Coles Group Limited (COL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Coles Group 3Q '22 Sales Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.

Thank you, and good morning, everyone, from Melbourne, a mask-less Melbourne, I think, for the first time, which is nice for us and nice for our colleagues in store. Joining me on the call is Charlie Elias, who many of you already know, our Chief Financial Officer; and of course, Matt Swindells, who many of you know as well, our Chief Operations Officer, whose team has been leading the front line in the most disruptive quarter we've seen so far, even verging on the unprecedented brackets again. Despite the disruption to our supply chain and the return of a bit more local shopping, I'm pleased to be able to report that we are delivering trusted value to our customers, a solid sales performance in both supermarkets and liquor and significant growth in our e-commerce business as we continue to invest in technology and capacity. Before getting into detail, I want to thank our team members and suppliers for their continued hard work during the quarter to provide the best offer possible despite the impact of widespread flooding and record COVID-19 numbers. I would also like to thank our customers, community partners, including Red Cross and state and federal governments for their help and generosity in supporting Coles' efforts to assist communities impacted by the flooding during the quarter. With regards to sales, gross retail sales increased by 3.9%; Supermarkets, 4.2% and Liquor 2.8%. Sales in Coles Express were impacted by reduced traffic on the roads and declined just over 2%. Whilst this is a sales announcement, there are a couple of important costs to call out. Firstly, the direct cost of the flood events for the third quarter, including the loss of stock, asset write-offs and increased freight costs through road and rail disruptions was approximately $30 million. The costs do not include an estimate of the loss of profits as a result of business interruption. We are working through the insurance claim process and have not recognized an insurance recovery in the third quarter. Secondly, we incurred COVID-19 costs of approximately $65 million in the third quarter in comparison to approximately $10 million in the prior corresponding period. Costs peaked at approximately $30 million in January, largely driven by team member isolation requirements [indiscernible]. We also had the operation of shift bubbles and costs associated with administering rapid antigen testing in distribution centers. COVID-19 costs tapered meaningfully in February and March. We continue to closely manage the ongoing disruptions from COVID and the flood events, including recovery of supply chain and ensuring the health and wellbeing of our team. As we approach the end of our third year of our strategy delivery, we continue to make progress on inspiring customers with our own brand ranges, smarter selling efficiency and our sustainability program. With regards to outlook, Coles has recorded a solid trading period in Q4 to date with no COVID-19 related restrictions on traditional family events, such as Easter. We continue to manage the ongoing impacts from the highly disruptive events from the third quarter. And pleasingly, availability continues to improve as the supply chain recovers. COVID-19 costs are expected to continue to moderate further, particularly as public health requirements are eased. Supplier input cost inflation is expected to continue into the fourth quarter and into FY '23. And Coles will continue to focus on providing trusted value for customers to ease the burden from cost of living pressures. To finish, we're looking forward to supporting the return of a more normal Mother's Day with a wide range of exciting, great value gift ideas, ranging from carbon-neutral steaks launched last week, chocolates, flowers and cozy socks and slippers to the finest local Australian gins just in case any of you are in need of any inspiration in the next week or so. So with that, I'll open up for Q&A. Thank you.

[Operator Instructions] Your first question comes from David Errington with Bank of America.

Steve, my first question is clearly with such rapid price increases, I mean, I think your second quarter, you're in price deflation. In this quarter, you're in over 3%. So your exit rate of inflation is probably well above 5%. Can you give us a bit of an overview with the current, are you seeing any customer change in behavior, in other words, toward trading down? And going forward, I mean, generally, most economists are suggesting that we're likely to see this sort of price inflation prevail. What's your thoughts toward -- I mean it's unprecedented, these levels of inflation. But what's your thoughts toward what this is -- what the customers are going to do? Do you think they'll trade down? Or do you think there's enough cash in the system that they'll wear the cost increases or the price increases for the time being? Can you give us a bit of an idea what your thoughts are? Because clearly, everyone is going to be thinking are the big supermarkets going to start losing share to the discounters or are you going to have to trade down to more your discount promotional items. So can you give us a bit of a view as to what you see will be the outlook in the next, say, 3 to 6 months as well as if you're seeing any current trends albeit very early days?

