THE DISTILLERY: Wesfarmers' weakness

The commentariat pick up on a flustered moment for Richard Goyder, while one jotter eyes a Glencore power struggle.

Wesfarmers chief executive Richard Goyder and his executives are doing a splendid job turning Coles around, with Australia’s second-largest supermarket consistently outperforming larger rival Woolworths in terms of sales growth. Then again, Woolies is so much bigger than Coles, Goyder has to achieve solid results in percentage terms to keep up with his competitor’s total growth. Well deserved high-fives have been the Wesfarmers way of late, but Woolworths has expanded its footprint at an astonishing pace while Coles has stood still. Merrill Lynch retail analyst David Errington brought all this up during an analyst briefing yesterday with a question that left Goyder a little flustered and three business commentators with quite an impression.

Firstly, Fairfax’s Adele Ferguson quickly declared Coles the winner in the latest quarterly sales numbers, however the commentator did pick up on Errington’s observation that Coles has expanded its footprint by 9000 new square metres in the last two and a half years, compared to Woolworths’ 245,000.

"This lack of space growth was not missed on Merrill Lynch retail analyst David Errington at the analyst briefing yesterday morning. When he questioned the massive difference between both supermarket giants, Wesfarmers boss Richard Goyder tried to blow it off by asking if he was reading from the Woolies handbook. It might have provoked a giggle, but it was an important question because it could potentially be a big dampener on future sales. The rule of thumb is that a supermarket generates $14,000 of sales per square metre. Put another way, this translates into an extra $3.43 billion sales growth for Woolworths over the past 2½ years, compared with $126 million for Coles.”

The Australian’s John Durie, with reference to Merrill Lynch, picked up on the exact same point.

"It's a significant difference, especially when you consider that sales at Coles at $12.9 billion were 31 per cent behind Woolies. Wesfarmers boss Richard Goyder acknowledges the argument, but says he is big enough to grab the attention of the suppliers, and the days when volume discounts were a competitive advantage between the two are long gone. Maybe so, but it is worth noting the difference between zero growth in Coles's space and Bunnings, which is building 16 new stores today. Woolies certainly thinks it has a competitive advantage, but also acknowledges Coles boss Ian McLeod has taken the momentum from it in the supermarket wars.”

Whatever the precise nature of the product offering, floor space is at the core of successful, long-term, major league retailing because eventually you exhaust your existing footprint and the customers in it. But as The Australian’s Richard Gluyas points out – also picking up on the encounter between Goyder and Errington – Woolworths was blessed with a weakened competitor and could afford to grow its floor space.

"At Coles, by necessity, the strategy has been different, closing smaller and unprofitable stores that are a hangover from volume-obsessed previous management. When strong sales growth is added to the mix, admittedly from a low base, sales per square metre has risen impressively. This has lifted divisional return on capital by 130 basis points, from 6.5 per cent to 7.8 per cent last year. That's the story as told by Coles, and Goyder is unapologetic.”

Meanwhile, The Australian Financial Review’s Chanticleer columnist Tony Boyd takes a look at the power struggle between global commodity trading giant Glencore, led by Ivan Glasenberg, and its apparent merger-of-equals target Xstrata, led by Mick Davis. If Davis should get the top job in the event of a merger, it could one day make a dream for Davis to run the world’s largest mining company – bigger even than our own BHP Billiton – come true.

"Legend has it that after Davis was passed over for the top job at BHP Billiton, when that company was created in 2001, he vowed to turn the relatively small Xstrata into a global mining giant. In the decade since then has transformed a company with a market cap of $US500 million into one with a market cap of about $US50 billion. But at today’s market values, Davis is a long way behind catching his former Billiton colleague who worked on the BHP merger, Marius Kloppers. Kloppers sits atop the world’s biggest resources company but that may change. If Davis remains with the company after the merger of equals then the path would be open for the merged company to bid for Anglo American.”

Returning briefly to the Coles numbers for the rest of the business commentaries, The Age’s Michael West says there are few better indicators for the Reserve Bank to use than food price inflation/deflation at the major supermarkets. Given the news out of Woolworths and Coles, there’s plenty of room for a rate cut.

Staying with economic matters, The Sydney Morning Herald’s Jessica Irvine injects some much needed depth into the 'two-speed economy' concept, adding that it is not just a "multi-speed economy” – or "three speed economy” – but that there is nothing new about the current state of play between the states. A good read.

Meanwhile, The Australian’s Tim Boreham writes in his column Criterion that rare earths miner Lynas Corp has much reason to celebrate its temporary production licence in Malaysia, but warns that perhaps only speculative investors should wade into the stock. Boreham’s colleague Rowan Callick reminds readers that Australia’s economic relationship with Malaysia is under-emphasised and, given the disastrous outcome of the regional asylum seeker solution, this deal has come just in time.

Still in resources, The Australian’s Bryan Frith previews the pending downstream takeover bid for Perth’s Extract Resources from China Guangdong Nuclear Power Corp.

Elsewhere, Fairfax’s Insider columnist Ian McIlwraith revisits the once debt-threatened Photon Group amid allegations of former management engaging in misleading and deceptive conduct.

And finally, The Australian’s Stuart Kennedy says Facebook will become more circumspect as a publicly listed company.

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