Wesfarmers chief executive Richard Goyder tells Alan Kohler, Robert Gottliebsen and Stephen Bartholmeusz:
– The high dollar is exposing the underinvestment in capital improvements for the dairy industry, and that the sector is struggling because of farm-gate export prices, not because of home brand milk purchases from Coles or Woolworths.
Alan Kohler: Well Richard, welcome to the KGB. Thanks for coming.
Richard Goyder: Thanks, Alan. Nice to be with you.
Kohler: Now, were you surprised that 50 of Coles’ suppliers have complained to the ACCC about illegal behaviour by Coles?
Goyder: Well, I’m not sure it’s 50. We don’t know how many and we…
Kohler: Well, Rod Sims says it was about 50.
Goyder: Yeah. Well, we don’t know how many.
Kohler: Don’t you believe Rod? He said that to a Senate committee, so it must be true.
Goyder: Well, he said for Coles and Woolworths, so presumably…
Kohler: Coles and Woolworths, okay, so it’s not just Coles.
Goyder: So, it may not just be us. That’s right. And, you know, we’ll see what comes out of that investigation. We’ve done our own internal work to ensure that we’re behaving in an appropriate way. We’ll cooperate fully with the ACCC on the investigation. But, you know Alan, I think our arrangement with suppliers and our relationship with suppliers have done nothing but got stronger since we acquired the business. We’ve got significantly higher turnover in Coles than we had in 2007 and they’ve got much greater visuals through the business now on what our orders are likely to be. Their orders are stronger. As in all of these things, there are some winners and losers and often it’s the losers who make all the noise.
Kohler: But it’s pretty straightforward. I mean at least some have complained about Coles behaving unconscionably and/or misuse of market power. So the ACCC is naturally looking into that and if you’re found to be guilty of that, you’ll be prosecuted.
Goyder: Yeah. If that’s the case and if we’ve done something we shouldn’t have done, then we’ll pay the price for that. I’m very confident there’s nothing systemic in the business and, you know, we’ve had another look at what we’re doing to make sure that we’ve got the appropriate policies in place. Where there have been one off instances we deal with those appropriately internally and with suppliers, so in some ways I welcome this investigation because there’s been a lot of noise for a year or two about it and I think what it will also do is turn a spotlight on what’s going on in the supply base in Australia, amongst whom there are players with significant market share and significant market power and amongst whom there are some who haven’t invested enough in their productive capabilities and because of the high currency they are using the blame game with Coles and Woolworths to deal with their own efficiencies and shortcomings.
Robert Gottliebsen: Do you think that a large number of our food suppliers are inefficient?
Goyder: I think some are, Robert. I think there hasn’t been the investment. I think for a long time in Australia the supermarkets just pushed prices up. When suppliers came saying we want to increase prices, it suited the supermarkets just to say ‘sure’, and consumers paid more for their food and that’s why the Rudd government had a food price inquiry in 2008 because food prices in Australia had increased way beyond the level of inflation for some period of time. When we took over Coles the new Coles management pushed back on that and said ‘no, justify to us price increases’, because every time this happens consumers pay more.
Gottliebsen: Right now, the unions are demanding a full per cent rise in the Toll transport group’s costs. I think LinFox, according to press reports, they’ve fallen over. So, are we going to see a rise in the costs and will you pass that on?
Goyder: Well, where we have to we will, but you know the focus when we acquired Coles, one of the key platforms of what we were trying to do with the business was to get price trust from our customers and at the time we took over Coles there were every week 5000 to 10,000 products on special, prices were going up and down all over the place and consumers had no idea what was going on. So, we’ve endeavoured to reduce food prices. I think we have and I think that’s made a considerable difference for consumers. And so, any costs that come through the supply chain we will want to understand what they are. Where we can absorb them, we will. Where we can put our productivity increases into lower prices, we will because that brings more customers into our stores. But you know, if transport costs go up, then that will be reflected...
Gottliebsen: Will you play hardball with Toll though, and say listen, you shouldn’t have given in to the unions?
Goyder: No, because we’ve got a long, strong relationship with Toll and Linfox and others and we’ll work with them because we want a long-term, stable relationship with them because we want them to be world class in terms of their logistics arrangements with us.
