KGB: Wesfarmers' Richard Goyder
Wesfarmers managing director Richard Goyder gives an update on supermarket war strategies, the state of retailing generally and the group's thoughts on further acquisitions.
– The challenge of competing with Woolworths on liquor.
– What the conglomerate is considering to do with its surplus cash.
– How industrial relations are relatively settled for one of the nation's biggest employers.
– How Wesfarmers views the current state of the Australian economy.
– What impact the introduction of Woolworth's hardware chain is having on Bunnings.
Stephen Bartholomeusz: Richard, we’ve just passed the, or just about to pass, the fifth anniversary of your acquisition of the Coles Group. When you look back at that five years, has it met your expectations?
Richard Goyder: Yeah generally, Stephen, it has. There are always some ups and downs and none of us at the time had perfect foresight which would have meant a global financial crisis, but the financial returns have been very much in line with what we forecast nearly five years ago. We’ve got more cash out of the business than we forecast. I think Coles is on track; liquor probably not as good as we would have liked, Kmart well ahead and Officeworks and Target up and down a bit, but generally in line with where they thought they’d be… where we thought they’d be. So generally on track and, you know, we still think there’s a long way to go.
SB: You have renovated to a large degree, though, those… the supermarket business which was in a bit of strife. This next five-year period, is it about growth rather than rebuilding?
RG: Well, I think… Yeah, one of the pleasing things about the Coles turnaround has been the growth. The comparative store sales growth has been strong now for pretty much three years and, yes, we’ve renovated the business, so to speak. But there are still two thirds of the store network which isn’t in the new format, so we’ve got a number of years of upgrading the format in new stores and we’ll increase our new face in the coming years as well. So we’ve got that plus a lot more work to do in fresh and a lot more work to do in supply chain. So, you know, we want this to be a revenue led turnaround. It has to date and we’re very keen that that continues.
Alan Kohler: Obviously to some extent you’ve been held back, or the GFC, as you say, was a surprise. Do you think to some extent you’ve been helped by Woolworths?
RG: It’s a good question, Alan. One of the key aspects of this business that we looked at before we acquired it was how would it perform through different parts of the economic cycle and in Australia and globally actually supermarkets tend to go okay through ups and downs, although obviously a more difficult environment is more challenging. I think we were probably underestimated a bit for a while, both by our competitors, not just Woolworths but others, and also the market and that enabled us to get on with things. And, you know, I think one of the things we’ve done well is bring a really good team to bear in managing Coles and, you know, I think Ian McLeod and his team have done a terrific job.
AK: You bought Coles. Did you have in mind that you would need to or would bring about food price deflation over the five years… the first five years or is that something that Ian McLeod brought along?
RG: It’s… You know, whether it’s deflation or less inflation, one of the things we always thought was a key plank early on, Alan, was to get price trust back with our customers. You know, one of the levers you can pull short term in supermarket retailing is increase your prices and in the short term customers may not notice it, but longer term they do and Coles had to get trust back. It was one of the key planks that Archie Norman in fact brought to the business before Ian came on board and we’ve been religious in pursuing that and we will continue to be leading on price because it’s good for our customers and that’s a key plank in any business obviously – its side-product is it’s been good for the country – but you know we’ll keep pushing hard on pricing because…
AK: What’s been the key to improving margins while at the same time bringing prices down?
RG: Well, because there have been so many cost savings available in the business, we’ve been able to do that and as we’ve got more customers into our store buying more product. We’re buying more from our suppliers and so we can get better terms from our suppliers as well, so it becomes quite a virtuous loop, whereas it was completely the opposite before we acquired the business.
SB: Richard, one of the things that’s been noticeable about the last couple of years has been the divergence in strategies between you and Woolworths. They’ve been busily adding stores to their network at a rate and Ian’s focus primarily on his existing footprint, that seems to be changing. Is there a new dimension to the strategy now?
RG: Again, Stephen, I think, you know, you’ve got to think back nearly five years ago we had a lot of work to do with the existing business. So, we’ve got the same number of stores now, about 750, 760 stores… supermarket stores, but we’ve closed or sold off nearly 100 of poor performing stores and we’ve opened larger stores, so we’ve got more space and we’ve got a better performing network and we will be looking to open new stores, but typically larger format stores, we find that they perform better and this is all about getting decent returns from this investment. You know, we think… the primary thing is to make a decent return on the investment. Coles is a significant business and, you know, we won’t go for market share for market share’s sake. We want to make the business we’ve got a better business for our… all stakeholders; our customers, our suppliers and obviously our shareholders.
SB: You refer to return of investment which has obviously been a topic of some debate in the market and I know there are historical reasons why the Coles return in particular has been depressed in terms of the price you issued the shares back again in 2007. That return on investment within Coles, though, is starting to get to very respectable territory.
