Thank you for standing by, and welcome to the Coles Group Limited Q1 sales announcement. All participants are in a listen-only mode. There will be some opening remarks followed by a Q&A session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Steven Cain, CEO. Please go ahead.
Okay. Thank you, and good morning, everyone, and welcome to our first quarter results from a very damp Melbourne. I'd like to remind everybody that this is a sales call and not a profit update, which will obviously happen, well, hopefully like normal, in February to cover the half year. We also recognize, though, that there are and continue to be a number of moving parts, so anything we can do to help, we will. Joining me on the call this morning is Charlie Elias, our Chief Financial Officer, who many of you know, and a number of our executive leadership team chiefs. We've got Matt Swindells from Operations and Sustainability, Ben Hassing from E-commerce, and Darren Blackhurst from Liquor.
Unfortunately, Leah Weckert from Coles Express can't be with us today. She's feeling unwell, and we hope she gets better soon. You'll have to put up with me on any merch type questions. Before I start, I wish to acknowledge the traditional custodians of this land on which we meet today, the Wurundjeri peoples of the Kulin Nation. We acknowledge their strength and resilience and pay our respects to their elders, both past, present, and emerging. Just a quick focus on the results and then a bit on outlook, and we'll open up.
We were pleased with the quarter results and the trajectory within the quarter. Group sales hit AUD 9.9 billion, and comp sales grew 1.8% despite cycling the COVID-19 lockdowns that many of us will remember with a bit of scar tissue in New South Wales, Victoria, and the ACT. We also note that, perhaps surprisingly, the hospitality sector just continues, certainly on the data that's available, to go from strength to strength and I think hit 30% of total food expenditure, which is up from about 26 or 27 pre-COVID. Still a lot of eating out going on in the marketplace, although happy to update on some further research we've done recently.
On a three-year basis, pre-COVID, if we'd gone back to those times and sort of said, "What about the next three years?" If we said, 14% in supermarkets, 15% in liquor, and 7.5% in express, I think we'd have taken it quite quickly and been pleased that that has, you know, remained stable, despite everything that's gone on. In supermarkets, as I've alluded to, we saw a strengthening of sales trajectory, in the quarter, and beyond, driven by improved availability, particularly in produce. Obviously, that's on watch given what's happening with rain on the East Coast. We did see significant improvements in produce availability and in many cases, some better pricing.
We've had our new value campaigns of Dropped & Locked, and we're seeing the unwind of local shopping as consumer behaviors normalize, and happy to talk about that further as well. Our e-commerce business continues to grow penetration with supermarkets up to 7.6% from 7.4% in the prior quarter, and a three-year growth of 105%. On the liquor side, up to 6% from 5.5% in the prior quarter, a three-year growth of 348%. We remain committed to delivering trusted value. As we talked about last time at the full year results, we think about all stakeholders when we make decisions. Obviously shareholders are front of mind, but so are customers, suppliers, our team, and the communities that we serve.
We know that there are many customers out there today doing it tough. Equally, we know that there are many customers out there who are looking for innovation around sustainability, health, and convenience, and it is about getting the mix right. I'm pleased to say we've had a positive response to what we've been doing and, albeit that inflation continues to increase to around 7%, that's still well below the national average of 9%, and we'll continue to try and keep prices down as best we can. With regards to sales outlook, As I've mentioned, in the first four weeks of P4 , we've seen, you know, continuing strengthening of sales volumes and transactions.
As I've said, we're seeing some good traction on the 1,000 prices locked and 500 prices that we've been dropping through the quarter, which are very much aimed at the center of the shopping basket, not the peripherals. Cost price inflation is expected to increase, given the ongoing level of supplier increases that we're seeing, as well as whatever impacts we might see from the flooding events and particularly around farm produce type products. We're not immune to inflationary pressures in our own business. you know, we're seeing that in logistics, fuel costs, salary and wages and construction costs on projects as well. certainly something to bear in mind.
We continue to make increased investments in technology and digital and data, both in Coles and at flybuys. As a result of that, plus the right of use lease assets, we expect depreciation to be AUD 1.7 billion or around AUD 1.7 billion for the full year. I'd like to acknowledge the work of our team, our suppliers, our community partners. This is the new normal, I think. Well, post-COVID, hopefully post-COVID. We are entering perhaps, you know, a bit of a changing time now where we just have to accept that there's always gonna be some sort of disruption out there.
The great news is we've built some muscle during the last few years, and I think we're far more resilient and agile organization now than we were three years ago. We've got teams helping on the ground in Northern Victoria and everywhere else where there is floods. Again, our thoughts are with those communities, and indeed with our team members who lost or had their homes damaged. So despite all of those things that are going on, we're pretty optimistic about Christmas. We've got our best range ever, particularly around easy entertaining and gifting. As you'll have seen in the more detailed commentary, we've launched meal kits, which we think is an opportunity for the future. If you'd quite like a curry or a steak, it's at great value, then I'm sure you'd quite like one of ours. With that, I might hand over to Q&A. Thank you.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Shaun Cousins with UBS. Please go ahead.