Okay. Thanks, David. Well, you know better than I do, but I don't have a crystal ball, but I'll give you some thoughts. It's a bit early to sort of talk about big trends that we've seen, and particularly with the availability issues that the industry has been working through. We had -- in particular, WA had very difficult circumstances in the quarter and is recovering. But even across the rest of the nation, our availability is still well below what it was pre-COVID. So trying to sort of dig into trends is a bit more difficult than normal because, in some cases, customers are having to buy perhaps what's there rather than whatever was on their shopping list in terms of a particular brand or a particular kind of meat, but that's getting better. Some of the longer-term changes that we've seen in pricing or some of the commodities that normally go up and down, I'd say, look, there's 2 price elasticities to think about here. At a sort of more national level, there's a price elasticity between foodservice and supermarkets. And we always know that historically, people will come out of foodservice and into supermarkets if times are tightened. And I think someone was trending a $7 latte in Melbourne last week. If that happens, then there'll certainly be a bit of a shift to our capsules, I would hope. So there's that elasticity of demand. The other elasticity in demand that we've seen over a longer period of time is things like red meat where we know red meat has been in inflation as stocks recover since the droughts. But that's been in inflation for 2 years now. And during that time, we've seen people switch out of some red meats into white meats. And of course, you've got this growing vegetarianism running alongside for potentially different reasons as well. So that's -- it shows you there is an elasticity of demand when it comes to individual products. The other one that we see more often is as produce prices go up and down, we do see people trading into different products based on the prices that are there. And as I mentioned on a call earlier to some of the -- the majority of products haven't gone up in price in Coles to date. And if you look hard, you'll find that there's actually products that have come down in price. So bananas, which is the #1 bestseller in the supermarket, as you know, bananas are down more than 25% year-on-year and the same with avocado. So it's not the same everywhere. And obviously, what we're trying to do is to keep our price increases below the average. And that was demonstrated yesterday with the ABS figures that came out because we do need to deliver trusted value in the process. As we move -- so that's sort of a bit of the history, if you like. As we move forward, I am convinced that our own brand range, having the widest range and everyday pricing, will stand us in good stead. We've got a strong promotional program, which is complemented by flybuys and some of the continuity programs that are there. So we've got great value in the mix. We're continuing to run Down Downs and so on. But as you've mentioned, the inflationary pressures on suppliers are increasing and not decreasing. But from a Coles point of view, I'm feeling comfortable that we've got the right program to keep our customers. And I'd be very disappointed if we ended up leasing them to anybody. But in particular, I think we've got a good range to compete with the discounters.

Excellent. And the second question, Steve, if I may, and maybe Matt might want to chime in with this, but it's -- one of the key things I'm looking for is we had a period of elevated sales. And both you and Woolworths were calling out that sales were so high that it was causing inefficiencies in your supply chains. Now I know it's an incredibly disruptive period still, supply chains. But can we expect to see -- and I know it's sales, I don't want to talk about margins, but it's mainly on supply chain efficiency here. As volumes moderate, can we expect to see your supply chain get a little bit more efficient through forward predicting? Or do you think that these costs that are coming through the supply chain are going to be detrimental? Without going into profits, I'm not going down that path, I'm more in the underlying drivers of the supply chain because it looks like volumes are moderating, can we start to expect to see efficiencies come through as volumes moderate? Or do you think that these other costs are going to still be impeding?

Thanks, David. It's Matt here. you're right, through COVID, it was more the spiky and the lumpiness of the demand that caused the challenges in running efficiency. And obviously, everybody was trying to react to that spike. The disruption continues, and it's a combination of the blockages at international ports, a lack of transport capacity, still an impact upon labor through bulk suppliers. And for us, Western Australia is still challenged with COVID, and that's causing some challenges. And then the pallet situation has improved, but it's still got a long way to go. And I think that's a common theme that we'll see throughout this quarter. There's a lot of work still to be done to recover the supply chain to its normal operating rhythm. And we are very, very focused upon restoring availability for our customers and, importantly, for our team members because they've had to work through these high levels of disruption for long periods. And our focus is very much getting back to pre-COVID norms of performance for availability and in time for efficiency, but there is a long way to go.

Your next question comes from Ross Curran with Macquarie.

Team, I really appreciate the detail this morning. Just further along David's questions. You talked in the release about local specialty stores picking up a bit of share on those availability issues. Has that worked its way through now and we're back to a more normal event as we exit through March and into April? And then secondly, can you maybe talk about the specialty retailers versus those discount supermarket chains and how that's performing?

Yes. The line was a little bit difficult to hear, Ross. But I got the first bit about is availability getting -- is it better? Was that right? And then the second one was the performance of specialists.

Versus discount supermarket chains.

Yes. So availability and...

Availability of the local and then secondly on the discount surplus.

Yes. Okay. So on availability, probably our most impacted category in the quarter was meat, and we've had this before given the susceptibility of the meat supply chain to COVID-related issues and so on. Obviously, what's happened there is things have improved over the period running into Easter. There's still a bit of work to do on things like meat. But what we've seen, I think, from looking at the various performances around the [ traps ] it has driven people to shop locally at more places, including specialists and particularly in February by the looks of things. So we're expecting that there will be a bit of a reversal of that as the availability situation improves. Some of the longer-standing items of what Matt referred to earlier, which is the international things. And we were quite lucky because we're 90% Australian. But even within those 90%, you can still get products that are dependent on overseas packaging or something. But I'm feeling more confident today than I was in the middle of February around the availability situation. And particularly in the hardest hit areas, which was WA. We certainly lost some business in WA during that period where the road and rail were down. And for those who had higher stock levels over there, they would have been advantaged.

And the second part was just around the discount retailers. So are they starting to have more of an impact as inflation comes through shelf prices?

