Coles is spinning out at a time it is struggling against its top competitor

Picture: Sandra Mu/Getty Images
  • A top 30 ASX company with $39.2 billion in revenue and 109,000 staff.
  • But its sales growth is lagging that of main competitor Woolworths.
  • Wesfarmers says it has invested more than $8 billion since buying Coles in 2007.

Spinning off Coles from Wesfarmers will create a new company with $39.2 billion in revenue, $1.6 billion in EBIT (earnings before interest and tax) of $1.6 billion and staff of 109,000.

The company would be one of Australia’s largest retailers, providing fresh food, groceries, general merchandise, financial services, liquor, hotels and fuel, and sit within the top 30 on the ASX.

Coles processes 21 million customer transactions on average per week through a national network of 2,5001 stores — 806 supermarkets, 8941 liquor stores and 712 Coles Express fuel and convenience store outlets under an exclusive alliance with Viva Energy.

Then there’s Coles Financial Services, which offers general insurance and credit cards, and Spirit Hotels, a chain of 88 hotels mainly in Queensland.

Wesfarmers acquired Coles, in Australia’s biggest corporate takeover, for $19.3 billion in 2007.

Since then, Wesfarmers has invested more than $8 billion of capital across the store network, supply chain and online channel.

“Long-term collaborative partnerships have been developed with many suppliers, and prices have been reduced for customers for eight consecutive years,” says Wesfarmers.

“Coles is well-placed to continue to execute its customer-led strategy and achieve growth over the long-term as demand increases for quality fresh food at great value, further supply chain efficiencies are identified and executed, the transformation of the liquor business progresses, and through the opportunities to drive growth in online, convenience and financial services.”

Coles accounts for about 60% of Wesfarmers’ capital employed and 34% of divisional earnings.

Here’s the Coles business at a glance:

Source: Wesfarmers

Coles has been lagging its main competitor Woolworths in sales growth. For Woolworths, Australian food sales rose by 4.9% for the latest half year. Coles managed 1.9%.

The two big supermarket players face market erosion from a series of digital and discount players including Aldi and Amazon.

In the latest half year results, Coles’ EBIT (earnings before interest and tax) fell 14.1% to $790 million for the half. Revenue was weaker at $19.98 billion, down 0.4%.

At the half year results announcement, Wesfarmers said the decline in earnings reflected the annualisation of investments made in the customer offer in the 2017 financial year, lower property earnings due to a one-off gain in the prior year, lower financial services earnings following the sale of Coles’ credit card receivables and lower fuel earnings.

But the numbers showed that sales had started to edge higher. Growth accelerated in the second quarter, better than it had for six quarters.

And today Wesfarmers managing director Rob Scott says Coles has been successfully turned around since Wesfarmers bought it in 2007, restoring its position as a leading Australian retailer.

“We believe Coles has developed strong investment fundamentals and is of a scale where it should be operated and owned separately. It is now a mature and cash generative business, which is expected to have a strong balance sheet and dividend paying capacity.

“Coles will be well positioned to continue to deliver long-term earnings growth, with an earnings profile that is expected to be resilient through economic cycles.”

To cement the demerger deal, Wesfarmers has poached a senior executive from Metcash, operator of IGA supermarkets, to lead Coles into a new ASX-listed company.

Steven Cain will be the next managing director of Coles, succeeding John Durkan, who will step down later this year after 10 years in senior leadership positions.

Cain is currently chief executive officer of Supermarkets and Convenience at Metcash. He began his career with Bain & Co before moving into retail with UK retail group Kingfisher, later helping to transform supermarket chain Asda, where his roles included group marketing director, store development director and grocery trading director.

Later roles included being CEO of FTSE 100 media group Carlton Communications plc, managing director of food, liquor and fuel at Coles Myer, and operating director and portfolio company chairman at private equity firm Pacific Equity Partners, before joining Metcash in 2015.

He was an adviser to Wesfarmers on its takeover of Coles in 2007.

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