Wesfarmers bought Coles supermarkets in 2007. As reported by ABC News, Coles put itself up for sale in February 2007. The board made this decision due to poor financial performance, especially sales. ABC News reported that:
“The major problems stem from Mr Fletcher’s backfired rebranding strategy for the Bi-Lo supermarkets, which ended up handing over more losses to Woolworths.”
The Coles board accepted a $22B offer from Wesfarmers in July 2007 and the transaction finalised in November 2007 (Wesfarmers). The $22B sale price included other retailers such as Harris Technology, K Mart, Officeworks and Target. As reported by ABC News, Wesfarmers Managing Director, Richard Goyder, at the time stated:
“There is a lot of work to be done to restore Coles to its rightful position in Australian retail”
Wesfarmers demerged Coles in November 2018 (Wesfarmers). Wesfarmers maintained a 15% share and gave Wesfarmers shareholders the remaining 85% of shares. Coles is now a stand-alone entity on the ASX (Australian Stock Exchange).
This blog focuses on whether Wesfarmers was able to turn Coles around and create a successful long-term strategy.
Top line financials
Coles Group Limited Annual Report for 2007 (before Wesfarmers purchase) highlights food and liquor sales, including Coles Express, of $26.2B with Retail EBIT of $739M and Retail margin of 2.8%. Coles Group Annual Results for 2019 (new de-merged group) highlights food and liquor sales of $35.0B with Retail EBIT of $1,353M and Retail margin of 3.87%. These top line numbers would suggest Wesfarmers period of ownership did help grow sales and profit. During this period several successful sales campaigns such as ‘down, down’ pricing and Coles Little Shop were launched.
Aldi Market Share Gain
Due to continued expansion and a strong offer Aldi has grown their market share the most whilst Coles was owned by Wesfarmers. Part of their market share growth was from opening new stores and entering new regions including SA and WA in 2016.
Supermarket Market Share
Importantly, during this period Aldi was able to improve their offer. By listening to their customers and addressing their concerns Aldi has increased customer satisfaction. This can be seen by Aldi winning the Canstar Blue Most Satisfied Customers – Supermarket award in 2014, 15, 16, 18, 19. Other research, by dunnhumby, highlights that Aldi has been able to create a strong emotional connection with customers.
Source: SMH, dunnhumby Retail Preference Index report
Aldi has now positioned themselves as the leading ‘hard discounter’ in the Australian market place. Independent research by Choice highlights that Australian shoppers believe that Aldi is best for value for money. According to Choice research, Coles is best for opening hours.
Woolworths Group – Masters Hardware
After announcing their decision to enter hardware retailing in 2009 the first Masters store was opened in 2011. The venture was not successful, so Woolworths Group closed the hardware business in 2016 (Wikipedia).
During this period Woolworths Group invested significant financial resources into the Masters business. This meant Woolworths Supermarkets had limited resources to invest their business. The following chart highlights Woolworths Supermarket share loss during this period. The same chart highlights Coles share gain during the same period.
Australian Supermarket Share
Source: AFR, Roy Morgan statistics
The following L4L (like for like) sales growth chart again highlights Coles sales growth whilst Woolworths Group invested into Masters. After exiting the Masters Hardware business in 2016 Woolworths L4L sales growth drew dramatically.
These figures highlight that some of the sales growth Coles achieved was due to the poor performance of Woolworths Supermarkets. Whilst the Woolworths board invested in Masters Hardware the supermarkets did not have the financial resources to compete. After existing Masters Woolworths have improved their sales performance.
International Competition – Amazon, Costco, Kaufland
As outlined in my blog, Amazon Australia – 18 months post launch, Amazon Australia have not met Australian shoppers’ expectations during their launch phase. The first Australian warehouse, in Victoria, opened in December 2017. The second larger Australian warehouse, opened in NSW, in August 2018. Then, in October 2018, Amazon Australia launched Amazon Pantry. Amazon Pantry is their grocery offer.
Costco opened their first warehouse (store) in Australia in 2009. Today Costco Australia has grown to 11 warehouses in VIC, NSW, QLD and SA. They also have plans to open more warehouses and an online business in the future. As reported by SMH Costco is achieving L4L (like for like) sales growth of about 5 to 6 per cent and “Costco’s total revenue for the 12 months to September 3 (2018) grew by $228 million, or 14 per cent, to $1.8 billion.” The sales success of Costco in Australia highlights they are becoming the leading ‘big box’ grocery retailer in Australia.
