Coles: pushing ‘value’ hard in a challenging consumer market

Jon Condon, 29/08/2011


Coles head of merchandising, John Durkan, addressing Thursday's AMIC conference Responding more to customers has been the underlying mission behind Coles’ renaissance as a major player in supermarket retailing in Australia over the past three years, delegates attending Thursday’s Australian Meat Industry Council conference heard.  

John Durkan, Coles Group merchandise director, made a frank admission to the audience saying prior to that, the company had lacked customer focus.

“In fact we were completely driven by our suppliers and supply chains, and not in a positive way,” he said.

He suggested there was always a tension between what customers wanted, and what industry wanted, and Coles ‘had to somehow find a way through that.’

“The way we have driven the customer focus has been a big part of our recent success – in fact I would say it has underpinned our turnaround thus-far.”

“When we set out on our journey three years ago, we came up with our definition of our circle of success. It started with our best customer experience, followed by delivering value and stunning quality fresh foods.”

Mr Durkan said the provenance behind Coles fresh foods offer was now “really quite important: where we get our products, how they are grown, and more importantly, what goes into them and what doesn’t.”

“It’s at the heart of everything we do, and we have built the turnaround of Coles on the back of its fresh food business, including the meat department, fruit and veg and bakery. It’s the engine-room of any supermarket business.”

He said Coles currently operated around 740 stores nationwide. In terms of its beef offer, that footprint demanded the equivalent of about 500,000 head of cattle each year. More than 250,000 head are processed annually through the Australian Country Choice facility in Brisbane alone, supplemented by a number of smaller processing facilities in southern areas.

95-98pc direct procurement

One of the big changes over the past three years has been in the way cattle are procured. Between 95 and 98 percent are now directly sourced from feedlots or producers working directly with Coles. The number of cattle suppliers had reduced from about 70, and a ‘whole heap’ of boxed beef product was previously bought on the spot market, Mr Durkan said.

“That’s represented a big change in the way we have gone to market, and the only way we can control the quality and consistency of our food is by having more direct relationships with our suppliers,” he said.

Equally, the only way the company could ensure its long-term viability was by having good relationships with those suppliers.

In contrast, Coles’ lamb supply chains remain much less reliant on direct supply, with just over half of the current requirement for 1.5 million lambs each year coming through direct channels.

“We’re on a move to try to grow that, and get as much lamb as we can – hopefully above 90pc – coming through direct channels.”

Mr Durkan said the source of beef supply and the direct relationships with suppliers was ‘really important’ to Coles, but these activities (how the beef industry wanted to produce its product, for example) were not always in direct alignment with consumer expectations.

“We’ve been trying to drive our overall business through our meat sales, and it’s not just about price or quality, it’s a little bit about inspiration as well. It’s about things like using chef Curtis Stone to drive recipe development to deliver messages like ‘feed your family for under $10’,” he said

“Whenever those leaflets are in store, the sales of those items go through the roof,” Mr Durkan said.

“There is a real, latent demand out there for consumers to be inspired and stimulated with recipe development, and it is one way of pushing the usage of certain products.”

Greater retail innovation

A second important development was about introducing innovation. Last year Coles introduced its ‘Grill’ range (across a number of meat proteins, not just beef), and the campaign would be re-introduced for summer around November, with a suite of new products being launched under the ‘Grill’ banner.

This was not just about the meat cuts on offer, but also about making it easier and more convenient, and appealing to customers in terms of their use.

Getting the company’s supply chain in the ‘right space’ in terms of quality, consistency and supply had been another important development over the past three years, Mr Durkan said.

About 150 of the company’s meat departments now had a fresh, modern new look being carried out progressively under a redesign program. The company was also re-investing in butcher skills in stores, which had been gradually lost over a long period of time.

“Customers tell us that is important. Having someone in-store that knows about meat and can talk to them about meat quality and cut selection is important. Do they always want something sliced up and cut to specification? Not really. They just want someone with knowledge to talk to, to give them some advice.”

The other big customer push apart from provenance and quality was in value, Mr Durkan said.

“Value is at the heart of everything we are doing and we see lots of feedback from customers about value. But it’s not just about being cheap. All the interventions discussed earlier in fact added cost to the supply chain, but we are not planning on passing that on to the customer. In fact they’d like to pay less,” Mr Durkan said.

“We’re actually seeing a move from more premium to lower-priced goods. This ‘flight to value’ is being echoed around the world, and is even more distinct in markets like the UK, and the US.”

Coles had reduced prices on around 5000 staples, including bread at $1 a loaf, which he said was not cheap, on a worldwide scale.

“This response is all about taking our supply chains and making them more efficient. The move to $2 for two litres of milk has not meant the industry has suffered in terms of price,” he said.

“It’s important for us to have a viable supply industry. We can’t have a supply network that’s on its knees, yet these two things are at odds with consumers: low prices and better quality, and us wanting more intensive production.”

Mr Durkan said he was asked quite frequently about how we solve the world’s needs in terms of food.

“I’m afraid little old Coles out of Melbourne really cannot answer that question, but I can understand the issues behind it. My view is that customers shouldn’t have to pay in terms of doing the right thing in terms of our business.”

In order to reward its suppliers adequately, Coles was making cuts and driving greater efficiencies in its own business.

“We have invested a few billion dollars in terms of making this business much more efficient, and have been able to take that efficiency and pass it on to our consumers,” he said.


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