|Summary: From NBN line tangles at Telstra, to Coca-Cola’s milk war, Coles’ pay dispute, and Caltex’s big food play, there are lessons for every investor.|
Key take-out: Various developments across the retail sector are worth noting, and some have potential ramifications for investors.
Key beneficiaries: General Investors. Category: Strategy.
For many years I have been reminding Eureka readers to monitor their own personal experiences with the companies they invest in.
If it is a bad experience, it obviously doesn’t mean the company is either overpriced or is about to suffer a reverse (or if it’s a good experience, the reverse). But it is an alert to keep your eyes open for further developments that might come in obscure announcements.
So today I am going to relate about my experiences with Telstra, milk and Coca-Cola. And then I am going to move to developments in the retail industry that I do not think the institutions fully understand. My reference point for this will be Caltex.
As many of you know, we have a property at seaside Anglesea and after some delays the Anglesea community was promised the NBN. So the letterbox was bombarded with material from various groups wanting to provide our NBN service.
There was a letter from Telstra, but they were swamped. But with the exception of Telstra all the mobile phone companies provide a bad service to the residents of Anglesea, so it is a Telstra town. So like everyone else I phoned the Telstra number and was told someone would get back to me within 10 days – they came back in about 25 and it was a caller offshore who had difficulty fathoming my situation.
After raising my voice we were able to gain the required two appointments on suitable days. But it wasn’t a pleasant experience, because the person involved was running on a script and really didn’t understand what was happening in Australia. If Telstra behaves like that around the country, it is in danger of performing poorly in this exercise.
Then, more importantly, I yarned with the local plumber. He had a far more horrific story where he had a long conversation with a Telstra person, but record of it was completely lost. Then there was the post master who got the NBN connected via Telstra but then it didn’t work. I don’t know whether this is the fault of Telstra or the NBN, but there is chaos out there and any group that succeeds in helping its customers through the mess is going to do very well.
At least on the basis of what happened in Anglesea, it won’t be Telstra. That maybe unfair—that’s why experiences like this are warnings not definitive indicators. The interviews are still to come and I will let you know if things get better as time progresses.
Coca-Cola’s flavoured milk battleground
I have been noticing around the convenience shops that milk seems to becoming a lot more popular than sugared soft drinks. If it continues, this trend will hurt Coca-Cola. A lot of momentum in milk is related to flavoured milk, which like Coke, Pepsi etc has a high sugar content. So sugar content is a question of perception rather than actual fact.
Coke faced the flavoured milk challenge a few decades ago and won, but now it has come again. It will need great skill to handle this problem because too much emphasis on sugar can be very counter-productive for a soft drink producer. Keep your eye on how Coca-Cola handles the problem.
Coles’ penalty rates dispute
The other day I was yarning to the Caltex group, and what really surprised me was the fact that the institutions aren’t asking the company how it is handling what is probably the greatest retail issue of the current period – the fact that the major retailers have been paying their Saturday, Sunday and night workers at a rate that is well below the award.
This is now being challenged in the Fair Work Commission. The challengers have won the first round and Coles has to retreat from its 2014 agreement to the 2011 agreement, but it now a challenge has been mounted against that agreement.
Coles is confident of winning. Alternatively, it is hoping the retail penalty rates will be reduced to the hospitality rates so if it loses then the cost burden will not be as great. As you know, all the major retailers reached an agreement with the retail union where they would pay less than the award for those working evenings and Saturdays and Sundays, and more than the award for those working Monday to Friday in conventional hours. The quid pro quo was that most of the retail employees would belong to the union, which in turn became the richest in Australia and the biggest funder of the ALP.
This matter is without doubt the biggest issue in retail and it is stunning that it is not being discussed. If Coles, effectively acting on behalf of all major retailers, wins the case then the status quo will remain. Coles is confident that this will happen. But the people I speak to in the enterprise bargaining industry say Coles has almost no chance of winning because the act does not allow for those sorts of arrangements. If Coles loses, then the cost of retailing in the fastest-growing time slots – night, and weekends – is going to rise sharply, particularly on Sunday.
The person challenging Coles wants back pay and if they were to get that it will be a huge bill, not only for Coles but all retailers. I am not making a forecast as to which way that case will go, but it is certainly a huge risk for all major retailers, particularly as they are engaged in price competition with Aldi, which is not a beneficiary of the arrangement.
If the retailers increase their prices to reduce the profit burden of an adverse ruling, then Aldi will take big slabs of market share. What surprises me is that this major risk area is not being appreciated by the major institutions, so if Coles loses the case there will be a big market shock.
Caltex’s big food experiment
The Caltex story is an interesting one, because after closing its Sydney refinery it converted itself into a major global oil product supply chain. It did that, not by buying an existing business but by recruiting key experts from other major supply chain operators/traders from around the world. The company believes it has the talents to create a convenience store offering which is totally different to that currently provided by the supermarkets and groups like 7-Eleven.
The Caltex plan involves customers ordering by phone or email their meals, including wine and trimmings, and then picking up those meals from their service station site along with their dry cleaning and Australia Post parcels. It plans a small-scale trial and is very aware of the dangers of starting a new business on a major scale.
But, at this stage, Caltex is not planning major acquisitions but rather duplicating what it did in the supply chain and recruiting top executive talent. If you operate on this basis, when it comes to securing the right people you must not be afraid to offer a high price to attract the talent. All companies operating in competitive industries should be aware that in the current environment, where wage rises are not being given, their top people might be frustrated and if they are offered big pay rises they might walk out the door.
I know it is politically incorrect, but lower-priced people are generally easier to replace than your talented top executives. Of course, you must know which executives are irreplaceable and which are simply there to make up the numbers.
Footnote: My guess is Caltex will change its name to AMPOL, but the food business will have a different name.