Thanks. Good morning, Steve and team. Just in terms of your outlook, you've mentioned quite a lot about costs, Steven. I'm conscious it's a sales release, but you've decided to mention more about costs. Is this reiteration of the cost comments that you highlighted in August and then now sort of indicating that D&A is going to be above market? Does that indicate that you don't believe you can expand EBIT margins this period, or are you confident that, you know, higher dollar gross profits can actually see that come through? I'm just responding to what you've put in your release, particularly around costs.
Okay. I'm gonna hand over to Charlie in a second, but good morning, Shaun, and I'll just start with saying that you should know me better by now than to know you're gonna get an EBIT forecast out of me at a sales call. It's pretty difficult in a profit call, never mind a sales call. I don't think we'll be going down the what's the EBIT margin for the year or whatever. I think Charlie's quite keen to talk to his slide 32, though, and just update everybody on what's happening there. Charlie.
No, thanks, Steven. Shaun, I'll more than gladly give you an EBIT number in February. Look, in terms of cost, we're not calling out anything more than what we called out at the full year results in August. In fact, you know, subject to a few things, it's pretty much playing out as we would have expected. There's some things it's worth highlighting. Firstly, yeah, in terms of the gross profit line, effectively, you know, we talked a little bit at the full year that we continue to do really well with better buying and range reviews and category plan optimizations. Those benefits continue into the quarter and we continue to focus on those.
As Steven mentioned in his call, though, we are getting obviously logistics costs are up both in disrupted global and local supply chains, but also, as we've worked through availability challenges, things like waste and markdowns and the like. We're doing a great job on Smarter Selling and delivering against our billion-dollar promise that we talked about. That continues really well. We continue to manage the rising food inflation, balancing the three major stakeholders here of our consumers and customers, our shareholders, and obviously our suppliers, our supply partners.
We're not calling out anything more than what we called out at the full year, Shaun. In relation to depreciation, I think it's just reminding. We, if you recall from our strategy day back in 2021, we actually called out depreciation in a range of 1.67-1.72. What we're trying to do here is give a broader guidance in terms of where depreciation is likely to land for this year, given timing and phasing of various capital initiatives that we've updated on.
Right. Maybe I'm gonna have to ask a second question just around supply. That seems to be the key sort of challenge for suppliers, just getting supply in market. Where are you seeing, I guess, your in-stock position or case fill rates now relative to pre-COVID? How is Coles ensuring that it is going to get its fair share of product as supply position improves in the industry, please?
Thanks, Shaun. I might answer this and then hand over to Matt. I think overall versus pre-COVID, we're still not at those levels of disruption from suppliers or those levels of availability in store, but we've certainly made significant progress in the last quarter right across the country, including in WA, which was the most impacted spot. We've seen sales volumes respond and customer metrics respond on the back of that. Clearly, it's a watching brief as to what goes on at the moment with the flooding that we're seeing. Most of the issues at the moment are related to access, which is people getting in and out of farms, in and out of factories, on and off trains, all those type of things.
I think we've got two or three railway lines down, which Matt can talk to, and so on. Most of it's a timing thing rather than a wipe-out thing. There might be one or two things that are wiped out, but it's not, you know, it's not anything that's catastrophic and certainly not yet as big as what we saw back in Queensland and New South Wales, earlier in the year. The watching brief is probably around things like berries and stone fruits. It's not quite clear yet. Obviously, it's disappointing for farmers because it looked like we were gonna have a bumper crop of most things this year, particularly in Victoria. It's not quite clear how much water all the trees and everything else will take up and therefore what the quality of the fruit will be.
There's certainly, you know, from the northern regions, you know, some a lot of good news around as well. Overall, what we were seeing was in vegetables, we're beginning to see prices, you know, coming down week by week. If you look at some products like well asparagus, we've been selling that for, you know, AUD 1 each and there's gonna be probably more mangoes than we've seen for a long time. There's some good news on the horizon as well as some watching briefs. Matt, do you just wanna talk about what else we're doing to improve supply through to Christmas?
Yeah, I think the only thing I would add is I think the ongoing focus from the teams remains high, so there's certainly a lot of effort managing the day-to-day operations. The fragility in the supply chain post-COVID is still there, even though our gaps have come down and we are improving. I think the recent floods have demonstrated that. The positive is that the impacts are shorter term. We had the rail line go at Tarcoola in South Australia through the recent floods last week.
That's the same point where 200 km of track was knocked out for multiple weeks earlier in the year. Instead of this being multiple weeks, it's been a 24-48-hour blip, and the teams are able to recover that. There is a high degree of focus on continuing to rebuild availability. It is having the required effect, but the fragility is definitely still there within the supply chain, and we need to be continuing that focus right the way through peak.