Kohler: You probably reckon the ACCC should be giving you and Ian McLeod a medal, not investigating you. Say you’ve brought prices down, you’ve revolutionised groceries in Australia. I mean you should be getting a little trophy.
Goyder: I don’t think we will, Alan. I don’t think we’ll get a trophy.
Kohler: No. But I mean were you disappointed to find Rod Sims coming out and giving you a whack like that after all you’ve done over the past five years?
Goyder: Alan, I think it’s been coming for a while, because there’s been a bit of political pressure on, you know, ‘what are you guys doing’? And so, I think it’s been coming for a while. As I said, in some ways I welcome it… Usually these things aren’t announced. Usually an investigation takes place quietly and then if there’s something that is untoward, then the ACCC or any regulatory body in this instance would take action. In this case… my understanding is because Rod Sims appears in front of the Senate estimates committee regularly and the Senate estimates committee has been asking him about what he’s doing, he’s pre-empted this by saying, ‘Well we are conducting an investigation and we do have this evidence to date’. So, unfortunately in this instance, in the court of public opinion we’re already tried...
Kohler: And he’s become the dairy farmers’ friend now.
Goyder: Well, the dairy farmers… Unfortunately, he’s not going to be able to solve the plight of the dairy farmers, and actually nor am I, because the plight of dairy farmers will be solved through stronger export markets for milk and a lower Australian dollar, and/or improved efficiency at processing businesses in Australia, because Australia is an exporter of dairy products and milk prices domestically are set by the export market and you can understand that because when we go to a processor to acquire milk, the processor will pay a farm gate price equal to what they can bring milk to their plant at, at export price plus transport, and that’s how a market is set — just as it’s set in wheat and meat and any other primary product. And, you know, Coles’ own label milk is 4 per cent of milk produced in Australia and whether we sell it for a $1 or $2 a litre, frankly it wouldn’t have one iota of difference for the profitability of dairy farmers in Australia. It makes a difference to our profitability, but none to dairy farmers.
Stephen Bartholomeusz: Richard, if the productivity of the food manufacturers and the farmers has lagged from the previous productivity the chains have been able to achieve, what should be done about it? If you were running the food manufacturers, what would you do?
Goyder: Well, the issue, Stephen, will be whether they’ve got the scale and whether they’ve got a sustainable export business and one of the problems with the high dollar is it exposes businesses that haven’t invested in capital and haven’t innovated in their product and therefore as export markets dry up, then they become increasingly reliant on the domestic market and/or they get passed like any of us do if we don’t invest in our business – passed by competitors who do it better.
So like all businesses in Australia, food processors need to be efficient, need to be innovative and creative, need to be looking for new markets and what I think is this. Not necessarily [that] the ACCC investigation will turn out, but I think there’ll be more of a focus on the processing sector. In terms of food suppliers to Coles there are significant multinational companies with really significant market share in there at the moment and if you want to talk about market power and bargaining strength, they’ve got an enormous amount.
Bartholomeusz: The volumes you’re pushing through, not just the supermarkets but all the brands you’ve got, have risen dramatically since you acquired them. There must be some winners out there.
Goyder: Oh, there are. There are some significant winners. Unfortunately they’re the good news stories and they don’t get to the media. Even in fresh we’ve got our meat producers, our bakery suppliers, we’ve got a strawberry producer in Victoria that we’ve invested in or given a long-term supply arrangement so they can invest in new equipment which gives them 10 months a year of fresh strawberry supply to our business. We’ve given them a 10-year contract which has enabled them to do that. Their volume has increased dramatically. So, there are plenty of winners.
Gottliebsen: Before we get too much praise for Coles, let’s look at the downside, let’s look at what was very clearly a serious weakness in your business and that is that there’s Woolworths out there and they’re efficient enough to earn a margin of 7.5 per cent on their sales, or roughly that area, whereas all you could manage is 4.5 per cent. What are you going to do to fix that up and get back up to 7.5?
Goyder: Well, we were below three I think when we took over the business.
Gottliebsen: No, let me try this. But there’s still a big gap.
Goyder: Yeah, there is a big gap.
Gottliebsen: Well, what does that mean? What’s your strategy?