Well, there aren't too many discounters. So I always prefer not to talk about a specific competitor. But I think what you can show at the moment is really important because it's not value if it's not there. It's -- an old retailer used to say to me. And so getting availability right is the #1 priority for us, but I'm convinced that our pricing is there. And what you'll find is that different retailers will be impacted to different degrees by, a, how much they import. And you may have read an article at some point last year or recently that sort of said we've got the most Australian range of own brand in the country, not only the biggest range but the most Australian range, which is advantageous to us. And then the other thing that could impact you is the number of SKUs that you hold. And there's no doubt that the more SKUs that you hold, the better the offer you've been able to put on over the last few months.

Your next question comes from Tom Kierath with Barrenjoey.

Steve, I just wanted to pick up on your comment there before that you said the majority of products haven't had a price increase. Just interested by that because if you look at the CPI data yesterday, it looked like in food, across the food categories, it was pretty broad-based, the price increases. Can you just put a bit more color around those comments, whether it relates to month-on-month, quarter-over-quarter, year-on-year? Just it was an interesting comment.

Yes. probably talking mostly about -- well, it's a combination of through the year and what we're seeing currently. But the fact -- our inflation through to Q2 was 0, as in prices, net-net, weren't going up. And we knew that there were categories in inflation like meat, and we knew there were categories that weren't like packaged grocery and so on. What we saw through the quarter was things being impacted by promotional availability as well. So we saw overall a lower quarter of promotional intensity than we've seen for a while. And what we did see was that as we approached Easter, that was getting back to a more normal level. It is -- suffice to say that we're experiencing inflation in most, if not all, of the categories that we're looking at. But it is different by category. And as I said before, the #1 product in the store is bananas and they're down 25% year-on-year. We've got thousands of lines that are on everyday low pricing and Down Downs, which haven't changed in a while, and we continue to roll out Down Downs across the seasons as well. So it's not all one way. And obviously, what we're seeing is people, I think, will be potentially buying more own brand going forward and also more promotional stock when it's available. We launched, as you may have seen a week or 2 ago, the big pack range again. And again, that's a good sign that people have got money to spend. It's proven to be very popular so far. So the things that we do, do on value seem to be gaining traction. But I wouldn't want anyone to be any doubt that the #1 thing that we need to focus on as an organization is still availability with our suppliers. And if we do that, then we'll be in a good position because there's no doubt that we've lost sales in the quarter down to availability, and we want to get those back.

Yes. And just a second one. You haven't caught that for a little while, but just the impact of tobacco on the food business. I think in the first quarter, you said it was a 160-point drag. Is it still a drag on the business? Is it still down? I'm just trying to, I guess, assess it, if you exclude that category, which I presume is still declining.

Yes. It's still in double-digit decline, Tom, but it's not quite as intense as it was.

Your next question comes from Shaun Cousins with UBS.

I just want to talk a bit about value, your comments around providing trusted value for customers. Can we infer from that, that Coles are seeking, at best, I guess, to maintain gross margins when accepting supply-driven cost increases rather than using the supplier cost inflation as an opportunity to expand margins while your customer is dealing with higher cost of living?

Yes. I think that we've always said there are sort of 3 buckets here on price increases. There's price increases or cost price increases should I say, that come through from suppliers where we don't move the price because the product is an important or memorable KPI. Price increases -- if a supplier comes to us and says, we want $1 more, there's price increases that then result in $1 more being on the shelf price. And then there's suppliers where the margin might be 30%, the gross margin, and there's a price increase of $1, and the margin at the end remains at 30%. So those are the sort of 3 main scenarios and obviously some in between as well. But when we look back at the quarter, we've got a good percentage of products falling into each of those categories. And therefore, there is a gross margin percentage drag as we move through this inflationary wave. However, I'd sort of be quite quick to point out that in the past and ongoing, we've had strategic sourcing programs and smarter selling, which are there to continue to improve the gross margin, absent price maneuvers in the market that we're currently seeing.

Great. And that's one of the options there that wasn't available was for you to actually use this as an opportunity to expand your gross margins. I think that's quite telling as well. I guess my second question...

Sorry, Shaun. Yes, I don't see this current wave as an opportunity to increase the gross margin percentage. That's certainly not what's happening as a result of inflationary impacts at Coles. But what I would say is gross margin has got a number of moving parts in there. And there's 2 other important parts that the team is focused on as well.

Fantastic. And my second question is just around the promotional intensity and how that moderated a little bit during the quarter because of supply chain availability. I think you mentioned that in the earlier questions and feedback was consistent around that. How much did lower promotions contribute to the inflation? Could it be 100 basis points of the -- 1% of the 3.3% inflation that you've got. I'm just curious around if you could sort of put some context around the benefit or the impact of fuel promotions on the inflation you reported in the quarter, please, because of the supply availability issues.

Yes. I mean I won't give you the calculation, but I'll give you some numbers. So basically, promotional intensity in the quarter was -- what we've said in the release, I think the packaged inflation was very similar to the overall inflation number, at around 3%. But the promotional intensity in the quarter was about 300 or 400 basis points down on normal. So I'll leave the rest to you.

Sorry, that's 300 to 400 basis points of -- in terms of sales. By the way -- sorry, if you had, for instance, 30% of your sales on promotions previously, now you're saying they'd be 27% or 26%. Is that the way...

That's the way to think about it, yes.

