Back to the future for Coles

ColesIt’s back to the future for Coles supermarkets with a return to the Australian Stock Exchange in its own right and the return of Steven Cain as CEO.

Wesfarmers’ decision to divest its food, liquor and fuel businesses is a move to get out while the going is good because, in relative terms, the supermarkets business is past its peak.

Access exclusive news, features, interviews and reports.

Subscribe now or login to access premium content.

Subscribe Log in

Unless Coles – or for that matter its arch rival Woolworths, are able to jump through regulatory hurdles and acquire large chunks of the independent sector, the big two chains face declining market share and flagging growth.

While Coles’ trading performances are invariably compared to Woolworths, its low growth and waning market clout is more aligned to competition from Aldi, Costco; the prospect of new market entrant Kaufland; and potentially Amazon and other internet grocery services.

The independent supermarket sector is likely to be the first to lose market share in the face of the expanding international competitors but Coles and Woolworths are not immune and inevitably will struggle for growth unless they venture into new product or service categories.

Announcing the proposed demerger of Coles last Friday, Wesfarmers managing director Rob Scott said Coles was well positioned to achieve long term earnings growth but conceded it accounted for 60 percent of the company’s capital employed, but only 34 per cent of divisional earnings.

Coles and Woolworths earnings have been falling with both chains investing in  price reductions attempts to defend their respective market shares.

Woolworths currently has a 42 percent share of the grocery market, Coles 34 per cent, the independent supermarkets, including Metcash’s IGA network, hold 12 per cent, Aldi 9 per cent and Costco 2 per cent.

Coles earnings for the first half of the 2018 financial year declined 14.1 percent to $790 million on a 0.4 per cent fall in sales to $19.98 billion while Woolworths lifted its pre tax profits by 11 per cent to $1.21b on a 4.9 per cent revenue boost to $19.34 billion.

In the latest half, it is understood that two of the major independent supermarket groups also outpaced Coles growth, despite the chain’s attempts to keep pace with a resurgent focused Woolworths under CEO Brad Banducci.

Conglomerate looks to rejig portfolio

Coles is clearly more vulnerable to competition going forward after surrendering the gains, made under previous chief Ian McLeod and operations director Stuart Machin, back to Woolworths.

Wesfarmers decision to divest the food liquor and fuel business through a proposed listing on the Australian Stock Exchange and redeploy the proceeds into new growth opportunities follows a review of the company’s portfolio and capital utilisation.

In his announcement to the Australian Stock Market last week, Scott said Wesfarmers was repositioning its portfolio to target a higher capital weighting toward businesses with strong future earnings growth prospects.

Despite spruiking the potential of a standalone Coles, Scott’s remarks underscored the fact that Coles business is past its prime, a mature and cash generative business with an upside in terms of resilience to economic cycles, but with diminished future growth prospects.

If approved by shareholders and regulators, the proposed demerger would include 806 Coles supermarkets, 894 liquor stores, 712 Coles Express outlets, 88 hotels, Coles Online and a general insurance and credit card business.

Scott notes the business, which would be in the top 30 listings on the Australian Securities Exchange, has developed strong investment fundamentals and “is of a scale where it should be operated and owned separately”.

Scott said a demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses and the pursuit of value accretive transactions.

Wesfarmers acquired the struggling Coles Group in 2007 for $19.3 billion when ironically

Target was its best performer and Kmart and the core Coles supermarkets and liquor businesses were underperforming.

The proposed demerger is estimated to realise between $19 billion and $21b, although Wesfarmers have not indicated its expectations after finding last year that the market was not enthusiastic about its $1.5b pricing for a demerger and public listing of its Officeworks chain.

Wesfarmers remains interested in a sale of Officeworks if it can obtain its asking price or close to it.

With both Coles and Officeworks, Wesfarmers has something to sell. Not so with Target, which is more likely to be totally subsumed by Kmart, its discount department store sibling, than to continue trading in its own right or to find a new owner.

In February, Wesfarmers took a $306 million writedown on Target, including $47m of goodwill and $238m against the carrying value of its brand name.

Target’s sales for the six months to December 2017 fell a further 6.2 percent, although the chain did improve its trading profitability before taking into account the writedowns.

Scott has wasted little time in setting a new direction for Wesfarmers and it is not out of the question that the company may consider the sale of Kmart itself while its value is high as the best performed chain in the discount department store sector.

Just as Woolworths attempted to find a new growth channel when it launched the Masters Home Improvement chain, Wesfarmers acquisition of the Homebase hardware chain in the United Kingdom was an attempt to find a new growth channel that could leverage off its experience and operational strengths.

Wesfarmers Bunnings Warehouse business has been one of the best performed retailers in Australia over more than two decades and in the first-half of the 2018 financial year the chain actually reported a 12.2 percent lift in profits to $864 million.

Bunnings profit surpassed the Coles food and liquor business for the first time in that period. Coles earnings for the half were $790m.

However, the $700 million acquisition of Homebase, the number two hardware retailer in the UK market, has yet to vindicate Wesfarmers investment with losses mounting and, perhaps more worrying given store upgrades and conversions to the Bunnings format, a 15.7 percent drop in sales to $875m in the latest half.

Scott claims all options are on the table for the struggling Bunnings UK and Ireland chain including the possibility of Wesfarmers cutting its losses and exiting the business.

But as with Target, Scott recognises that Bunnings UK and Ireland is not an attractive sale proposition on its current trading numbers and an exit is not the preferred option at this point.

Wesfarmers has put a hold on further conversions of Homebase stores to the Bunnings format and has commenced a business-wide review to identify issues that have led to the sales decline and the mounting losses over the past two years.

Changing of the guard

One of the interesting aspects of the proposed Coles demerger is the appointment of Steven Cain as MD of Coles, taking over from John Durkan who was the supermarket chain’s chief for the past four years.

Cain was appointed MD of Coles food and liquor in 2003 when the business was part of Coles Myer.

He lasted just 14 months in the role and left abruptly as a result of tensions with other executives.

Cain had been recruited by Coles Myer from the UK after experience with the Asda supermarket chain in marketing, store development and trading roles.

He subsequently joined Pacific Equity Partners, which had investments in Redgroup Retail and collapsed financially and Godfreys that was effectively seized by its lenders.

Cain joins Coles after joining Metcash in 2015. His current role at Metcash is CEO of supermarkets and convenience.

 

Comments

Comment Manually

Loading...

Inside Retail Polls

Myer's new chief executive
Is John King the right CEO to lead Myer's turnaround?

Twitter

Steinhoff extends early creditor support twice, signalling difficulties in meeting tomorrows looming deadline. https://t.co/K7UFsLgZMQ

3 hours ago

A brief history of briefs. https://t.co/rIb9otEB7W

17 hours ago

Supermarket criticised over perceived double standard. https://t.co/kePL14qnD7

19 hours ago
x

SUBSCRIBE
FREE NEWS BRIEFS Get breaking news delivered