Coles chief Steven Cain under the pump over fuel supply deal

JOHN DURIE
OCTOBER 15, 2018
The Australian
In a decade of ownership of Coles, Wesfarmers has not admitted to inflation hitting the supermarket, because it has driven down prices.
That record was broken yesterday, when new Coles chief Steven Cain admitted inflation was up by 0.6 per cent in the first quarter, even if — excluding fresh produce — it was down 0.8 per cent.
Coles’s sales increase was a crackerjack 5.1 per cent, which will mean the supermarket chain will have ended rival Woolworths’ seven quarters of domination in sales growth.
The unmistakeable conclusion to be drawn was that former Coles boss John Durkan threw the kitchen sink into winning the sales numbers, but profit growth will be weak.
This is important because next month Wesfarmers will sell 85 per cent of Coles to its shareholders, in a blatant piece of financial engineering to ramp up return on capital for the head stock.
Coles accounts for around a third of Wesfarmers earnings and 64 per cent of capital employed.
Since announcing the demerger, Wesfarmers has rammed home the point by unveiling a $1.1 billion distribution centre upgrade to load Coles with yet more capital expenditure, pinched Sarah Hunter, who is running the demerger for Wesfarmers, to head Officeworks, taken 50 per cent of flybuys and installed joint venture partner and 20-year Wesfarmers veteran James Graham as the new Coles chair. Added to this corporate governance nightmare comes a last quarter of inflated sales and seemingly inevitable weaker profit growth.
The reason for the increased fresh food costs was in part the drought, which sent up meat ­prices and increased grain costs, which in turn lifted bread prices.
Throw in increased wage costs, the impact of the flybuys promotion and plummeting fuel volumes and the reasons for concern on profits are clear.
Coles is until 2029 locked into a long-term petrol supply deal with Vitol, which bought Shell’s downstream businesses. Two years ago Vitol jacked up wholesale prices, so Coles simply raised its prices. But last year earnings fell from $190 million to closer to $130m.
Now fuel is a small part of the $1.4bn earnings before interest and tax reported by Coles.
However, new boss Cain will not want the division to drop another $60m this half.
Volumes in the first quarter fell by close to 16 per cent because Coles is charging 2c or 3c a litre more than competitors. That might not matter when fuel is cheap, but higher oil prices are driving up prices and the one third of customers who chase bargains are gone and another third, who are just convenience customers, are starting to question themselves.
In short, Cain has a problem with a key part of his business and, no matter how the convenience stores are running, fuel is a key driver. That said, Coles can take some credit for reasserting its position on top of the supermarket growth league. For Coles’s next trick, Cain needs to produce sustainable earnings increases