Your next question comes from Adrian Lemme with Citi.

Yes, just a follow-up question on the inflation and the lack of promotions in the quarter. So if I subtract the inflation from the comps, it looks like the implied volume growth has declined from 1.8% in the second quarter to 0.6% this quarter. So should we think that that's more just a function of lower volumes due to lower promotions? Or should we read into it sort of this trade down and other sort of effects of the inflation, please?

I think the main thing I'd read into it is that we did see the opening up of hospitality through the quarter. And so there was an increase in -- if you look at the total of hospitality and supermarkets, I think hospitality was something like 25% of total sales back in January or something, and it's back up to about 27%, which is, I think, where it was pre-COVID levels. So we've seen that sort of move from supermarkets to hospitality. And we've also had that sort of summer period as well where it tends to do a bit better for obvious reasons. And we've had, in part, during the quarter, a bit of a return to work as well. And we always said that the supermarket industry was benefiting from breakfast and lunches at home. And what we'll see is as city centers opening up, which they're beginning to do, we'll start to see maybe some of that happening in those CBDs as well.

That's very helpful. I appreciate that. If I could ask a second question, please. Also notice that the online penetration supermarkets increased slightly from 7.6% in the second quarter to 7.8% this quarter. And I appreciate that January obviously was probably pretty elevated due to the high COVID cases. But are you seeing the rate of growth in online and the penetration slow down now as foot traffic is returning into shopping centers in recent months? And should we expect that -- I know you don't like the crystal ball, but are you sort of planning for online penetration to retrace a little bit at least? Or do you see it sort of continuing to grow off these levels, please?

Yes. It's a good question and one we give a fair bit of thought to, as you can imagine. What we've seen around the world is quite a severe drop-off. In places like the U.K. I think it's halved in some retailers over there as COVID has eased and the regulation -- well, the shops opened up properly and so on. We've seen nothing like that, of course, here. And part of what we're seeing is there was in January a bit of a rush to home shopping as the cases increased. But underlying what we're doing is we are increasing capacity again in the quarter and our technology efforts. So we've got a nice level of underlying growth. We probably didn't have the peaks that some of the other retailers had around the world. So I'm expecting it to come off slightly, but not significantly.

Your next question comes from Michael Simotas with Jefferies.

Good morning, everyone. First question I've got is on penetration of own brand. I know you don't give us the exact numbers, but based on the disclosure, it looks like penetration fell a little bit during quarter, which I thought was interesting in the context of the discussion we're having about consumers potentially trading down. So was there anything to do with sort of stock availability of private label versus branded? Or do you think it was the COVID effect through January or something else affecting that penetration?

Yes. Michael, good question. The main -- I mean, as I say, it's very difficult to read the quarter. We've got our advanced analytics team on over time trying to make a sense of what's going on. But as I called out earlier on, meat's been our most impacted category, and that's one of our highest own brand categories that we've had. So I'm not reading really anything into the quarter from an own brand or proprietary point of view. Where we've got product, it's selling it's doing well. And believe it or not, where we haven't got product, it's not something so well. So it's really about availability at the moment rather than any consumer trend.

Yes, I thought that's what it might be. And then the second question, just sort of thinking around consumers potentially trading down. I'm not expecting anyone to make any predictions, but I think it's reasonable to assume there will be some trading down. How should we think about the mechanics of how that will flow through your business? And the reason I ask specifically, is it necessarily negative for margins? Because if consumers trade out of brands into private label, I could see a potential offset there. Trading out of red meat into white meat could be actually favorable for margin. If consumers are buying what's on promotion, that tends to be supplier-funded. Trading down into frozen is probably pretty healthy for margins as well. So how should we think about the impact on your business if we do see consumers trading down?

Yes. It's a good -- again, a good question. And I guess you sort of need to offset that with the sales benefit of the cost price inflation coming through. So it's not just a trading down effect in isolation. And certainly looking at the numbers we see, there's probably more people with more money now than there was pre-COVID. But equally, we can see that there is a community of customers out there who, with the combination of increased prices and maybe some interest rate rises down the track will put them under some significant pressure, which we're very aware of, which is why we're very focused on value and everything else. But I wouldn't naturally read into the fact that if there is a bit of a trading down, it will impact gross margins significantly, although we'll wait and see on that one. That's not a forecast, by the way. But I'm pretty comfortable, as I've said before, about we're well set up for changes in consumer behavior. And the main thing is to keep your customers happy. And if you do that, then the profit should look after themselves. The main concern is if we were losing customers, which I think as local shopping unwinds and as people move from potentially foodservice back into supermarkets, I think we're well positioned overall.

Your next question comes from Bryan Raymond with JPMorgan.

My first one is just on the store network. I noticed you sort of net closed a store and only did 3 renewals in the quarter. I understand it's been a pretty crazy quarter with Omicron and that's the disruption side, et cetera. But just wanting to understand the priorities in terms of CapEx investment relative to online. You really made good progress in online. But are you keen to continue investing at similar run rate in the store network? And should we expect still pretty substantial net store growth and renewal activity in supermarkets going forward?