RG: Yeah. I mean it’s taken some time. We always knew it would and it’s got a way to go and, you know, we all recognise that. But if we look forward another five years, then we think it will be very respectable. It’s getting to a point now where it’s okay. But we know how many opportunities there are in front of us, so I’m very confident that the returns will come. One of the interesting things about this whole acquisition I think is that in doing it, you know, the Wesfarmers history of being a farmers’ cooperative and patience, the board I think knew when we did it that some of our things like return on equity and near term dividends would take a hit, but we thought this would be the right thing to do long-term and very few companies are able to do that sort of thing, I think, take a longer term view, but in the long run I think this will be very good for our shareholders.
AK: So, what was the problem with liquor and what are you going to do about it?
RG: There are a few, Alan, but principally the problem is we had a network which wasn’t right. We had built some large format stores in the wrong areas and if you build stores, it doesn’t matter what sort of retail your business… what sort of area your business is in in retail, if you build stores in the wrong locations, then you’ve got a problem. So, we’ve been busily extracting ourselves from some wrong locations for First Choice, endeavouring to find locations that are right and to get that format on track. The Liqourland business has been pretty good, particularly where there are adjacencies to our existing supermarkets and we’re also working out Vintage Cellars at the moment. So, there’s been a network issue and we’ve had to bring better management into the business as well and, you know, to be frank, Alan, it… you know, supermarkets have probably got the attention because supermarkets are 90 per cent of the revenue in that division and well over 90 per cent of the profit, so…
AK: Big picture, the structure of the Woolworths’ liquor business is killing you, isn’t it? I mean the Dan Murphy brand is fantastic and also the pubs joint venture. So, are you able to in some way match their structure?
RG: Yeah. Pubs are different for us. We will never be in a sort of pubs business the size of pubs business that Woolworths is, Alan, and the only reason we own pubs is so we can retail liquor in Queensland, frankly. The liquor business, I agree Dan’s is a terrific business and we’ve got some work to do, but over time we’re very confident we can improve our liquor business.
SB: Richard, this year just ended. You’ve ended it with a terrific balance sheet generating a huge amount of cash at the operating level, more cash than you need to spend on the retail brands. What are you going to do with it?
RG: Well , it’s nice having cash generating businesses, Stephen, and it’s also a good place to be to have a balance sheet that’s strong and a sort of tenor of debt going out which is very manageable. And in an uncertain environment I think that is a good place to be. It gives us the opportunity to continue and to invest in our existing businesses which we’re doing heavily at the moment. You know, net capex the last couple of years has been well over $2 billion and maybe that sort of amount this year, so we’ll invest heavily in the existing businesses and if the right opportunity comes up to make acquisitions, we’ll look at that. Otherwise we’ll look at the most efficient way of giving money back to our shareholders.
SB: Your previous disposition is to look first at major acquisitions rather than giving money back?
RG: Oh, you know, the most significant part of my wealth is my Wesfarmers shares and the same with most of the management team at Wesfarmers, so we look at what the best thing is for shareholders and we’d only buy another business if we thought it was going to be very good for our shareholders over time and if those opportunities don’t come along, then we’ll look at the most efficient way of getting money back to our shareholders.
AK: But Wesfarmers is a conglomerate, right. I mean it’s not a retailer; it’s a conglomerate and over the years its growth and its character has been all about making acquisitions that make sense. I mean if you don’t make acquisitions in future, you know, the character of the company fundamentally changes, doesn’t it?
RG: Well, yes and no, Alan. I think you’re right; over time we’ve had some very successful acquisitions in the group, but if you look at the company through the ‘90s, from ’94 to 2000, we didn’t do any acquisitions in that period of time. But we invested in the businesses we had and had good total shareholder return. And so, we’ll never be blighted by growth for growth’s sake; we’ll make investments that work for our shareholders, otherwise we’ll work, as I say, how to give money back to them. But, you know, we’ve got a very active business development team. I think we’ve got management capability across a broad range of businesses that… and a balance sheet that would support an investment at the moment, so it’s a matter of finding the right opportunity.
AK: Would you think about returning Wesfarmers to its roots and in a sense vertically integrating backwards from food into agriculture?
RG: I think one of the things we’ve always steered away from is vertical integration that traps a retail business into buying product from a particular supplier because of an ownership structure and we’ve always liked our businesses to be quite independent of each other. More broadly, though, and strategically I think the whole food issue is a big issue for this country and, you know, potentially opportunities for businesses like Wesfarmers because I think global demand for food is going to increase. I think Australia is in a great position to be a food producer and exporter, so you know that’s an area that we’ll look at, but it’s not that evident where the opportunities might be at the moment.
SB: Richard, the one kind of question mark within the Wesfarmers portfolio, and it’s no fault of your own, is coal given what’s happened to commodity prices generally over the last few months. How big a concern to you is it because coal does generate a lot of cash and profit for you?
RG: Yeah. It’s been a great business. You know, when you think that we acquired this business in the year 2000 for $200 million, it’s… Curragh has been a fantastic asset and, you know, we continue to think it is a very good asset notwithstanding ups and downs in coal prices. It’s open cut, low cost, lower cost quartile, very good customers in Japan, Asia, India and Europe and if you believe like I do that over time China will continue to grow, India continues to grow and other Asian countries continue to grow, then we think demand for steel will be strong and demand for met coal will be strong, so through the cycle we think this is a very good business. It’ll hit our earnings this year if prices come off as is forecast to come off, but I think it’s a very good asset.