Thank you very much. Oh, sorry. Just your final point, Shaun, of how do we know we're getting our fair share? That's.
How do we know? We check.
That's what we spend 95% of our meetings talking about. Obviously we, you know, constantly monitor who's got what, where, and, you know, obviously there's a lot of lines that we stock uniquely as well in terms of own brand, but we try to sort of triangulate a number of data points in that department.
A large number on a very regular basis.
Fantastic. Thank you very much. All that's great.
Thank you. Your next question comes from Michael Simotas with Jefferies. Please go ahead.
Morning, team. Steven, you spoke about some normalization or continued normalization in local shopping trends. You've seen quite good improvement in your three-year growth rates in this quarter, and your outlook suggests that momentum is continuing. How do you think you're performing relative to the broader market? Because the data was suggesting that Coles was lagging the broader market for some time. Do you think during this quarter you've managed to close the gap somewhat?
Yeah. Well, I'd say a couple of things. One is, we have spent the last two years talking about the concept of local shopping and that local shopping was two things. One was what it suggests, which is, people not traveling further afield or people having made a lifestyle decision to move to the coast or whatever. The second was leading cause local shopping by the fact that you couldn't get everything you needed in one place. Both of those things are, you know, changing. We're seeing people move back to the cities. We're seeing people get back to the offices a bit more. As I've said all along, you know, local shopping will unwind. It's only a case of to what degree, and we're certainly seeing shopping centers improve.
CBDs are improving. Probably Melbourne is the one that still needs to improve more. We've, you know, we've only got four stores in the city center there, so it's not, you know, it's not material from our point of view, but certainly that sort of shopping center versus neighborhood mix is improving back. Sundays are busier than ever. All the things that we look at that sort of talk to local shopping suggest that it's beginning to reverse, and that's what we expected. Obviously, we try and accelerate that as much as we can, and that's what we're doing with things like the value campaigns and flybuys.
Flybuys is becoming ever more popular. The redemptions year on year for the full year were up 28% in flybuys, which is, you know, a huge increase, and it just shows that a community of customers out there are really looking at better value. Whether it's f lybuys, the value campaign, improving availability, those are all playing into our favor, as well as those changes of, you know, people getting back to work in the cities. As migration improves now, which obviously the government is focusing on both new migration plus reducing the one million people queue, that will help Coles as well, because most of those people will end up in the metropolitan areas that we serve disproportionately.
I'm pretty comfortable that what we've said for the last two years is playing out and that local shopping is unwinding. The other thing that some people focus on and some people don't is new space is important in the supermarket industry. For the last few periods of time, we've been closing as many stores as we've been opening. Going forward, we've said we'll be opening, you know, net new space of, you know, 1%-1.5% per annum, and that's what's in the pipeline. This year we'll open around about 10 net new stores, which again adds to sales and adds to market share.
When you add up the two things of local shopping unwinding and net new space, I'd expect that you know we'll see an improvement in our market share. Well, that we are currently seeing an improvement in our market share as we expect, and that will be ongoing.
Okay. That's helpful. The second question from me is, in August, we spoke a little bit about some changing shopping behavior around the edges. Have you seen that intensify over the last few months as at least on paper, consumers look like they're under more pressure? Is there more trading down activity? Are you seeing any change in basket sizes, et cetera?
Yeah, as I say, we've mostly seen things that benefit us. You know, I've read a lot about what might be happening. But the reality is a little bit different. You know, the fact is we're selling more, transactions are significantly increased. What we're seeing is the benefit of our, you know, range. I think I've been, again, talking about our widest range of own brand in Australia for a few years now. That was designed for a number of reasons, one of which is we wanna be trusted value, and trusted value is, you know, low prices or consistent prices every day. We're seeing that, you know, in those areas of pantry, frozen, and so on, it's growing popularity.
These things aren't just stats, they're actually real, which is we have the widest range by far of anybody in Australia of own brand products. That's not just at the entry price point, it's at, you know, all price points. That will be a key strength of Coles over the coming years. What we've seen in Q1 versus Q4 is as we look through the various demographics of low to mid to high demographics, there's some very different dynamics going on. I'll start with the mid demographics. We've seen them buying more units and their sales going up. You know, they're in the sort of middle sweet spot, so to speak.
If we look to the lower demographics, what we've seen is units and sales going down, and those are the ones that are most impacted by all of the cost of living increases that we've seen to date. I'll come back to them in a second. Then at the higher level, what we've seen is upper demographic people spending more with us, but volume down a little bit. That, we think, is mainly down to hospitality reasons. We interviewed 8,000 people last week just to get a read on what's going on in their lives currently and how they're thinking about cost of living increases.