Goyder: Well, what that means, Robert, is actually there’s a heck of a long way for us to go. And one thing that we’re not is we’re not complacent and while we’re satisfied with the progress Coles has made to date, we realise there’s a long way to go.
Gottliebsen: Why can Woolworths get 7.5 and you only 4.5 as it is now?
Goyder: Their liquor business is a better business, so you need to strip liquor out. Their liquor business is a better business than our business and that means we’ve got a significant amount of improvement to do in liquor. And their supply chain is a more efficient supply chain. And they’ve got a higher-volume business.
Gottliebsen: Why is it more efficient than yours?
Goyder: Oh, because Woolworths invested heavily in supply chain in the ‘90s and the 2000s when Coles was struggling to make a decent profit and so through that period, through distribution centres, through more integrated supply chain, through better systems, Woolworths stole a march on Coles and Coles has in the last five years had to catch up on that and we’re making good progress. But there’s a way to go.
Gottliebsen: When do you catch up? How long? Twelve months? Eighteen months? Two years?
Goyder: No, no. It’ll be longer than that, Robert.
Gottliebsen: How long?
Goyder: Well, you know,…
Gottliebsen: Three years? Four years? Five years?
Goyder: I’m not sure when we’ll catch up, but there’s a lot to do over the next five years.
Bartholomeusz: Ian McLeod and his team have lifted sales per square metre from I think it was 70-something per cent of Woolworths’ sales per square metre to about 90 and EBIT per square metre from about 40 to 60, so there’s a lot of upside in terms of earnings out of what you’ve got, isn’t there?
Goyder: Yeah, there is. So, on sales, you know, we’ve made good progress. One of the things we’ve done on sales per square metre is close underperforming stores, so when we took over the business there was a rump of probably nearly 100 stores that were subscale, small, inefficient and performing poorly, but they hadn’t been closed because you take a hit on sales. So we’ve closed those underperforming stores and the stores we’re opening now are bigger and better and that improves that sales per square metre and also improves your EBIT per square metre.
We’ve had, as I said earlier, I think 17 quarters now of sales growth and 14 quarters of outperformance, so that all helps. But EBIT we’ve got a way to go. That’s the opportunity obviously. And supply chain is a big part of that and there’s a lot of work to do on supply chain.
Bartholomeusz: As you continue to close that gap, is Woolworths the benchmark? Can you get more yield out of the existing footprint or is the next phase to actually expand the network?
Goyder: Both. We’ll expand at about 2 to 3 per cent of space per annum which is pretty much in line with economic growth, if you like, and demographics. So, we’ll expand, but we’ve got a lot more to do [with] the existing business. So, we’ve refurbished 300 of 750 stores, so there are still another 450 stores to go. We’ve reduced the number of distribution centres we’ve got from near 40 to low-20s, but we need to do some more on that front. We’ve got to get a more integrated supply chain, so we’ve only just bringing in now what we call easy ordering which is fully sort of linked supply chain systems into the fresh area, so you know there’s a heck of a lot more for us to do to improve the profitability of the business and, as I said, our liquor business needs a lot of work. There is a lot of work going on in liquor because, you know, we’ve got a lot of improvement to do there.
Gottliebsen: Over the five-year period or whatever period it might be, will you take your margin up to 7.5, the same as Woolworths, or will you reduce the prices further?
Goyder: We’ll look to keep prices low for customers, Robert, and you know I’ve never said that we aim to have the same EBIT to sales margin that Woolworths has.
Gottliebsen: So, the price war is going to become a little more intense?
Goyder: Well, you know, that’s good for consumers, but it’s also been good for our business.
Gottliebsen: But is it true? Are you going to make the price war intense?
Goyder: Well, it’ll stay intense, put it that way.
Kohler: What are you going to do about liquor? I mean, you know, you just simply don’t have the scale there that Woolworths has. They’ve got a fantastic liquor business, as you say. How can you compete with that?
Goyder: Well, Alan, the platform we had in terms of the businesses, particularly First Choice, the locations that we [had] when we took over Coles, were just not the right locations for a large format liquor business and we’ve had to close a number of underperforming locations and find new locations. Now, we’ve done some pretty good work on that and so the benefits from that will show in the coming years. We’ve also had to change the product mix. We were selling much too much beer at a very low margin in First Choice and we need to get a bigger mix of wine.
