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Wesfarmers vows Coles will be competitive forever

Supermarket giant Coles is on a war footing, with boss John Durkan defiantly declaring the Wesfarmers-owned chain would be "competitive forever" and "never give up" after Woolworths' billion-dollar investment in prices and Aldi's national expansion slashed earnings.

As the conglomerate circles the wagons around its prized supermarket business, Wesfarmers has put its Officeworks chain up for sale through a sharemarket listing at the same time as it works through indicative bids for its coal operation.

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Wesfarmers half-year mixed bag

The retail giant reported strong results from Bunnings, Kmart and Officeworks, but a decline in earnings from Coles and Target.

The sale of coal and a potential float of Officeworks could deliver Wesfarmers more than $4 billion, a valuable war chest as it fights off a resurgent  Woolworths, invests in rebuilding the Target chain and converting British shoppers to its Bunnings hardware store model.

Mr Durkan revealed promotions and price cuts were "pulled forward" in the second quarter in response to increased competition from arch rival Woolworths and Aldi's rollout in South Australia and Western Australia.

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It wasn't enough to prevent a 6.8 per cent slide in earnings in the first half at Coles as lower prices weighed on profitability.

"We will always be competitive and we will never give up on that ... we do that to drive the business for the long term," he said.

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Pressure applied

Under pressure from analysts to explain how this was a rational response and not a path towards destroying profitability, Mr Durkan said 2016 was the weakest grocery market in 30 years.

"I go back to the fact that I think it's been an unusual year in terms of price adjustment but we've also had the rollout of  a major competitor in two different geographies.

"I can't say that won't happen twice but it would be unusual. What I do see is that there's plenty of room to grow in this marketplace for all players."

Mr Durkan said Coles' share of fresh foods  was nowhere near where it needed to be and there was plenty of room for it to grow earnings and be a "good cash-generating business on the back of that."

Wesfarmers would not quantify the cost of this strategy but it amounts to double its investment in price and promotions in the first quarter and it forecast this supercharged spend would continue through the second half of the financial year.

Chief executive Richard Goyder defended the big investment and the sustainability of ploughing so much into its supermarket business, saying Wesfarmers had worked hard to build its competitive position and would fight to maintain it.

Woolworths warned

And in what sounded like a warning to Woolworths, he said Wesfarmers had the balance sheet right now to back the fight and protect Coles' competitive advantage.

"We've seen what happens if you don't respond, we've seen it in Australia and we've seen it overseas, it's really important we maintain a position that we've worked really hard to build," Mr Goyder said.

Wesfarmers has doubled Officeworks' profits since acquiring the business through its $19.3 billion purchase of Coles in 2007 and it's now preparing to sell the chain and take advantage of investor appetite for its exposure to small business.

Operating in the small-to-medium-size business market, Mr Goyder denied the decision to explore a trade sale or float was a response to the looming arrival of Amazon and more about "an opportunity for shareholders".

Earnings in the stationery and office supplies chain have doubled since 2009 and Officeworks was delivering a 13.9 per cent return on capital, Mr Goyder said, making it the right time to capitalise on the turnaround.  

"Officeworks is quite a discrete business and in a sector that we like, but we think other people will like that SME sector too," Mr Goyder said.

"The every-channel strategy at Officeworks is going well and we've had advice that there may be an opportunity to IPO the business and in the process create real value for Wesfarmers shareholders."

Homebase loss

The transformation of Wesfarmers' Homebase business in Britain ran at a $48 million loss in the first half, prompting analysts such as Merrill Lynch's David Errington to ask how much further it would sink into the red.

Wesfarmers forecast the second-half performance of the business would be better than the first given it coincides with the northern hemisphere summer, and Mr Goyder said its conversion to Bunnings was on track to hit its forecast of an 18 per cent return on capital within five years.

Wesfarmers has meanwhile credited the group's conglomerate structure for a 13.2 per cent increase in half-year net profit to $1.57 billion.

The result is well above analyst consensus estimates of $1.47 billion. Mr Goyder said it had benefited from significantly higher earnings at Wesfarmers' industrials division, courtesy of higher coal prices.

Wesfarmers' revenue rose 4.3 per cent to $34.9 billion, and earnings before interest and tax were up 15.1 per cent to $2.42 billion.

Wesfarmers will increase its interim dividend 13.2 per cent to $1.03 a share.

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