What was interesting is 20% said that, you know, they were under extreme pressure, and, you know, 60% said they were concerned about cost of living increases, but 75% of them said they were actively managing their waste, their food waste. That, you know, is skewed towards the lower demographics. What we're seeing is in those areas, we're seeing lower demographics buying less produce, meat, and buying, you know, obviously more canned and frozen foods. What people are doing is planning, as you'd expect, planning their weekly meals much better. The combination of shopping more frequently means you waste less, but they're also making sure that they're doing soups, that they're, you know, catering in bulk, so to speak.
I think in the whole scheme of things, some fairly significant changes going on, but it is different by demographic. Obviously, our job, as I've said all along, is to cater for everybody, which is we have to be great value at the entry price points, which we think we are. Obviously we have to innovate at the other end in health, sustainability and convenience, which again, we're doing. We're trying to keep an eye on everybody. It is moving certainly in supermarkets, less so in liquor. That's been more steady. Yeah, there's some significant changes happening in food. This sort of war on waste will definitely be impacting volumes in the industry because we're up against the year last year, where people were shopping less often.
The basket sizes were significant, and obviously, the waste associated with that would have been more significant as well. That's sort of being cut back on, and that will sort of be something that probably takes, you know, a year to annualize in the system. But despite all of that, our volumes are increasing, which is good news. When I say increasing the trajectory is increasing rather than necessarily year-on-year. Yeah.
Yeah. Thank you.
Thank you. Your next question comes from Adrian Lemme with Citi. Please go ahead.
Hi. Good morning, Steven and Charlie. I just wanted to focus on the price locked products. You talked about obviously there's ongoing inflation. We know commodity costs are rising. My question is twofold. Firstly, are you losing money on some of these price locked products where the costs are rising? Then secondly, do you think it's encouraging a permanent switch to private label in the more commodity categories where the quality difference between branded and private label is fairly minimal, and it is therefore, you know, reducing the long-term value of some of these categories? Thanks.
Okay. Thanks, Adrian. I don't think we're gonna get into pricing by product or profit by product today. I think the key thing to note here is what Charlie said, which is, you know, we're trying to manage the basket and the gross profit overall through a number of various strategic programs, whether that's sourcing or whether it's Smarter Selling, and so on. For us, it's about balancing the mix and trying to keep everything moving along. Clearly, it's not in anyone's, or certainly not in our interests, to sell products at a loss. That's not our, you know, certainly not our strategy.
The most important thing is that we are, you know, remain competitive across a basket of items and that at the entry price points in particular. I think you said price labeling, which to me means something a little bit different. Then you talked about whether it's going to.
Oh, sorry.
I think deflate again.
It was private label. I was just wondering if people are gonna be encouraged to take up the private label and because, you know, there's not much perhaps not that much product quality difference between a branded oil and a private label, if therefore, you know, there's a permanent switch by some customers, and it sort of reduces the long-term value of some categories. That was my question. Thanks.
Yeah. Well, it's fair to say that some, you know. We do regular reviews of categories, but we do quarterly, well, sorry, half yearly reviews of DPP, which is the product profitability in our stores. We think about what, you know, what are the consequences of that. It's fair to say that some categories have been reducing in value for a long period of time now, and some have been increasing in value. Part of the challenge is how do you manage your space accordingly as categories grow and shrink, and that's what, you know, the store change program, various short store change programs are about. Then it's all about managing range by store.
At the moment, you know, we've moved from having a very flat range and pricing profile four years ago to having a clustered approach to ranging today. It's tailored ranging, but it's in clusters, and it applies to some categories, not others. Whereas over the next few years it'll be a tailored range by store. That'll not only be the range is tailored, but the facings are tailored as well. You get better availability by store, but also you're better meeting the consumer needs of those stores as well. There will always be some categories that are doing better than others. If a category deflates, then, you know, you have a look at the category and see if there's anything you do.
The more focus should go on what are the growing categories and how do you get an, you know, an unfair share of, the growth categories, as some categories decline and deflate. In those deflationary categories where it becomes commoditized, if that happens, it's because they are commodities and people don't see the difference. That's what's happened in Australia over the last 20 years. The great thing about what's happened in Australia over the last 20 years is there were a lot of commodities around 20 years ago, and a lot of the FMCG companies and ourselves have spent a huge amount of time working on innovation so that you get the average selling price per product up. Because if you don't improve sustainability, quality, convenience, health, then the, you know, the average selling price doesn't necessarily increase.
If you wanna get sales up and profits up in the long term, you have to innovate, because there's always something going down or there's always a disruptor trying to eat your lunch or whatever else. As all these things happen, you have to think about what you're going to do to manage the basket and grow the business.
Thanks very much, Steven.
Thanks.
Thank you. Your next question comes from Bryan Raymond with JPMorgan. Please go ahead.
