppliers.
It has also shaken up senior management, appointing Kevin Rudd's former economic adviser, Andrew Charlton, as general manager last May to take the reins from Tony Leon.
Citigroup says Coles is missing out because its big-box brand, 1st Choice, lacks scale. Coles said 1st Choice was a strong brand, but it was looking at other options such as Liquorland Warehouse. Coles has opened five Liquorland Warehouses and early trials are encouraging, but it has yet to decide whether to roll out the format.
Coles has also been shifting away from stand-alone small-format Liquorland stores in favour of co-locating liquor shops next to supermarkets.
"As [Coles managing director Ian McLeod] has said previously, there's a long way to go – we're not saying there isn't a challenge," the spokesman said.