AK: Richard, there’s a lot of discussion about the Fair Work Act at the moment and productivity in Australia and how the industrial relations legislation operates. You’re one of the biggest employers in the nation now. Do you think there needs to be more legislative change in industrial relations?
RG: Alan , you know, I’m pleased that the productivity discussion is now on the table because I think it’s an important discussion and I think, you know, workplace relations is one aspect of that; innovation, investment in infrastructure, better management, frankly, they’re all key parts as well. But in terms of the Fair Work Act, you know, we would think there are some areas where the Fair Work Act could be better which goes to things like greenfield sites, the capability for employer and employee to do things a bit more harmoniously together, but I… you know, I think some of the issues in industrial relations at the moment are less to do with the Fair Work Act and more to do with either interpretation or in fact what’s going on in the union movement. So, I don’t think big changes, but it is an area that, you know, I think requires some attention. Generally across the Wesfarmers group at the moment we’ve got very harmonious relationships with our employees and that’s important because, as you say, we’re a very large employer and that’s what we want.
AK: Do you have harmonious relations with your unions?
RG: Generally we do, Alan, particularly the SDA. But, you know, we came to an EBA agreement at Curragh recently without any of the… or with only a very little of the noise that was at adjacent mines. We’ve got, you know, terrific relationships with our employees there at Curragh. So, generally we’re in pretty good shape.
AK: The Coalition is proposing to expand the use of individual flexibility agreements within the Fair Work Act. If that happened, would you use them to expand the use of direct relations… direct agreements with employees that cut out unions?
RG: We’d never have a strategy to cut out unions. I do think direct relationships are good relationships. It doesn’t matter if it’s with your employees or actually with your suppliers. But it’s horses for courses. In some of our businesses it makes sense; in others it doesn’t. For example, I think, you know, it’s been very good for us up at Curragh where we’ve had a lot of individual agreements in the past. In other places where we’ve got literally tens of thousands of employees it’s a bit more challenging.
SB: Richard, you’ve probably got as broad a view across the economy as anyone in the country. Where do you think we are at the moment?
RG: That's a good question , Stephen. You guys have probably got a better perspective in some ways than I have. But my perspective is that Australia is still in pretty good shape. Yes, there’ll be some ups and downs around commodity prices. We took the board to China in June this year and came back feeling that China had slowed and that that would be reflected in Australia in due course and I think that’s where we are now, but we also came back with a view that China would be strong over many years to come and strong growth and that would be good for Australia. I think consumers are behaving rationally at the moment. They’re saving what they can. Because of deflation in food and deflation in businesses like Kmart, they can buy more for less and we are selling more products to more customers in our stores. So, consumers are behaving rationally in saving what they can as interest rates come off. So, you know, the economy is subdued and it’s certainly more subdued in some regions. For example, the southeast of the country is quieter than the west and the northeast. But, you know, I’d rather be doing business in Australia than most other places in the world. And, you know, we’ve got levers still to pull in monetary policy, we’ve got high employment in this country and we’ve got, you know, if it’s not balanced, a budget that’s not far out of balance, so most countries would kill for those sorts of things.
SB: Do you think the kind of political instability we’ve had through the term of this government has been a contributing factor to this kind of negativity amongst consumers and does it take until next year’s election to get that put to bed?
RG: I tend to think there’s always more noise in the media than what people are really feeling on that side of things, you know, but a minority government is obviously challenging and that probably hasn’t been that helpful, but I’m not sure it’s been a huge hindrance as well.
SB: There did seem to be in the last quarter I suppose of your financial year and other retailers’ financial years some slight pickup in retail spending which seems to, from the anecdotal evidence, to have continued on. Is that how you see it?
RG: Yeah. But we did in the last quarter and we called it out in Target and Kmart, Stephen, because of the payments that came out of the carbon tax to households and that added about 1 per cent comps in the quarter to Kmart and Target. But I don’t think generally things have changed a lot in the retail side of things this year. You know, time will tell. I think we’re bumbling along okay at the moment.
SB: In hardware Masters has now got I think 20 stores out there and they’re opening one every two-and-a-half weeks or so I think Grant (O'Brien) said. Are you seeing any impact on Bunnings at all from that and do you expect to see any as we go forward?
RG: Well, you know, it would be wrong to say there won’t be any impact because, as you say, there are a number of stores. It’s not a complete overlap in products, so where a Masters store opens adjacent to a Bunnings store, we don’t get the same impact as if we’d opened a Bunnings store and that makes sense because of this product overlap or lack of it. And on most trading days of the week the Bunnings store is performing better than it did last year. So while there’s some impact, we think, you know, there’s a long way to go in Bunnings. We continue to add to the product range. We’re continuing to invest in price and service. We’ve got a terrific pipeline of new stores and, you know, I’m very confident that the wonderful performance of Bunnings over the last 16 or 17 years will continue well into the future.
AK: Thanks very much, Richard.
RG: Thanks, Alan. Thanks, Stephen.
SB: Thank you, Richard.
Follow @AlanKohler on Twitter