Morning. Just following on the Dropped & Locked program. Just wanting to understand how much of that is incremental programs that you may have had prior to that. Is Coles putting in any funding of this relative to suppliers? Just be interested in that rough mix if possible.
Hi, Bryan. It was cutting in a little bit out, in and out there. Would you just mind saying that again?
Apologies. I'll try again. The Dropped & Locked program, how much of that program is actually incremental to what you've already had in from an ADLP program effective prior to that? Is there much incrementality? Is there much funding by Coles in that program as well relative to suppliers?
Yeah. There's incrementality to the Dropped & Locked. There was about 1,000 prices locked and about 500 dropped during the quarter. As we've mentioned before, every year, we allocate a value budget that Coles will endeavor to deploy. Obviously, you try and deploy that with your own initiatives that you've got stock and marketing against. Otherwise, it tends to get whittled away during the course of the year, and that's what we've tried to do this year. You know, obviously, we work with suppliers as well because, you know, a lot of them are interested in driving volume and being in the baskets as well. It's always a combination of factors.
Certainly when we look at the external benchmarks versus our competition or versus the broader CPI index for food, which I think was the last 9%. I think we're expecting something else today or shortly. The last Australia-wide CPI for food, I think, was 9%.
9.3, yeah.
Yeah, we're at 7%. We are trying to, you know, manage inflation. We're very proud of the fact that we are. We don't see our job as, you know, just waving things through. I've said that before. You know, we wanna be trusted by all of those communities that we serve. Some want high quality, fresh seafood, and others want, you know, reliable entry price points. We've got to serve everybody well to grow the business.
Bryan, just to build on that. I think, you know, again, I know this is obviously not an earnings call or a profit call. Yeah, the various initiatives, as I mentioned earlier, in an earlier response to official initiatives that have been successful for Coles in delivering improvements in the gross profit and gross margin continue into this quarter as well. The campaigns around how we better buying, working with our suppliers, our range reviews and category plan optimization, those things, those initiatives have continued into this quarter and will continue going forward. Again, I think just to leverage off of Steven's comment there into. Yeah, in addition to obviously the investments that we have made in value.
Okay. Great. Thanks for that. Just to follow up on that Dropped & Locked. Is it? It says until the end of January on most of the products I've seen. Is that across the board, and do you envision it being sort of a short-term initiative or something that will then get rolled into a broader longer-term program once you've reached that milestone period?
Bryan, I don't think we're legally allowed to flag what our price intentions are. I'm certainly not. I'm not, I'm certainly not gonna do an inference to the whole world. You know, we'll see how it goes. We'll see how people respond. Obviously, we've constantly got to think about what's the new news and how are we gonna inspire customers and you know get them into our stores. But you're right, it is to the end of January.
I think the other thing that we've said before, and probably say again, is that we do think, we do expect currently, you know, absent any further major weather events, we do expect inflation to start moderating in the new year as we start cycling last year. The only thing I'd say is that the rate of supplier price requests is fairly constant, but it's against a backdrop of there's a lot in the system that have been executed, so that will eventually annualize.
Right. That was actually my second question, just around the peak in inflation. I have been hearing about quite a few lining up for the new year once you get through Christmas, for another round. Is that in your expectations, or do you think that we should be seeing a moderation in that pace of price rises coming from suppliers?
Yeah. I think the danger of not talking to everyone and talking to a few is, you know, exactly that. Even an average is an average. As I've said before, you know, with vegetables coming down to similar sorts of levels of price as last year, you know, eventually meat will moderate. For those, you know, relying on energy-based products or overseas, that's likely to be different to what's going on in Australia. Absent this current wave of weather, we were expecting bumper crops, but, you know, you can still get an asparagus for AUD 1. The mango season is gonna be one of the best ever. There are continuing headwinds around things like wheat, which is still elevated and so on.
It's different by supplier and by category. I'm sure there are suppliers who will be coming back for another increase, then we'll look closely at, you know, what and why and how we can help. I personally don't see this lasting forever. It will moderate, and I suspect it's gonna be early in the new year.
Yeah. I think the inflation levels are stable as I was saying, we'd expect that. Although not forgetting that some of the inflation in this quarter and this half is really driven by fresh produce availability and the floods that occurred clearly earlier in the year. I mean, that's certainly been an impact on the growth and/or the changes in inflation between, say, last quarter and this quarter. Yeah, again, absent any sort of other disaster type events or floods of that magnitude, you'd expect that to moderate as well.
Okay. Thank you.
Thank you.
Thank you. Your next question comes from David Errington with Bank of America. Please go ahead.
Morning, Steve. Morning, Charlie. Steve, following on from questions on supply chain, we were talking a fair bit about the short-term challenges that you're coming through. May I ask Matt to maybe give a bit of an elaboration on what his view is, where we've come through a very heavily disrupted period in supply chain, where probably the one thing that didn't disappoint me, but probably I didn't see coming as much as I should have, is that the cost of moving cartons during COVID was very high, you know, through all sorts of disruptions, whether it be absenteeism and whatnot. Can I ask Matt on a sort of like going forward, we're not talking short-term here, I'm talking about the next two, three years.