We’ve had to sort out Liquorland or improve Liquorland. Liquorland is not a bad business, but we’ve had to improve it, invest in it and make sure that Vintage Cellars is, you know, well positioned in its niche. So, there’s a lot going on. We’ve added some talented resources into the liquor business in recent times and certainly the performance in the last half was materially better than the…
Kohler: But there’s a fundamental difference in strategy in that they mostly combine in Dan Murphy’s both the bulk and the premium end which really works. You’ve got these various niches and it does seem that that doesn’t work, so fundamentally it seems to me you’re on the wrong path.
Goyder: Yeah. I think you’ll see in our new First Choices that it’s a much better business than the old First Choice was.
Gottliebsen: Just changing the subject, shouldn’t you sell coal ? Let’s get out of it. You’ve got a great retail business. You can see where it’s going. And you’re stuck in coal.
Goyder: It’s been a great business for us, Robert, for a long time.
Gottliebsen: It has, but it’s served its purpose.
Goyder: Yeah. But, you know, we acquired this business for $200 million in 2000 and we spent a bit of money on it, but it’s been a brilliant....
Gottliebsen: You’ve got 1.3 million or 1.4 million invested in it now.
Goyder: Billion. Yeah.
Gottliebsen: Billion, sorry.
Goyder: Yeah. And it’s now got, you know, export sales capacity of 8½ million tonnes per annum. It’s low cost quartile, long run I think the metallurgical export business would be a good business and, you know, when a business is in a cyclical decline through pricing, that is not the time to sell a business.
Kohler: But isn’t it the case that you actually want to remain a conglomerate? You just don’t want to be a retailer. You are a conglomerate. You know, if you sold coal, you sold insurance which you should have done years ago, I mean it’s not a question of selling it now, you should have done it years ago.
Goyder: I don’t...
Kohler: I mean we’ve been sitting here talking for 20 minutes about retail and you’re a retailer.
Goyder: No. We’re a conglomerate and happy.
Kohler: Yeah. But you have to stay a conglomerate otherwise you lose your job.
Goyder: No, no, I don’t. I can tell you that’s the last thing I’m worried about. I can tell you quite sincerely that’s the last thing I’m worried about. Never have been about it. But I think being a conglomerate actually has been a good thing for Wesfarmers and I think we’ve been successful as a company over a long period of time, not in spite of being a conglomerate but because we’re a conglomerate. And, you know Alan, if we’d had this interview six or seven years ago, you would have said you’re a resources business, why don’t you get rid of these other things because you know you’ve made a billion dollars out of coal and why don’t you get big as a resource company?
There have been periods of time before that when Bunnings was going well. People were saying, you know, you’re a retail company. We’re a multi-business company. We’ve been able to grow faster than most companies, if not all companies in Australia in the last thirty years because we’ve been able to expand in markets we know and understand. And we’ve got an operating system to run the business with empowered CEOs with a strong focus on return on capital and business that’s worked for shareholders. So, and it means that, you know, when we’re looking for expansion opportunities now we’re not faced with the dilemma of go overseas or else. We’ve got plenty of opportunities and, you know, hopefully that’ll be good for our shareholders into the future.
Gottliebsen: Would you consider buying more coal?
Gottliebsen: So, you’re looking to buy coal?
Goyder: No, no. We’d consider anything that can make a return for our shareholders. So, we’d consider more coal, we’d consider more retail, we’d consider more industrial businesses and, indeed if we felt an investment in insurance was going to be a good investment for our shareholders in the long run, we’d invest in insurance.
Gottliebsen: So, you’re looking at these other industries to see whether you should expand them?
Goyder: Of course.
Gottliebsen: All the time?
Goyder: All the time. As I might say, we look for divestments as well. And, you know, one of the things Alan, you said, you should have sold this business, you should have sold that business, right. One of the things that, you know, if you think about our coal business, I could guarantee you that after we acquired Coles every investment banker in Australia, if not the world, would have been ringing people saying, by the way you should buy this Wesfarmers coal asset because they’ve now got all this retail. And, you know, our door hasn’t been knocked down in the rush of people coming along and saying we’d like to buy it. So, you know, selling a business, you have to be opportunistic in some ways as well.