Yes. Thanks, Bryan. Yes, you summed up the quarter very well from a store development point of view. It was a tough one for everybody concerned. We've probably had a bit of a different strategy on store network to maybe some others in the industry. We have a pretty low tolerance for unproductive stores, and that's what you're seeing. And so when we set out the strategy a few years ago, we said that we wanted to win online, and that's what Ocado is about and all the rest of it. But we did say with an optimized store network. And what that meant was we know that if a store isn't productive today, in 5 years' time, it will definitely not be productive as sales shift online. And so in the last couple of quarters, it's been far easier to close a store than to open one, I have to say, given all of the things that are happening out there. But we will continue to close. And we don't have unprofitable stores as such, they're just not profitable. And therefore, we will continue to close stores where they're unproductive for us as an organization, and we will continue to open stores where we can see that we can drive sales density and make a reasonable profit. If I look at the quarter to go, I think we're expecting to open 4 new stores and close 3 in supermarkets. And I think in liquor, we're planning to open 16 new stores. And then in supers, we've got about 27 renewals to go. So I think that compares to about 2 in this quarter. So we're expecting a lot in the final quarter. And there's a bit of pent-up activity there, as you'd expect. So we're not calling out today any particular change in our store strategy. But I would note that we're not being precious about market share when it comes to keeping a store open for market share, so that just isn't happening. We're looking for good stores. I think we've said in the past that we expect stores to contribute in excess of 1% to net sales on average in the future. And I think that's where we're still at today. So a bit of an unusual year, but I think if you can compare us to most others, we have been net-net opening fewer stores, and we've been closing more unproductive stores despite the impact that might have on things like market share and so on.

Right. So just to follow up on that, though. So if you're still expecting a 1 percentage point contribution to sales growth from stores, over the course of the second half, you're not going to open any of that new space really. Previously, I think you guys spoke to 2% to 3% space growth through the cycle. Are you saying that's still -- as we stand today, still your stated target? Or you sort of moved away from that and under review?

Yes. It's not intended to be every quarter or every year. It's a sort of long-term average. And this year has been, as I've said, a bit different because we have had to defer projects, as everybody would know, particularly in Victoria and New South Wales where we had those extended closure periods. So there's a bit being shipped into next year, so to speak, but I expect to return to a bit more business as usual from next year. And you will recall that when we started the year, we anticipated we'd be close to or up to about 1 point for $1 billion of CapEx. And more recently, we said that would be in the range of 1% to 1.2%. So that's not unexpected, but it's not a change of strategy on new stores. I sit in our new store approval meeting every single week, and we've got a great pipeline of stores ahead of us as far as you can -- so anyway, so no change to store strategy. And obviously, this year has been a little bit unusual, Bryan, as you stated before.

Great. Okay. And I understand. Just my second question then is just around inflation trends in liquor actually. We have a lot of focus on supermarket inflation. Are you seeing similar trends there into -- I know it's an annual excise or some annual excise that comes through, and that's usually an opportunity to add some price through from suppliers and retailer. How are you seeing inflation trends there relative to, say, the 3% you're seeing in supermarkets?

Yes. Liquor is a bit different. Obviously, it's at an earlier stage of its transformation journey, as we talked about at the half year. But the focus of the team has been to come up with a winning format, which we think we've got in the B&W Liquorland. The focus has been reducing clutter and getting more focus on to product and particularly some of the exclusive and local lines. And it's been around lower prices for longer. And so the combination of those things, with a strong investment in online as well, has resulted in some pretty strong sales there relative to the market. So that strategy of lower prices for longer has resulted in a different outcome which is -- in supermarkets, which is we are seeing inflation beginning to come through. But in the quarter, it was -- versus last year, that is. In the quarter, it was pretty much flat.

Your next question comes from Lisa Deng with Goldman Sachs.

I've got 2 questions. The first one is around availability, still. So are we able to quantify a little bit about -- around how availability was impacted during the quarter, for example, stock-out rates or order fill rates pre-COVID or in a normal environment versus what happened during the quarter and what we're looking for over the next 1 or 2 quarters? Especially given increasing lockdowns in China, does that also have any impact on availability looking forward is question one. Question 2 is around e-commerce. So definitely very good growth out of e-commerce. But as the penetration starts to increase, can we please talk a little bit about the per order or the per basket economics and how that might impact versus in-store economics?

Thanks, Lisa. Matt will answer the first bit on can we offer any stats around availability. I don't think he'll offer too many stats around availability, but I'll see if I can get any for you. And then the e-commerce one, I'll answer when he's finished.

So on availability, Lisa, we entered into the quarter post Christmas with a fulfillment level from suppliers at about 80%, and that was the level of disruption from COVID, including international supply chain impacts at ports. So broadly 8 out of 10 products post Christmas as Omicron then hit and the disruption from floods and rail outages that fell to about 2/3. So we're getting then probably 6 or 7 out of every 10 cans that we're ordering. And that's been the challenge to solve for primarily, notwithstanding those are the things that we need to fix. Our gaps today are about 1/3 as high as they were at its peak in the quarter. And at its peak, it was at record levels understandably with the impact of the amount of disruption that we had. And today, we're probably running somewhere around double the rate where we would want to be, if not slightly higher, depending upon which state you look at. So there's more work to do. The international future impact is a good question and the impacts of COVID in China, particularly in the Port of Shanghai at the moment, there is a lot of congested containers, probably in the order of about 1 million containers stuck in that port, not just related to Coles, but obviously, economic worldwide, there will be an impact there. And I do think that we have to plan to tackle ongoing challenges through the supply chain through this quarter into next year because, clearly, there are still some major impacts globally around COVID but also potentially Ukraine and other factors.