What his view would be as to whether there's been any structural changes in the ability to move cartons from suppliers into your stores, and whether there's likely to be, you know, enhanced impediments or whether now that, you know, we're hopefully through the worst of COVID, things can get back to a more normalized level, and that we can get back to operating efficiencies that are more predictable and probably where they were before COVID. Can I ask him, Matt, as to whether what his views are? Cause what's concerning me is maybe some of these impediments that we're seeing may be a bit longer term than what some of us as analysts have got factored into our numbers. Would he be able to give us a bit of an update on that?
Sure. Thank you, David. It's certainly been the most accelerated period of learning for all supply chains. When I talk about supply chain here, it's the same for our supply partners, both in fresh and ambient. We've all had to work together to overcome the obstacles through COVID. I think certainly a number of those challenges continue, and as I said earlier, the supply chains are still fragile, albeit they're definitely improving. The depth of collaboration is better, the resilience has absolutely improved, and we are seeing a steady progress to improved availability and more stability and predictability in the supply chain. I don't see a structural change coming out of this to the medium and long term that would be a negative.
I think importantly for us, what's been really encouraging is the ongoing progress of our automation strategy with WITRON. The fact that our supply partners, WITRON, have been able to work through COVID with our own teams and maintain some fantastic progress towards automating ambient in Queensland and also in New South Wales. There's no reason why we would suspect that's not going to be still the right decision, still a great success, still a material safety, availability, and efficiency improvement within our business when it goes live. My summary would be, we've learned a lot through COVID. We are more resilient, we can react quicker, we're more collaborative with our supply partners, and I hope that continues, and I suspect it will. I don't see any medium to longer term structural problems within the supply chain of the business.
Can I just?
Sorry.
Sorry.
Sorry, David. I was just gonna add a couple of things. We're moving from this era of, you know, COVID disruption, and prior to COVID, we had the bushfires, and now we've got the floods. We're very alert as a business to the fact that climate is changing. We're doing a lot of work around how do we secure supply better to manage our way through these various things that will happen and continue to happen over the next 10 years. Now, clearly, there's a job we've got to do there with our suppliers, and then there's a job obviously that the government's got to do around infrastructure and all of the other things, just to sort of make that a bit more resilient as well.
By infrastructure, I'm talking about things like railways and roads and all of that type of stuff. There's a climate scenario playing out here, which is becoming more constant and something that we're just gonna have to look supply chain by supply chain about where we're at. There's then a global fragility that's there. The great news about Australia, I can't think of too many other countries that are in a better position than Australia. Clearly, there's issues like packaging from time to time and all those type of stuff, but we are highly self-dependent as a country for what we do, and that puts Australia in a very unique place.
You know, when you look about what's happening in the U.K. and the U.S. right now around inflation and energy and all the rest and outlook for supermarkets, it's a very different outlook to the one that we face here. Yes, there's things to think about and things to act upon, but Australian the Australian food industry is in a relatively advantaged position to continue to you know to grow.
Following up, it's a follow-up, but this is the last question. The depreciation step-up, I mean, it's a fair step-up. It's about AUD 130 million this year. Two prongs to it. First prong, is this a one-off step up, or is it likely to continue to rise going forward? I suppose this is just a cost of the capitalization that you're putting in. Then following all of this in, I mean, at the end of the day, it's all about moving cost per carton. Matt basically said, we can get back to normality. There's nothing structural, so we should start seeing efficiencies coming from WITRON and Ocado, et cetera.
Can we expect to see the cost per carton being lower in, say, three years' time than what it was three years ago to offset these big hits in depreciation? Or is it just a normal part that cost is just gonna keep rising?
Well, thanks, David. Look, let me just take that last question. Let me remind you the benefits of WITRON. Remember, the benefits of WITRON is we're working from, it's five DCs into two. They're warehouses of half the footprint, twice the volume, and 2/3s of the operating costs, right? I mean, that's the real sort of high level. I'm not gonna give a forecast in terms of numbers. That's the high level of benefit that we could expect to see through.
Look, in relation to the depreciation and amortization, this shouldn't be anything new. We flagged this, again, saying at our strategy day about 18 months ago. Clearly, CapEx has stepped up over the last few years, has been at that level of around AUD 1.2 last year. We gave guidance that this year will be in that AUD 1.2-AUD 1.4 range. Obviously, now I'm not here to give a forward CapEx guidance, but there is an element in terms of how depreciation and amortization is phased through the right-of-use assets and through our capital spends and also reflecting the timing of Ocado and WITRON and the like.
