It is no great surprise to me that Wesfarmers are spinning off the Coles supermarket business, and associated liquor and variety businesses. It also makes sense that they are keeping Officeworks and Bunnings, both stunningly successful businesses in Australia. Bunnings However, has failed miserably in the UK expansion, consuming capital and morale like a starving gypsy. It seems ironic that Coles thought they could beat the odds in the UK, just as Woolworths thought they could beat the odds with Masters here at home.
I do not think it is just being smart with hindsight to have foreseen the spin-off. Wesfarmers always seemed to me to be an owner that had adopted a culturally different and troubled although talented child, and was not too sure what to do with it. Despite pumping a lot of capital (around 8 billion) into the business and successfully turning it around beating the incumbent FMCG thug, Woolworths at their own game for a number of years, it still seemed to be an odd adoption.
A new Managing Director will always be keen to take the opportunity to ‘clear the decks’ of underperforming assets freeing up capital to deploy elsewhere in the hope of better returns.
New Wesfarmers MD Rob Scott is no different. Coles was a weight on the Wesfarmers balance sheet, accounting for 60% of capital employed, but returning only 30% of EBIT. Coles while a strongly cash positive business, is also the second player in a very mature market that faces a volatile future. However, it has played a role in the impressive increase in Wesfarmers value despite the nightmares that must have engulfed then MD Richard Goyder when the 2008 market crash occurred just after the $22 billion Coles acquisition in July 2007.
The FMCG market is entering a volatile period.
The channels to the consumer continue to fragment and enable the entry of innovative business models, and cashed up innovators. Aldi continues to make significant market share headway, Costco while a minnow is continuing to invest, Kaufland appears committed, and the shadow over everything is what Amazon may, or may not do. Meanwhile, online shopping is increasing, while at the extreme other end of the spectrum, farmers markets, and even ‘pick your own‘ schemes are growing like mushrooms after rain.
Sounds like a good time for Wesfarmers to sell out of what may become a ‘legacy’ business over the next 10 years, and to put shareholders capital to work elsewhere.
Header credit: David Rowe Via Australian Financial Review.
Looking beyond the questionable metaphor this is an excellent analysis Allen. I was a WES shareholder when they purchased Coles, and all but blew up their share price. The whole story is a lesson in corporate strategy. Quite impressive how they went after a dominant Woolworths and hauled them in. But in the end it has become a race to the bottom. And that is before the appropriately named Amazon (now there was a vision!) appeared as a large cloud on the horizon.
Thanks Bruce, I am glad it synced with your experience. I watched in surprise when Wesfarmers originally bought Coles, then struggled to refinance after the GFC, and at several points was really on the brink, then in admiration as they hauled in Woolies. However, starting a price war is never a good long term strategy, you might win, which they did and their financial improvement stalled, and Woolies have pulled ahead again.
If you have any shares left, I would not select the presumed option on listing the ‘new Coles’ of being able to transfer them into the new entity. the competitive landscape is just too unstable for a set of mature businesses like Coles. Having said that, i am not a financial adviser, so what would i know!