It was a very different John Durkan who stepped up to the podium for the release of Wesfarmers' half-year result this week.
The experienced Coles boss dispensed with the usual, carefully crafted corporate script to rattle the sabre at arch-rival Woolworths and promise a fight to protect its hard-earned market share.
More BusinessDay Videos
- Video duration
- 01:42
Wesfarmers half-year mixed bag
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.
Up Next
Samsung chief arrested over alleged bribes
- Video duration
- 01:19
- Video duration
- 01:19
Samsung chief arrested over alleged bribes
Samsung chief arrested over alleged bribes
Jay Y. Lee has been arrested over his alleged role in a corruption scandal that led South Korea's parliament to impeach President Park Geun-hye.
Up Next
ANZ profit surge
- Video duration
- 02:09
- Video duration
- 02:09
ANZ profit surge
ANZ profit surge
Shares in ANZ are in focus after the bank posted a 31% surge in cash profit.
Up Next
Uber ordered to pay GST
- Video duration
- 02:56
- Video duration
- 02:56
Uber ordered to pay GST
Uber ordered to pay GST
A Federal Court judgment on Uber raises GST issues over the entire sharing economy. Vision courtesy ABC News 24.
Up Next
Under Armour sinks after dismal forecast
- Video duration
- 02:29
- Video duration
- 02:29
Under Armour sinks after dismal forecast
Under Armour sinks after dismal forecast
In January, Under Armour shares tumbled the most in nine years after its sales forecast missed analysts’ estimates by a wide margin.
Up Next
New 10 dollar note revealed
- Video duration
- 01:01
- Video duration
- 01:01
New 10 dollar note revealed
New 10 dollar note revealed
See some of the new design and security features of Australia's latest $10 banknote.
Up Next
Telstra posts profit slump
- Video duration
- 01:20
- Video duration
- 01:20
Telstra posts profit slump
Telstra posts profit slump
Increased competition in the mobile space is being blamed for Telstra's half-year profit slump.
Up Next
'Reshoring' US manufacturing jobs?
- Video duration
- 01:56
- Video duration
- 01:56
'Reshoring' US manufacturing jobs?
'Reshoring' US manufacturing jobs?
The US has serious problems with recruiting, training and retaining suitable factory workers. Michael Pascoe explains.
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.
In place of the usual disciplined beige lines about shareholder returns and the value of a maintaining a long-term focus, Durkan proclaimed Coles would "never give up" and remain "competitive forever".
It sounded like a declaration of war and contrasted sharply with his comments from just four months ago that its competitors' pricing and promotional activity would not distract it from its own carefully planned strategy.
Related Content
Even more than that, the response appeared unusually combative for the respected, Perth-based conglomerate but then a lot has changed at Wesfarmers in the recent months.
The much-telegraphed announcement of Rob Scott as the next chief executive on Tuesday came less than three months after long-time Bunnings boss John Gillam shocked the market by stepping down from his role.
Gillam remains working for Wesfarmers in an advisory role and outgoing chief Richard Goyder said at the half-year result this week that Gillam and finance director Terry Bowen had both made it clear they did not want the top job.
Challenges loom
One source close to Wesfarmers said the appointment of Scott was a change the operation needed but he takes the reins at a tumultuous time for the 103-year-old business.
The biggest challenge for Scott will be managing Wesfarmers' portfolio of maturing businesses and finding "appealing acquisition targets" according to Citi, and it warns suitable acquisitions could take years to find, which puts the performance of Coles squarely in the frame.
It's just over a year since Wesfarmers outlaid $705 million for the Homebase hardware business in the UK and Citi says it's unlikely to make any other offshore acquisitions until there are signs of success from Bunnings UK.
Citi's head of research Craig Woolford says Wesfarmers had always been "more focused on adding value through its management style and business planning process than through building scale in a particular industry".
Citi also noted the elevated turnover of very senior roles at Wesfarmers in the past 18 months with the departure of chairman Bob Every, Goyder, Gillam, Target boss Stuart Machin, managing director of chemicals, energy and fertiliser Tom O'Leary and resources boss Stewart Butel.
Cole's management's language suggests the risk of a price war is higher than we thought.
UBS analyst Ben Gilbert
But it was Coles' pugilistic response to a resurgent Woolworths and Aldi's expansion into South Australia and Western Australia that dominated commentary about the conglomerate this week and how it will drive future growth.
War chest
The sale of coal and the potential spin off of Officeworks – which was announced this week – would deliver Wesfarmers' a $4 billion war chest but these divestments will also increase the group's reliance on its retail businesses.
Margins are under intense pressure at Coles, the chain has given up profitability to fight back against Woolworth's $1 billion investment in cutting prices and rebuilding Australia's biggest supermarket chain.
Durkan's decision to "pull forward" price cuts and promotions – estimated to be worth $50 million – ahead of schedule amounted to a doubling in the rate of investment from the first quarter and sparked concerns of a mutually destructive price war between the two majors.
On the back of that investment bank UBS is forecasting an 80 basis point decline in Coles' food and liquor margin to 4.6 per cent in the second half, a slide that will weigh on earnings before interest and tax, sending them back by as much as 15 per cent, according to analyst Ben Gilbert.
"While we commend Coles' decision to take a long-term view to maintain its competitive position in food, the late stage at which this has occurred ... surprised and worried us," Gilbert says.
Woolworths stepped up its investment 18 months ago and Aldi launched in WA and South Australia by the middle of last year.
"Coles management's language suggests the risk of a price war is higher than we thought and that Aldi, Woolworths and Metcash may need to respond," Gilbert says.
'Fat and happy'
Merrill Lynch analyst David Errington has consistently argued that Woolworths' margins should be above Coles'.
"We've always maintained Woolworths should have higher margins than Coles because of their scale advantage and the fact that Woolworths has invested heavily in their back end," Errington says.
Sacrificing margin to maintain a competitive edge is what Australia's supermarket sector should be doing, says Alphinity Investment Management portfolio manager Bruce Smith.
"One of the reasons the supermarket industry got into such trouble was that it got fat and happy," says Smith.
"Coles is doing absolutely the right thing by responding to the price competition. If it was worried about the short term, you would expect it to be protecting its margins."
The Coles supermarket business is expected to account for as much as 36 per cent of Wesfarmers' full-year earnings before interest and tax this financial year, according to Macquarie Wealth Management.
The group's exposure to the fortunes of Coles and its reliance on the chain to drive earnings growth will intensity if it stitches up a sale of coal and Officeworks, potentially increasing pressure on Wesfarmers to make another major acquisition outside of retail.
Scott said this week it would be very "un-Wesfarmers" to deliberately set out to diversify away from retail but if change is the only constant at the conglomerate, as he claimed, he might be forced to challenge the 'Wesfarmers way' early in his tenure.
0 comments
New User? Sign up