Sorry, Matt, can I -- sorry, can I just understand if we were 80% before Christmas, as we entered Christmas, we were 67%, 2/3 during the quarter, and we're currently -- what are we currently?

So that -- what I'm referring to is the volumes that we're getting into our supply chain from the supplier base. We're about 80%. We're roughly running at about 2/3 now. That's the problem to solve.

Okay. We're still running at 2/3. Okay, got it.

Okay. Lisa, I hope -- you've got a bit more out of Matt than I expected though. So I hope that sort of answers your question.

Yes, a lot.

Okay. On the e-commerce thing, we're in danger of this turning into a quarterly profit call rather than a quarterly sales call. But one thing we've said in the past is that, as you drive volume into this business, then obviously, your cost per order does come down. So that's been pleasing from that perspective. So yes, that's volume is good when it comes to reducing cost per order.

Okay. So it's dilutive on a variable profit versus store margin, but it's increasingly less dilutive. Is that what I'm understanding?

I'm definitely not getting into in-store costs on a...

Got it. Got it.

Your next question comes from Grant Saligari with Credit Suisse.

Just maybe on the Express business because we haven't spoken about that yet. Can you comment at all on the sort of the cadence of volume through the quarter? Did it -- was volume at its worse during the COVID period? And how did it sort of track as we've been through the quarter?

Yes, it's always a bit difficult to talk about Express in the first quarter of the calendar year, Grant, because it's -- January is a seasonal low. And then as you get into Easter, things tail off a little bit as well. I think the bit that I'd probably look a little bit more at is what happened in the more normal period on the run up to Christmas. And I think it's been said before that we got up to about 65 in 1 or 2 weeks on the run up to Christmas. And we'd expect, without issuing a forecast, we don't see any real reason why we can't get back up there except for how elasticity impacts demand, which clearly it does once it gets to $2 and so on. It's obviously a bit below that at the moment. But I'd have to say that as things open up, we're pretty confident that fuel volumes will improve. And I think we've been doing a really good job on the marketing, as you may have seen, since -- well, over the last month or so in terms of supporting the government reductions and so on and so forth. So I'm pretty confident that performance will improve for the Coles Express business.

Okay. And just secondly, just very quickly back on the COVID costs incurred in the quarter. Is there any sort of -- can you give us some indication of what's driving the cost, whether it's blood testing, whether it was isolation? Because I would have thought they would come off materially given the change in the isolation rules across most states in the last couple of weeks.

Yes. So Grant, Charlie here. Look, in terms of the COVID cost, I think we indicated COVID cost for the quarter were about $65 million. And when we reported our half results, we sort of indicated that about $30 million was incurred in January. Certainly, the biggest cost in that $30 million was around right through the quarter and hence, February and March costs have sort of come down. And we would expect as things continue to ease and isolations come off, noting that in WA, they're still, as Matt indicated earlier, still running ahead of the Eastern Seaboard that, that would continue to moderate further.

Your next question comes from Ben Gilbert with Jarden.

Just question for me. Just on the availability piece, how did you see your NPS versus your peers? Because it sounds like your availability has probably been a little bit lower than your peers, particularly the independents.

Yes. Thanks, Ben. We'll give you a full update versus -- well, not versus our peers, but we'll give you a full update on NPS at the full year. Clearly, NPS has been impacted -- as far as we can tell NPS has been impacted for everybody in the industry by the availability because it doesn't just impact your availability metrics, it impacts almost all metrics really if availability is not what it is. But what we can see is that that's beginning -- whether it's telcos or NPS, it's beginning to sort of head in the right direction again. So I don't think it's anything terminal, so to speak. But it's obviously been disappointing that we haven't had all products in stock all of the time. And so I'm expecting that NPS number to be in a much better position come year-end.

And just a second one for me. You've touched a bit on -- a little bit talked about value shopping and you'd mentioned in the U.K. as well. If we look to the U.K., Tesco has done a great job with their club card prices, and you've shared data at this point, they've probably done better than most. How are you sort of -- with your advanced analytics and flybuys now, have you got the sophistication of capability to do more targeted offers, specific promotions to really start to leverage and drive that and get a higher return in promotions?

The short answer is yes. And what I'd say about flybuys is that it's become more important over the last few years. It's a key part of our future. The addition of Bunnings and Officeworks has been a success to the program. But as we've gone through COVID, it's been invaluable to us really because we can see who is shopping with us, what they buy, who isn't shopping with us. We can try and get them back with an offer. And it will be -- and it's been closely linked to the continuity programs, of course. So yes, it's a really important part of our mix, and it's getting more important every year. And between us and Wesfarmers, we continue to invest more money into flybuys to make it the preeminent data ecosystem in Australia.