That really all it is, David, is just really updating that. It's where we were and what we guided almost 18 months ago, which is 1.67-1.72, and just really ensuring that we're out there with what we believe is approximately where we'll land. I'm not gonna forecast whether there's a step up or not. That really does depend on CapEx profiles going forward.
Okay. Well, thank you. Thank you for your answer. I appreciate it.
Thank you. Your next question comes from Lisa Deng with Goldman Sachs. Please go ahead.
Oh. Hi, guys. Just a question, following up on Witron. When we sort of start commissioning it and it comes online, can we talk about the step-up profile in utilization across, for example, you know, year one, year two, year three, or to full maturity? That's question one. Then second part of that first question is that 2/3s of operating costs inclusive of potential step-up in depreciation?
Yeah. Lisa, just and without being, I don't wanna be sort of rude, we are in a sales call and, we'll give a sales update. Look, we are very mindful of assisting the market through understanding the WITRON sort of profiles and the Ocado profiles going forward, and we'll do that at the appropriate calls going forward.
Okay. Are we able to talk about the two-thirds operating cost inclusive or not inclusive of depreciation?
Again-
Can't do that.
Lisa, this is a sales call.
Got it.
Again-
Understood. No, no worries.
Thank you.
Okay. My second question is more on execution into Christmas with our focus on trusted value. We talked about the 1,001 locked and then the 500 of reduction. Are we expecting the breadth to be higher or the same going into Christmas? Again, you know, the exclusive products, the growth was 1.1%, which is slightly lower than the total supermarket growth. Was that a little bit surprising if we're thinking that consumers will shift to value and you know we have the most extensive exclusive products or exclusive brands?
Thanks, Lisa. I might take the trusted value piece. If we look at the products that are on everyday pricing, then we are seeing that that is increasing during the quarter and recently. So people are gravitating towards the lower-priced products. We're seeing sort of stable situation on promotions. And then we're comfortable that we will achieve what we want to achieve in exclusive products over the course of the year. You have to look at what you're selling, of course. The story from the first quarter was that produce availability was severely impacted, and obviously there's a lot of produce lines that are own brand lines. So, no, not concerned. It's a bit like last year, where we had meat availability issues.
Own brand penetration is much higher in fresh areas than it is in packaged grocery. As availability improves in those areas, we'll see a natural improvement in own brand penetration. I'm comfortable that we're on track to continue to deliver trusted value through everyday low pricing exclusive to Coles products. Obviously we're making sure that we're sharp on the promotional activity as well.
The 1,001 and the 500 is kind of it going into Christmas. That's going to be stable in terms of the breadth of those two offers, right?
Yeah. I think as I said to Bryan, I think it's illegal for me to tell you what any price change activity.
I see.
I'm trying to sort of not get any letters from the ACCC before Christmas.
Got it.
You know, we've said what we are going to do, which is those prices on the products that we have changed are fixed.
Got it.
until the end of January, which takes people through that really important
Yeah.
Christmas season. Everything else, you'll see like everybody else does on a week-to-week or month-to-month basis. All right. Thank you.
Thank you.
Thank you. Your next question comes from Grant Saligari with Credit Suisse. Please go ahead.
Good morning. Just a quick one on liquor, if I could, Steve. It looks like you've outperformed the competitor, the listed competitor again this quarter. Is that mainly coming through Liquorland? Perhaps you could just expand on the relative performance of Liquorland versus or and First Choice and progress with the renewals with Liquorland, please.
Thanks, Grant. You've made Darren's day. He's smiling like a Cheshire cat at the end of the table here. Darren, over to you. Over to you.
Thanks, Grant, for that. Yeah, I mean, if I take sort of Liquorland first, we're really, really delighted with the way that's developing at the moment. I think we had Q1 304 renewals in place, and within the quarter opened our 300th in Armstrong Creek. That is performing really well. It's in line with our expectations. It's resonating really well with our customers and probably most importantly, with the team as well. It's important to remember, I think on Black & White, it's not just a change of the colorways. It's, you know, work that we're doing very much in terms of the ranging, the macro space and the team are all changing as we look at that. I think the team managed a fantastic job.
That has been clearly, I think, a factor in our performance. I wouldn't necessarily put everything just down to that. I think the strategy that we talked about back in August 2020 is serving us well. Over the last couple of years, we've simplified the way that we buy and sell. We've been doing a lot of work on our offer, particularly around local craft and boutique products. Our exclusive liquor brand is growing its participation within our business, so that's on a really good trajectory at the moment. Within that, I think the sort of the premium angle of our ELB portfolio is also impressing me somewhat. We've invested in service in our shops. We've put a lot of investment in online.
We're growing online as well, which is pleasing to see. We continue to optimize the estate. We talked about some of those store renewals. We're also doing some work in Vintage Cellars, as well as finalizing the work that was already kicked off in First Choice Liquor Market. There's a lot going on really. Together with our new store pipeline as well, where we opened seven stores. We did close six in the period, but we also opened seven stores, so that's also in place. Yeah, that strategy is really serving us well, really, and I think goes some way to explaining that step up.
