Why Wesfarmers is cutting Coles loose 3.0

Posted by Gary Mortimer on 8th August 2018
Coles-Store

AFTER a decade of turning Coles around, Wesfarmers will demerger their $20 billion supermarket business. Retail expert Gary Mortimer tells Australian Food News why Wesfarmers is cutting Coles loose, and what’s at play in the move.

This is the third and final instalment from Associate Professor Mortimer on why Wesfarmers is cutting Coles loose. In part one, we learned Wesfarmers has 61 per cent of its working capital invested in a business that is contributing 34 per cent of the conglomerate’s profit (EBIT). In part two we looked at steps to market, investing in FlyBuys MAX and keeping a stake in FlyBuys data.

Private equity groups and international players

While Wesfarmers will remain a minor shareholder of the new company, it will be interesting to see which companies will be casting an eye over the books as the new and separate Coles business lists on the ASX.

Putting a food, liquor and convenience business comprising over 2500 locations onto the market becomes a very attractive proposition for international players to enter, like Walmart or Carrefour.

Walmart has a long history of international market entry via acquisition. Wal-Mart entered Canada through an acquisition. In Mexico, due to cultural differences, they used a 50/50 joint venture with Cifra, Mexico’s largest retailer. Entry into Brazil was also accomplished through a joint 60/40 (in favour of Walmart) with Lojas Americana. French retail giant Carrefour too has adopted different approaches to international expansion, including joint ventures and acquisition. Then there is of course Amazon’s purchase of US grocery Whole Foods, which enabled them to grow the food element of their offer.

Potential relationship impacts

The new ownership – be it a private equity group or international player – will have impacts on existing relationships, none more important than the relationship between the supermarket and suppliers. While the nature of these relationships have regularly been criticised and investigated, a new owner will bring these matters back to the forefront. Ultimately, private equity good and global businesses generally purchase companies and enter markets where considerable return on investments (ROI) can be made.

A new Coles company will become a more agile business, no longer constrained by a conglomerate ownership model and this will present challenges for a newly refreshed and profitable Woolworths. This will lead to faster innovation, greater investment and potentially another battle for market share between the two big supermarkets.

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About the author:  Associate Professor Gary Mortimer from the QUT Business School is an active researcher in the areas of food retailing, retail operations and shopping behaviour, particularly consumer behaviour in food retailing and shopping.

Prior to joining QUT, Dr Mortimer spent over 20 years working with some of Australia’s largest general merchandise and food retailers.

 

Wesfarmers subsidiaries: Bunnings Warehouse, Coles Supermarkets, BI-LO, Pick ‘n Pay Hypermarket, Coles Express, Coles Central, Liquorland, Vintage Cellars, 1st Choice Liquor Superstore, Officeworks, Officeworks BusinessDirect, Harris Technology, Kmart, Kmart Tyre & Auto Service, Target, Curragh Queensland Mining, Bengalla Mining Company*, Koukia*, Blackwoods, Bakers, Total Fasteners, Bullivants, Wesfarmers Industrial & Safety NZ, CSBP, PB Workwear, Australian Gold Reagents*, Kleenheat, Unigas*, Coregas, Gresham Partners Group*, Wespine Industries*

*Joint ventures