So is there a step change coming there, do you think, in terms of ability to be more targeted? Because I just noticed you guys were launching spend in sales again, blanket spending in sales over the last sort of few weeks. I was just a bit surprised given I thought you'd be able to get more targeted around it now.

Yes. I think over time, you'll see -- Tesco does things a bit differently, as you say. I mean Tesco and Kroger, I think, and a few others are doing more member -- well, a, more member pricing but also some more tailored type activity. And I think that that's going to happen around the world, is promotional funds will become more targeted for everybody. So that suppliers and ourselves get a better return over time. But yes, I wouldn't say it's limitless, the opportunities with flybuys in the future, but it's an important part. It's going to be a more important part of our business going forward than it's ever been in the past.

Your next question comes from Phil Kimber with E&P Capital.

Steve, just a question around the liquor business actually. The last 3 quarters, that business has been very consistent in sales, around 2.5% to 3% and actually so is the ABS data. And that's notwithstanding all the issues that you've talked about on this call with lockdowns and Omicron and the like. I guess my question is, did you see a lot of volatility -- that's a quarter number that we can see. Is there a lot of volatility going on intra-quarter? And I guess where I'm going is, how should we think about this, you would expect a shift back towards on-premise, which would hurt the off-premise liquor business? But it doesn't seem to be happening at the moment.

Yes. Thanks, Phil. Good question. Volatility, yes, the quarter was volatile. And we probably didn't quite expect the sales to finish up exactly where they finished. And it was a different sales profile than expected. We had a very intense period for those first few weeks of January where it was probably double digit for a few weeks. We then sort of had a bit of tapering off at the end of January and into February as the hospitality sector opened. And then what we saw in Easter was what we described as solid, which you should read into is similar to the quarter as a whole, which doesn't mean the quarter as a whole was the same number every month, it definitely wasn't. And I think where we are at the moment is in a pretty good position as far as we can tell going forward. I mean there is a lingering level of COVID, as we all know, probably everyone knows someone who's got COVID at the moment. Obviously, the easing restrictions will help. But people should be aware that there is a part of the community out there who are still paranoid about COVID. And that isn't going to change very quickly. You can't have a campaign that says COVID is bad for 2 years and then say it's all right, and everyone is going to be all right with that. Most people are, but there's still a part of the community that are very vulnerable and very concerned about COVID. But I think what we'll see is these competing trends in the future, which is return to work, which will be breakfast and lunches and then offset by that elasticity of demand of people being able to afford to eat out or grab a coffee if the food bill is more important. So it's a difficult one to predict, but I think we've got some tailwinds still to come from improving availability through the rest of -- I'm not just talking about this quarter but improving availability throughout the course of the year and then a further unwind of local shopping, which still exists.

Yes. That's great. And then maybe just a quick housekeeping one. I know your quarter finished on the 27th of March, and so Easter falls in both -- in fourth quarter, this year and last year, for your particular calendar. But sometimes promotional calendar sounds a bit -- I noticed you didn't call out anything, so should we assume there really just wasn't -- not a material impact from a slightly later this year than last year on your third quarter results?

Yes. It was a little bit muffled at the end there, Phil. But I think I heard it as is there any impact on our results from the change in timing of Easter? Is that -- was that the question?

Yes. But I know your results -- Easter's fourth quarter, both years. It's just that it was at the start of the fourth quarter last year, and I wasn't sure if you've got some slight changes to promotional calendars and the like that might have impacted it.

Yes, Phil, given the sort of timing you're right, it was a little earlier. But in terms of any material, it wasn't material in terms of any other changes or impacts. So Easter's Q4 in both quarters and not any material change.

Your next question comes from Craig Woolford with MST Marquee.

Steven and Team, I just -- on this availability issue, maybe it's directed to Matt, just I guess the main question is why is availability still such a challenge in your view? And do you have a crystal ball as to when it might improve?

Craig, it's a good question. And I think it's just worth touching on the quarter's impacts just to set the scene for why we are where we are today. I mean we're all across the impacts of COVID and the disruption on workforces, the Omicron, the absenteeism through the quarter for not just COVID supply chain but also for manufacturers and distributors at times is between 40% and 50%. So the lack of transport capacity isn't just around assets but also drivers to shortfall, certainly in that part of logistics. And then you've got the shortage of pallets and the amount of effort that is taken to make sure that we were both having the right amount of pallets for our own internal supply chain but also for suppliers. So it's very much been a team approach with our suppliers facing similar challenges. And that, in itself, would be hard enough, to have almost 200 kilometers of track washed away just outside of Adelaide to essentially cut off Western Australia more than we've ever seen and require us to go to chipping freight to additional road capacity at almost 2,000 kilometers ago, and also to have the challenges with the road cut off up into the Northern Territory, that was then on top of COVID. And then Queensland and New South Wales flooded. And I can't ever recall a period where the disruption was that extensive. And that was off the back of a good solid Christmas trade where supply chains were already under pressure. And it's really been a compounding effect of all of the above. And that takes time to unwind in not just our supply chain but in the suppliers and also in the market more broadly. We are very, very focused upon fixing it. We're also focused on supporting the team. It's been a long road over a couple of years of facing these challenges, and we're focused upon making sure that our customers get the products that they want. But it does take time to unpick a level of disruption that is so enormous and get everything back to where it needs to be. It's not just a Coles issue. It's a wider industry problem that not even just food retailing is facing but industries outside of ours are.

