Would you buy shares in the ‘New Coles’?
It is no great surprise to me that Westfarmers are spinning off the Coles supermarket business, and associated liquor and variety businesses. It also makes sense that they are keeping Officeworks and Bunnings, both stunningly successful businesses in Australia, although Bunnings has failed miserably in the UK expansion, consuming capital and morale. It seems ironic that Coles thought they could beat the odds in the UK, just as Woolworths thought they could beat the odds with Masters here at home.
I do not think it is just being smart with hindsight to have foreseen the spin-off. Westfarmers always seemed to me to be an owner that had adopted a culturally different and troubled although talented child, and was not too sure what to do with it. Despite pumping a lot of capital (around 8 billion) into the business and successfully turning it around beating Woolworths at their own game for a number of years, it still seemed to be an odd adoption.
A new Managing Director will always be keen to take the opportunity to ‘clear the decks’ of underperforming assets freeing up capital to deploy elsewhere in the hope of better returns.
New Westfarmers MD Rob Scott is no different. Coles was a weight on the Westfarmers balance sheet, accounting for 60 per cent of capital employed, but returning only 30 per cent of EBIT. Coles, while a strongly cash positive business, is also the second player in a very mature market that faces a volatile future. However, it has played a role in the impressive increase in Westfarmers value despite the nightmares that must have engulfed then MD Richard Goyder when the 2008 market crash occurred just after the $22 billion acquisition in July 2007.
The FMCG market is entering a volatile period.
The channels to the consumer continue to fragment and enable the entry of innovative business models, and cashed up innovators. Aldi continues to make significant market share headway, Costco, while a minnow is continuing to invest, Kaufland appears committed, and the shadow over everything is what Amazon may, or may not do. Meanwhile, online shopping is increasing, while at the extreme other end of the spectrum, farmers markets, and even ‘pick your own‘ schemes are growing like mushrooms after rain.
Sounds like a good time to sell out of what may become a ‘legacy’ business over the next 10 years.
Allen Roberts is a guest contributor to Australian Food News and writes another of his regular articles here. He is the Director of Strategy Audit www.strategyaudit.com.au and has worked in the food sector for more than 35 years. To read his full biography click HERE.
