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Robb Scott named new Wesfarmers CEO
Wesfarmers announces Rob Scott will succeed Richard Goyder, who will step down from the role towards the end of this year. Vision courtesy ABC News 24.
Last week was a bad week for Wesfarmers, but good news for its shelf-stackers and shoppers.
Shares in the Perth conglomerate slid last week after it revealed it had spent about $200 million cutting prices at its supermarket chain, Coles, in the June half, and its UK hardware business, Homebase, was likely to be unprofitable for some time.
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"Coles is having to spend a lot of money to keep themselves competitive," an analyst said. "And it probably didn't execute very well in the past 12 months."
The question for investors, he said, was whether Coles was being strategic or desperate.
Citi is predicting Coles' earnings before interest and tax margins will fall to 4.5 per cent this financial year – their lowest level since 2010.
Australia's biggest retailer, Woolworths, famously maintained profits rather than cut prices for customers when Coles was on its knees in the 2000s.
Coles' revival under Wesfarmers saw profitability among large suppliers to supermarkets fall from 2010 to 2015, and the big two chains' profitability peak in the 2015 financial year.
At that point, Australia had the developed world's highest supermarket profit margins and Australians had the lowest level of trust in supermarkets across eight major markets, according to professional services firm EY.
But under new boss Brad Banducci, Woolworths has slashed its margins and invested more than $1 billion in price cuts to early this year steal the crown of same-store growth from Coles for the first time in 7 and a half years.
Now Coles was "sending a strong signal that it will continue to focus on driving sales productivity at the expense of near-term margins," Morgan Stanley said.
Wesfarmers is inextricably tied to the consumer and, as the GDP numbers showed, consumers are struggling.
Bruce Smith
"Lower profitability ... now seems an acceptable outcome for Wesfarmers."
And further price cuts are likely, which is good news for shoppers.
"Investing so much in price by Coles on top of what Woolies has done is a great outcome for consumers, [but] maybe not so great for suppliers or shareholders in the short term," said Bruce Smith, principal of Alphinity Investment Management.
It is unclear whether future price cuts at the checkout will be funded by suppliers, who complain they have nothing more to give.
Another question is whether current margins for supermarkets are about right or have further to fall as foreign chains Aldi and Amazon expand.
Investors have been shifting from Wesfarmers to Woolworths for about six months.
Wesfarmers shares are down 5 per cent this year and Woolworths share have gained 7.7 per cent, leaving  Smith to quip that some in the market "seem to be competing with each other to be the most bearish on the outlook for the group".
"It is a bit tough at present but Wesfarmers is inextricably tied to the consumer and, as the GDP numbers showed, consumers are struggling," he said, due to anaemic wage growth.
'Hard to be bullish'
Retail accounts for 90 per cent of Wesfarmers' earnings, and Coles about 50 per cent. Citi recently told clients it was "hard to be bullish on retail with such a weak macro-economic backdrop and longer-term risk around online competition".
Executive changes at Wesfarmers have created another level of uncertainty for the company, particularly when Woolworths'Â Banducci has been given the thumbs up from the market.
And on Thursday, Coles admitted underpaying much of its workforce in cosy deals it struck with the conservative shop assistants' union, meaning Coles will eventually face a bigger wage bill when it negotiates a new agreement.
Bright spots
But it's not all bad news for Wesfarmers.
"The good bits remain very good (Bunnings, Kmart), the turnarounds remain turnarounds (Target, Homebase) and Coles has a bit of ground to make up against a resurgent Woolworths," Smith said.
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