Yes. Understood. Yes, absolutely been unprecedented, which I know that word has been overused, but yes, certainly.

The part that I would add, Craig, is that the teams that work and it's not just the Coles team, it's our third-party providers, Linfox and Toll and the carriers that work as subcontractors through there. The effort that goes in is incredible. And the continued focus on serving the community and customers we should really reflect and kind of congratulate them on the effort that they put in. I was in Queensland yesterday with team members, who've worked in stores that were flooded, and they are selflessly and really, really are together to service those communities with food through some incredibly difficult times. The stories are amazing. We've just got to keep the focus on supporting them while we recover the wider supply chain.

Yes, absolutely. Yes, and fingers crossed, things get back to normal soon, whatever normal is. My second question, just to follow up on that net space growth addition. It's more of a probably a technical question as much as anything. The growth in square meters is 1.1% for 3Q '22 compared with the third quarter from last year. But the net sales contribution from space is only 0.3%, if I just do the difference between total sales and comparable store sales. That just surprises me that the conversion rate of space to sales is so small. Maybe there's something else technically in your comps calculation that I need to be aware of, but any clarity you can provide on that disconnect between square meters and the sales from new space would be interesting.

Let us get back to you on that one, Craig, with the full answer. There's things that -- when it comes to meterage and things, we just need to be careful about quarters versus years versus MATs. And then in some of our figures, comp -- things are included in comp sales or not and so on. So we'll just make sure we've got the right breakdown for you. We'll get back to you.

Your next question comes from Richard Barwick with CLSA.

Steve and team, another question on product availability. I just wanted to clarify, obviously, you talked about meat as being one of the most impacted. But within packaged grocery, was there any difference in availability between your private label offering and branded products? So is there anything to call out there?

Yes. It's -- again, it's a good question. I mean what we found at times were certain categories were out. And if they were strong own brand categories and they were out. I wouldn't say that there was any difference between whether somebody had a Coles name on it or it didn't. It just so happens that in a lot of categories that were impacted, they happen to be skewed towards more own brand type product. Things like milk, for example, has been up and down. Meat has been up and down. A lot of dairy -- a lot of the rest of the sort of chiller cabinet has been up and down. Some of the frozen veg type things, toilet rolls, which, again, there's some very strong private label product in there, that's been variable. So I think it's more to do with category type things rather than whether it's own brand or proprietary.

Okay. Understood. And then the second question is just picking up what you talked about in the commentary around the bit of a return to shopping local during the quarter, I guess there's 2 sort of elements to this question. Has that unwound already the shopping local? Has it reversed to where you'd expect it to be now? And previously, you have called out sort of a bit of a order of magnitude across your comps by store type, so your neighborhood shopping centers and city center stores. I'm just wondering if you could give us a sense of that across the quarter just done.

Yes. So no, local shopping hasn't unwound. There's still a bit to go. We are -- when we talked about local shopping, what we were talking about is if you look at the neighborhood store contribution that we had getting into Christmas versus what it was going into Easter, it was greater for the Easter quarter. If you look at things year-on-year, then what we're seeing is that shopping centers are improving ahead of average, and we're seeing other types of metro-type stores beginning to improve as well, but they're still not where they were pre-COVID relative to the neighborhood stores. And then, of course, what we've also had in the quarter that was, I know Easter probably a bit more of a holiday effect than we've had in other years. I think more people have had more holidays this year -- this calendar year than probably the previous 2 years combined. And even over Easter in the last couple of weeks, our resort stores were up an extraordinary amount versus the rest. So that doesn't naturally favor Coles, as you know, given our store breakdown in terms of metro versus rural or resorts. But it gives you an idea that those first 3 or 4 months of the year are not typical of the rest of the year than what we saw last year. And we've had a prolonged summer in Melbourne. I'm touching wood here because it's, in 20 years, it's the best in the -- I've experienced. But what we did see last year Easter was the weather was a bit different in Victoria. And we did notice that people got back into -- once the kids return to school and so on, people got back into shopping centers as winter came on and all the rest. And obviously, we're getting some clear directions of back to work more broadly for the city centers as well. So there's still a bit to unwind, but we expect it will do so throughout the rest of the calendar year.

There are no further questions at this time. I'll now hand back to Mr. Cain for closing remarks.

Okay. Thank you, and thanks for all your questions this morning, everybody. If I was to leave you with a few key messages, it would be that we are focused on both helping our suppliers in these difficult circumstances, but we're also very focused on delivering trusted value for our customer base. And as you've heard from Matt, we're very focused on improving availability throughout the rest of the year. So with that, I might bid you farewell until our full year results and wish you and your families all the best for Mother's Day. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.