Coles transformation to see them eclipse Woolworths’ growth rate by 2010?
Coles’ five-year turnaround may not be as difficult as some have suggested, according to Craig Woolford – a retail analyst for Citi Investment Research; with sales potentially receiving a $1.3 billion boost by 2012.
Mr Woolford’s review of Coles and Bi-Lo outlets suggested that management had been the primary difference between Coles and Woolworths, validating Wesfarmers’ decision to overhaul the management team after they purchased Coles Group in 2007.
“Our findings show that Coles’ problems are not structural, they are management challenges centred around staff service, store format, produce range and the pricing strategy,” Mr Woolford advised in a note to Citi clients.
Since the takeover Wesfarmers has enticed a number of managers from leading UK retailers Asda, Tesco and Sainsbury’s, and they now believe they have the team in place to again challenge Woolworths.
“In our planning for the acquisition of Coles we knew we needed a vastly changed top team of people. We also knew that the good people we needed would undoubtedly be employed elsewhere,” Wesfarmers Chairman, Trevor Eastwood, said at last year’s AGM. “I am happy to report that we (now) have in place a world class management team to drive this company towards a successful future.”
Coles and Bi-Lo missed out on $6.1 billion worth of sales in 2007-08, which would equate to about $350 million in pre-tax profit, according to Mr Woolford. As a result, there was around a 22 per cent discrepancy between the sales per metre recorded at Coles compared to market leader Woolworths. Mr Woolford was confident that the gap would shrink in the next few years, provided the company strengthened their focus on improving stores, service and pricing strategies.
He believes that the chain has a more lucrative store network than rival Woolworths, dictating that sales per store should be around $33 million as opposed to Woolworths’ potential of $31 million. As it stands, however, Woolworths is capitalising on the investments they have made in efficiency and reaping sales above their ‘potential’ at around $33 million per store, while Coles outlets only average around $25 million. On those calculations, Coles is trading around 24% below its potential and Woolworths is 6.45% above theirs.
Despite the comparatively disappointing results over the past few years, Mr Woolford was bullish about the future for Coles, optimistically predicting sales growth to eclipse that of Woolworths in the next financial year.
Based on this year’s data to date that would represent quite a turnaround. In the first quarter, the comparative store sales growth recorded at Coles was 1.3 per cent as opposed to 6 per cent at Woolworths. Coles did manage to make some inroads in the second quarter, with growth of 3.8 per cent compared to 7.1 per cent.
By the completion of the 2012 financial year the chain may have clawed back most of the 1.75 per cent market share it has yielded over the past three years, Mr Woolford suggested. If so, there sales would be boosted by around $1.3 billion, with almost half ($620 million) to be taken from Woolworths.
Potential, of course, does not guarantee results – something investors would only be too aware of – but there are signs that Coles may be finding its feet after treading water for most of the 21st century.