Kaufland Australia have opened their head office and are currently building their first DC (distribution centre) and group of initial stores. As reported by news.com.au Kaufland plan to open their first stores in Australia in 2020 (some other reports are 2021).
Unlike Aldi, Kaufland has a large range (more SKUs than Coles) and offers a deep PL (private label) range. As outlined in my blog, An introduction to Kaufland Australia, it is a realistic expectation for Kaufland Australia to achieve market share of 10%+ over a long period (10+ years). Also, it is possible for Kaufland to position themselves as the leading hypermarket grocer in Australia.
Did Wesfarmers create a successful long-term strategy for Coles?
During Wesfarmers ownership Coles did achieve good short-term financials, such as increased sales and profit. For example, 46 quarters of consecutive sales growth (Coles Group). This was driven sales initiatives such as ‘down, down’ pricing and Coles Little Shop.
Unfortunately, Wesfarmers did not create a successful long-term strategy. New entrants, such as Aldi and Costco already, and Kaufland in the future, have a clear position / offer in the market. These retailers are dominating their niche in grocery retailing. Woolworths, after closing Masters hardware, is again focused on supermarkets and improving their offer. Recent results highlight that Woolworths are again dominating full-service grocery supermarkets in Australia.
Unfortunately, Coles now has to reposition itself again to ensure long term success. IMHO (in my humble opinion) this is why Wesfarmers de-merged Coles. To be successful in Australian grocery retailing in the future would have required major capital investments. These investments, with potential low ROI (return on investment), due to competition from local and international grocery retailers, were not the right investment for the Wesfarmers board.
As reported by Inside Retail Steven Cain, current Coles CEO, has stated:
“The next five years are going to be the toughest we have faced as a company and the toughest the industry will face”
I agree with Steven Cain. Looking forward, Coles have to compete with a resurgent Woolworths, that is focused on supermarkets. Also, they have to compete with international grocery retailers, with deep pockets, that are focused on their niche.
At the Coles Investor Day 2019, Steven Cain and his team outlined the new strategy. The following slide highlights the challenge Steven Cain and his team face.
Strategy Day 2019 Presentation
Source: Coles Group
Coles strategy is to:
- Inspire Customers through best value food and drink solutions to make lives easier
- Smarter Selling through efficiency and pace of change
- Win Together with our team members, suppliers and communities
This strategy is different to the one outlined by then Coles Managing Director, John Durkan, at the Wesfarmers investor day 2017. John Durkan was focused on ‘delivering a better customer offer’ with lower prices and a simplified range.
Steven Cain and his team have already made major announcements to achieve the new strategy. These include:
- Coles and Ocado strategic partnership
As announced in March 2019, Coles hopes to make their customers lives easier by utilising Ocado’s software for online orders. Also, by building two new automated CFCs (customer fulfillment centre) they should decrease their cost of doing business (Smarter Selling ) for online orders.
Importantly, as outlined in the Coles Investor Day 2019 presentation, this tie up could allow them to increase the online range to approx. 40,000 SKUs. This would allow them to compete with Woolworths improved online offer and new entrants. For example, the new CFCs could make Coles competitive vs online specialist Amazon, Costco that is planning to launch an online offer in 2019 and Kaufland stores that carry more SKUs than a normal Coles supermarket. As reported by SMH, Steven Cain stated the partnership will:
“It’s a combination of better sales and margin because the website is better and you’re offering a wider range of products.”
- Smarter Selling
As reported by Inside Retail, in June 2019, Coles announced 450 roles would be made redundant at Coles head office. Inside Retail reported that this decision was made to “reduce costs and allow further investment in online and convenience.” As outlined in the Coles Investor Day 2019, this restructure was part of a larger plan to reduce costs by approx. $1B by FY23. The Smarter Selling initiative will focus on using technology, including AI, to reduce costs throughout the business. Coles will also invest in renewables, e.g. solar panels, to reduce their CODB (cost of doing business).
Steven Cain, and his team, have already started to implement a new plan to turn the business around. Only time will tell how successful the plan is or as Steven Cain stated:
“Maintaining, or growing our share … would be a terrific result given the competition we face.”
The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.