Bartholomeusz: The performance of the retail businesses and the fact that Bunnings is now starting to recycle capital as it starts to move property off its balance sheet means that your cashflows are starting to swell quite significantly. That provides an opportunity obviously for you to do a number of things. The perennial question is do you spend it or do you give it back to shareholders?
Goyder: Yeah. It’s a good question. And I think it’s a good observation. Over the last four or five years we’ve invested very heavily in the businesses, in capital expenditure. We’ve continued to pay dividends back to our shareholders at a payout ratio of about 90 per cent and we’ve strengthened our credit rating, so we’ve moved from a triple-B plus to an A minus in those five years. And, as you say, a lot of the capital in the last few years has been real estate for Coles and Bunnings and we’ll now be spinning some more of that off. So, I think the group is going to be in a strong, very strong cash generating position which enables us the opportunity to invest and or find efficient ways to return money to shareholders. And, as you all know, we’ve never been reluctant to give money back to shareholders if we don’t have a place to invest it. So it’s not burning a hole in our pocket.
Bartholomeusz: As these guys said though, at the moment you look like a retail conglomerate with these other things stuck on the back. Presumably this gives you the opportunity to get those other things up to scale or to get something else up to scale.
Goyder: Well, at the moment we’re investing 5550 million building more ammonium nitrate capacity at our chemicals business, for example, and we’ve also invested fairly heavily in the last few years expanding our coal production capacity at Curragh and Bengowlah. So, the industrial businesses actually had a fair degree of capital expenditure the last few years and we keep looking for investment opportunities But if we’re not confident that an investment is going to make returns above our cost of capital over the long run for shareholders, we’ll find an efficient way of giving the money back to shareholders.
Gottliebsen: So, the 90 per cent dividend payout ratio is pretty safe.
Goyder: I’ve said it’s approximately, but we know our shareholders like dividends, Robert, and in the current market they like them even more and so, our policy is to maintain them and grow our dividends over time and hopefully we can do that.
Gottliebsen: Just one last thing. The Master chain that Woolworths went in to to give you a bad time. That was a mistake, wasn’t it, for them?
Goyder: Well, you could ask Grant O’Brien that, but…
Gottliebsen: But, you know, has it really affected you?
Goyder: Oh, I mean it’s early days I think. What we’re pleased is that the momentum in Bunnings has continued. We’ve continued to add to the product range and service capability of the business. We’ve got a really strong pipeline of new stores to open. In the next few years we’ll open a lot of new stores because, you know, that just happens to be the case. So, I think Bunnings is a well run business that’s performing well and we’ll have competitors of all shapes and sizes and in any business you’ve got to deal with your competitors by being innovative, by being efficient and, you know, giving your customers what they want.
Bartholomeusz: Richard, I think it’s five years since Ian McLeod’s team was assembled largely from the UK. You’ve already lost one of them and the finance chief has gone back to the UK. Is there a risk that that team that you put together who’ve clearly done a superior job breaks up and goes home?
Goyder: I think Ian and his team have done a brilliant job and we’re looking forward to that continuing for some time. There will be some people, as in any business, who for family reasons – and that’s why Tony Buffin left – want to go home. But one of the things we’ve done well that isn’t in the spotlight has been build the talent pool in Coles immeasurably over the last five years and Ian… people like Ian and John Burke and Stuart Machin I think are first class operators. I think they’ve got, a really terrific future inside the Wesfarmers group those people — Simon McDowell and others. And we’ve now got the capacity to fil the breach if people leave in any case, so you know I’m very confident of the human resource capabilities we’ve got in the Coles business now.
Bartholomeusz: I think Ian has told people he doesn’t want to go home until St Kilda has won a premiership, so he’s possibly here for a very long time.
Goyder: Yeah. Well, here could be here for a while. Good luck if I said I’m only going to leave the CEO seat of Wesfarmers when Fremantle win a premiership. That could be a very depressing thing for a lot of people.
Kohler: We’ll have to leave it there. Thanks very much, Richard.
Goyder: Thank you all very much.
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