Coles turnaround “to gather pace over the next 12 months”: Wesfarmers

Posted by Daniel Palmer on 16th February 2009

Wesfarmers Limited, the owner of Coles supermarkets, today announced a 46.3 per cent lift in net profit after tax to $879 million for the half-year ended 31 December 2008,  which was in the upper range of guidance provided on 14 January 2009, and includes $125 million (post-tax) in write-downs and provisions.

The all-important Coles turnaround was gathering pace, Wesfarmers Managing Director, Richard Goyder, advised. “Despite the impact of a tougher consumer environment, the Group’s retail businesses have generally weathered the downturn well and the Coles turnaround is gaining momentum,” he said.

Operating revenue for the six months increased to $26.4 billion, boosted by the inclusion in the current period of a full six-month period of ownership of the Coles, Target, Kmart and Officeworks businesses.

Mr Goyder reported that the signs are suggesting the five-year Coles turnaround plan remains on track. “Our turnaround retail businesses are generally performing well despite the challenging conditions,” he advised. “Particularly pleasing are the signs that the turnaround in Coles is gaining traction. In the second quarter of the financial year, Coles’ Food and Liquor comparative store sales growth was 3.8 per cent compared with 1.3 per cent in the first quarter.”

“The business achieved a record Christmas trading period driven by its fresh offer. We’ve also seen the upward trend continue since 31 December 2008,” Mr Goyder said about Australia’s second largest supermarket operator. “Under Ian McLeod’s leadership, there is a strong new senior management team, a new customer focused culture and a more efficient head office. During the period the team has continued with the development of new store formats, achieved much better in-store availability (up 50%) and an improved fresh offer.”

“Liquor sales have grown while the Convenience business continues to show strong non-fuel sales growth.”

The first phase of the Coles recovery strategy revolves around developing strong retail disciplines, improving operating standards, effective financial control, changing the culture, and starting the process of reformatting the stores to create a stronger fresh offer and a more customer friendly shopping experience, the company explained.

“Recognising that further consistency of Fresh in-store will be required, early stage actions to improve quality, display and availability delivered solid trading uplifts. Christmas trading was encouraging, with notable improvements in Produce, Bakery and Seafood. For example, sales of prawns and lobsters grew by over 50 per cent year on year,” Wesfarmers reported.

The pilot store trials, which are gauging customer reaction to help Coles determine the most effective format for the future of the supermarket, had received “encouraging” responses from shoppers and there are plans for a “further roll-out next financial year, subject to successful refinement.”

A stronger promotional programme was developed and aligned to peak trading days, with a positive response in both customer reaction and sales impact. While Coles’ housebrand review was also completed, with the supermarket chain reporting Housebrand sales grew three times faster than alternative branded products. Sales of the ‘You’ll Love Coles’ brand had risen 12% year-on-year.

“While initial response is pleasing to an array of early programmes that have been instigated in all parts of the business, it is recognised that delivering the necessary change required to a business that had lost its way will take time,” the company warned. “Despite the scale of change required, this can be achieved.”Mr Goyder explained that the economic environment would be challenging for most of the Group’s businesses over 2009 but still anticipates momentum to pick up for the Coles business.

“I expect the turnaround of Coles to continue to gather pace over the next 12 months,” he concluded.