Why Wesfarmers is cutting Coles Loose 2.0
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, in this second instalment of his analysis.
This is the second of three instalments 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 simple terms, as a property investor, would you continue to leave 60 per cent of your cash in one property, if it only returned 30 per cent value to your overall portfolio? Find part one here. In part two we look at steps to market.
Dressing for the party
It’s a bit like detailing your car before selling it. What shoppers and potential investors will see over the coming months is Coles investing in stores, marketing and retail talent.
Last month, materials were leaked to the media about the Coles trial of their subscription based FlyBuys MAX program. Coles later confirmed their intention to roll this program out. Essentially taken directly out of the Amazon Prime Playbook, the program intends to provide shoppers with discounts across fresh produce and meat, free delivery on online purchases (over $50), access to a streaming service and bonus points per dollar spent; for $10 a month or $99 a year. A smart move by Coles to capture the online grocery market, growing at 12.5 per cent. Further, customers will seek to get ‘value for money’ on their monthly $10 investment.
In the past month, Coles has announced a new management team, including ex-Coles boss Steven Cain, rolled out a very successful ‘Collectibles’ (miniature product toys) promotion, which has captured media attention and announced their intention to spend $500 million on in-store refurbishment.
Knowledge is power
Other than potentially cash back on the balance sheet, the sale creates two long-term revenue streams for Wesfarmers. To begin with, Wesfarmers will aim to a hold 15 per cent stake in the new company – thus, continuing supermarket generated revenues will flow back to Wesfarmers.
More importantly, Wesfarmers will retain a 50 per cent share of their FlyBuys data. The value for Wesfarmers in continuing to collect, analysis and disseminate shopper information is best highlighted by Woolworths move to purchase a 50 per cent share of data mining firm Quantium in 2013 for almost $20 million.
Retaining control over this data will allow Wesfarmers to boost its customer analytics capabilities, tailor promotions, ranging and store layouts across all of their other retail businesses. Further, any potential new owners of Coles will be eager to access this information.
Read Associate Professor Mortimer’s third and final instalment of this analysis on Wednesday.
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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*