http://www.news.com.au/finance/business ... 1a0ab6ad15SUPERMARKET giant Coles will be dumped by its parent company in a shock move that leaves it facing a very uncertain future without the backing of its enormous corporate parent.
The conglomerate Wesfarmers — which is Australia’s largest company in terms of revenue — announced on Friday it was done with Coles and, after getting the necessary approvals, would spin it off into a separate company.
Wesfarmers made it clear the performance potential of the huge supermarket chain was not good enough for them to continue owning it.
“Wesfarmers will measure its success over the next decade based on the returns that we generate, not the size of our portfolio,” said Wesfarmers managing director Rob Scott on Friday. “While Coles still has many opportunities to grow … its earnings can now be expected to grow at a more moderate rate.”
The Coles business — which includes 800 supermarkets, 900 bottle shops and 700 convenience stores — has recently begun to struggle. In 2017 Coles revenue fell and so did profits. Wesfarmers shares rose sharply on the news that it was dumping Coles, up 6 per cent.
Part of the problem is Australians’ insatiable taste for lower prices. The average price of goods sold at Coles, excluding fresh food and tobacco, fell by 2.2 per cent in 2017. While a lot of the pain of those price cuts is passed onto suppliers, profit is harder to come by in a time of falling prices.
Coles can’t hike prices because if it does, shoppers will go elsewhere. Aldi is continuing to open new stores across the country, while Woolworths is forecast to grow its sales four times faster than Coles.
Kaufland is also coming on strong, and of course Amazon could one day offer its Amazon Fresh business in Australia.
As this happens, Costco is also expanding with three new stores planned or under construction to add to its nine existing locations. It is also building a depot that can serve 30 warehouses. “This is Costco essentially making a long-term investment into the growth of our presence in Australia,” a Costco spokesman said.
The growing band of barbarians ready to ransack the lands on which Coles stands would make anyone nervous, and you can start to see why Wesfarmers might have wanted to get out.
But they’re not giving up everything. They will retain a stake of up to 20 per cent of Coles shares, and they will also maintain what they are calling a “substantial” share of Flybuys. If Coles has to stand on its own two feet without a controlling stake FlyBuys, that could make its life even harder post demerger.
Coles may not be a flashy business, and as discussed, its growth prospects are meek and mild. But worse corporate deals have gone down in recent memory. Frank Lowy just found a willing buyer for a $33 billion worth of Westfield shopping malls at a point in history where shopping malls have never looked more wobbly. Chinese buyers in particular seem excited to invest in Australia, and privateequity is, as ever, greedy for deals.
I would rather shop at Aldi than a Chinese owned Coles.
