Coles embarks on a new growth chapter
Coles’ announcement of a $1.1 billion investment in new supermarkets over the next three years was timed to be a centrepiece of the group’s centenary celebrations. It also, however, coincides with the end of one phase in Coles’ more recent history and the opening of another.
Since the audacious acquisition of Coles and its sibling brands by Wesfarmers in 2007 and the arrival of Ian McLeod and the team of retailers Wesfarmers assembled around him at Coles in 2008, most of the focus within Coles has been on stabilising and rehabilitating the ‘’decaying’’ business they inherited.
There has been significant investment, with Wesfarmers pouring about $3 billion into the store network alone over the past five years, but the strategy has been about renovating and fine-tuning the network rather than expanding it.
To the extent that new stores have been added to the portfolio, nearly as many have been subtracted as McLeod focused on increasing sales density rather than increasing floor space.
That’s in contrast to what has been happening within Woolworths, which has been on a massive expansion spree across its own retail portfolio but predominantly in its core food and liquor businesses.
Last financial year, excluding its fledgling hardware chain, its capital expenditures totalled $2.35 billion. Its chief executive, Grant O’Brien, has said the aggressive expansion of the supermarket network has now peaked.
While it is common and convenient for journalists and analysts to benchmark the two big supermarket chains’ performances against each other, over the last five years Coles itself has been inwardly focused, benchmarking its own progress against its internal goals rather than worrying about its performance relative to Woolworths. It was acutely aware of how far behind Woolworths it was – and how big the opportunity to simply improve its own performance was.
An important milestone in the restoration of Coles was passed recently when the compounding momentum of the improvements to sales and profit growth McLeod’s team has generated was reflected in a 10 per cent return on capital.
That’s nearly twice the level of return the business was generating in 2008-09 (and more than twice the level of the profits it was generating then) and neatly encapsulates the extent of the progress Coles has made.
With the business finally generating a double-digit return on capital, most of the portfolio refreshed and Coles starting to recycle capital by selling and leasing back some of its redeveloped and new properties, it is confident that the core improvements have now been entrenched in the business and it can shift into a more expansionary mode.
The $1.1 billion investment program will fund the opening of 70 new supermarkets over the next three years, close to a 10 per cent increase in the number of supermarkets it operates today and, with the rate of stores closures diminishing, will represent net new store growth of about two or three per cent a year. The new stores will be significantly larger than those within the existing network.
The shift from introspection to controlled growth has also been punctuated by the ending of McLeod’s tenure as Coles’ chief executive to take up a broader role as Wesfarmers’ commercial director.
While the job specs haven’t been disclosed it would appear a reasonable assumption that Richard Goyder wouldn’t have contemplated offering him a sinecure and that McLeod, on the receiving end of a number of significant offshore job offers, wouldn’t have accepted one anyway.
Whatever McLeod’s new role will lead to (and there will be continuing speculation that he’s been asked to identify Wesfarmers’ next big deal) his transfer says quite clearly that he, and Wesfarmers, believe he has completed the most important phase of the once-daunting task he was given at Coles.
John Durkan, one of McLeod’s key team members at Coles (and another who’s received some significant job offers elsewhere) will preside over the next, more expansionary, phase and the deployment of the capital over the next three years.
The changing of the guard represents another signal that Coles believes it has ended one more chapter in its long history and is about to enter another.