Maybe just a quick follow-up on that. I can recall many years ago when we did the work, there was a very high foot traffic sort of cross-sell from the supermarket into the liquor store. I wonder, with the improved performance in Liquorland, are you getting that in terms of sort of proportionally more people coming from the supermarket and also shopping liquor? Or are you also actually seeing, you know, additional new customers just come to the Liquorland store?
Okay. Thanks. Thanks, Grant. I think it's worth stepping back just a little bit on this one and sort of thinking about where we're at, which is, as I said before, we do think it's a strategic advantage for Coles Group to have supermarkets and liquor in the same portfolio. We are working closer than ever before to leverage the footfall and also leverage flybuys, and we're seeing that in the numbers. I think we're probably nearer the start than the end of that journey. In terms of opportunities ahead, that cross-sell is still one of the biggest. You'll note in the results this time we've included what Coles Liquor sells through the Coles online platform. Coles Liquor will be also available in Ocado next year.
That linkage, we still believe that outside of supermarkets, liquor is the strongest adjacency to food. Now that Darren, I think, has got a very clear and successful strategy working in liquor, that sort of relationship with supermarkets is really gonna be one for the future in terms of driving mutual growth.
Okay. All right. Thank you for that.
Thank you.
Thank you. Your next question comes from Ben Gilbert with Jarden. Please go ahead.
Good morning, Steve. Just one from me. This is a broader market question, but I'm super curious to you guys. The U.K. and the U.S. have put out a number of sort of consecutive quarters of negative volumes in grocery on the back of inflation. Do you sort of see a scenario that we move towards sort of flat volumes on a year-on-year basis as we move into Christmas?
I suppose the reason I ask that is we're cycling now two periods of lockdowns. We come out of that over the next week or so. Wesfarmers are eating out, coming back, which I think has been a big drag out of grocery. Is it sort of realistic or is that your expectation we move back to sort of a flat volume type scenario for the market, as we move through the December quarter?
It's a great question, Ben. I think it'll be challenging for the market as we annualize this waste issue and also the return to work. You know, I do expect that there'll be more people returning to city centers over the next six months as opposed to working from home. We're remaining a flexible policy by the way, in case anyone thinks that is the Coles policy. We are hybrid. You know, more broadly, people will be returning to the city centers. That will have an impact on you know, sales out of supermarkets versus in, albeit that there'll be a few more lunchboxes going with them than nipping down to the local cafe.
If you look at the other thing that's going on, which is this waste issue, a year ago there was significant waste in the food at home. I suspect that's coming down significantly. In fact, we know it's coming down cause customers have told us it's coming down. That'll take a time to work through the system. Other than that, if we can get to availability where we need to, then the outlook for volumes, particularly with increased migration and all the rest of it, looks pretty good. Whether the industry will get to flat in the year, I wouldn't like to forecast. All I can say is that, you know, we're seeing an unwind of local shopping and, you know, we're seeing improving trajectories, sort of month by month.
That's great. Thanks, Steve.
Thank you.
Thank you. Your next question comes from Bryan Raymond with JPMorgan. Please go ahead.
Thanks for taking the follow-up. Just very quickly, private label, you've called out the impact of fresh impacting that sales number. I wonder if you could share a private label ex fresh. So just packaged private label growth rate. Would that be above or below overall growth in the business? Thanks.
I don't think that would be available. I don't think it's ever something we've talked about before. You know, I can give you some examples, which is the ones we talked about last time, which is things like pasta and all those sort of lines. They're in very significant volume growth. I think we've got. Well, don't know the exact number, but I'm gonna call it, you know, 100. It might be a bit north or a bit south. A lot of lines that are in and around that AUD 1 mark, and that includes, you know, pasta and tomatoes and canned tomatoes, that is, and those type of lines, and they're all doing.
Extra tuna is another one, where you know you can go to some supermarkets, and they'll have tuna at less than AUD 1, and you can go to other supermarkets that might have tuna at AUD 2 or AUD 3 as their entry price point. Customers are noticing those things and all those entry price point own brand products in packaged are seeing significant volume increases.
Okay. All right. Thanks.
Thank you.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Cain for closing remarks.
Okay. Thanks for your questions, everybody. I'm hoping on behalf of all of us that this weather starts improving soon. Otherwise, all those people migrating from the U.K. might think about coming back. I hope that you all have a great Christmas, hopefully served by Coles. There's a lot of good stuff going on for Christmas. Urge you to go and have a look. If you're in Melbourne and Sydney Metro, please try our QuiteLike meal kits as well. They're fabulous. Thank you very much and obviously contact the team if there's any further questions that you have. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.