Coles MD reports rationale behind FoodWorks deal

Posted by Daniel Palmer on 30th June 2009

Supermarket chain Coles has suggested that the sale of 45 supermarkets to independent grocery chain Foodworks will have a negligible impact on their ability to close the market share gap to Woolworths, with the sale a key part of the turnaround of their store network.

“The transaction is part of our broader plans to improve and invest in the overall store network and is an important step in the Coles turnaround,” Coles Managing Director Ian McLeod said in an interview with “As a result of a comprehensive review of our entire supermarket portfolio we selected these 45 stores for transfer because they’re unlikely to meet our future store network plan due to their size, location, format or other factors.”

Mr McLeod said that the outlets to be sold were, on average, 1,400 square metres – 35 per cent smaller than their average store – and selling $5,500 per square metre less annually than the average of $12,700.

“We saw transfer to a more suitable owner as a preferable outcome for all stakeholders, particularly customers, team members and landlords. The stores’ size, location and format are much better suited to the FoodWorks network,” he advised.

Coles, which is still in the early stages of their five-year turnaround, will lose 2 per cent of their annual sales in the $35 million deal but believe overall efficiency will rise as a result.

Questioned as to the impact the deal could have on Coles’ purchasing power and the rebates received from suppliers, the boss of Coles said that they “don’t anticipate any impact”.

Mr McLeod reported that the store portfolio review was ongoing, although he all but ruled out “any further significant transfers”.

Is Bi-Lo dead?
Eight of the stores transferred were Bi-Lo outlets, but Coles maintains that the brand is currently a part of their plans going forward.

“Bi-Lo remains a part of the Coles group,” Mr McLeod noted. “It has improved its performance over the past 12 months.”

Beyond Bi-Lo, the company also says the move is not indicative of a concerted push to larger stores but rather an understanding that these particular smaller stores needed investment in tailored store formats.

“Whilst larger sites typically have scale benefits, including stock management efficiencies, this needs to be balanced against the demands of each store’s catchments and customer requirements. We’ll therefore continue to invest in a range of store sizes,” Mr McLeod said. “Our analysis supported the view that these stores would be more valuable in the hands of an alternative owner who could implement tailored store formats to optimise performance.”

Current trading conditions
In a sign of improvement, Coles’ first quarter like-for-like sales grew 1.3%, before rising 3.8% in the second quarter and surpassing the rate of inflation for the first time this financial year with a 6% lift in the third quarter. The growth in sales has been strong, albeit remaining lower than their major competitor, and Mr McLeod indicated that it has remained robust in the past two trading months.

“The business is travelling in line with our expectations,” he reported, adding that a more detailed update would not be provided until Wesfarmers’ full year results announcement on August 20.