Coles’ mini promo a nice little earner

COLES has enjoyed a windfall from its Little Shop promotional campaign, which will add 1 per cent to full-year earnings growth, industry experts say.

Analysts at investment bank Citi say the grocer’s sales growth, fuelled by the campaign, is accelerating at the expense of rival Woolworths.

But the momentum might not be sustainable, the analysts said in a report for investors.

Coles offered shoppers one miniature plastic “collectable”, modelled on real grocery brands, for every $30 they spent, with 30 available.

The promotion ended this month.

According to Citi’s estimates, it generated incremental earnings before interest and tax of about $11 million on the back of increased sales and lower discounting.

That was the equivalent of a 6 per cent boost to earnings over the eight-week promotion. Those earnings were likely to be reinvested in the business, the analysts said.

It comes as Coles owner Wesfarmers prepares to spin off the Melbourne-based grocery chain into a separately listed company.

“The net cost of Little Shop is a key assumption in this analysis,” the Citi report said.

“We estimate at about $30 million [the] cost of the program, prior to supplier contributions.

“We have assumed incremental supplier support offset half of Coles’ investment.”

Citi said that continued investment would be needed to continue the momentum over the coming quarters.

“We see significant risks ahead that Coles will not be able to maintain its lead over Woolworths, given senior management changes and lagging execution levels,” the analysts said.

Citi said Woolworths was expected to return to like-forlike sales growth in the second half of the financial year.

The analysts upgraded their rating on Woolworths’ shares to “buy” and left their “sell” recommendation on Wesfarmers, saying they expected fatter margins ahead for both Coles and Woolworths.