Coles concentrates on costs as CEO warns on consumer spending

Blair Speedy
The Australian
May 31, 2012

COLES managing director Ian McLeod has warned that consumer spending is set to remain subdued for some time, prompting the supermarket giant to focus on lowering costs and squeezing returns from its existing stores to drive earnings growth.

“We’ve still got a cautious consumer out there; I don’t think that’s going to change any time soon,” Mr McLeod said yesterday during parent company Wesfarmers’ annual strategy presentation for investors in Sydney.

“If we focus on combating our rising costs . . . we’ll deliver more value and we’ll satisfy that need that they’re looking for in terms of broader value.”

Mr McLeod said Coles had “significantly lost its way” when Wesfarmers acquired it in 2007, with poor customer service, value and fresh-food quality, and investors were sceptical the new management team could save it.

But improvements in all these areas, including a $1.6 billion increase in fresh-food sales, had translated into compound annual revenue growth from existing stores of 5.5 per cent, while earnings before interest and tax were up by 17 per cent annually since the acquisition, he said.

Coles has closed 87 underperforming stores since the takeover, replacing them with an equal number of new, larger stores. At the same time, 222 of its 740-plus existing stores have been refitted, including the extension of 34 sites, to compensate for what Mr McLeod described as “years of under-investment” by previous management.

However, despite spending $900 million on capital expenditure and property over the past four financial years, selling space had increased by only 5 per cent in net terms, a pace of growth Mr McLeod said he expected to maintain.

“We’re concerned to optimise the return on capital we’re getting out of these stores . . . it’s not just a race for space,” Mr McLeod said.

During this financial year, Coles plans to close 11 stores, open 19 new ones and extend another 10, expanding overall selling space by just 2 per cent.

Mr McLeod said the company wanted to address “structural deficiencies” in its store portfolio, continuing to replace smaller underperforming sites, but would not aim to increase sales by simply opening new stores.

Meanwhile, the supermarket’s FlyBuys loyalty card had been a hit with shoppers since last month’s relaunch added a slew of new discount offers, with the cards being used in about 50 per cent of sales, he said.

Mr McLeod, who this week signed a new rolling contract with Coles that is expected to see his annual pay packet shrink to about a third of the bonus-inflated $15.6m he took home last year, said the retailer was still some way from finishing the rebuilding process he was hired to lead in 2007.

“The turnaround is not complete: it was a five-year turnaround program and we’ve got another 15 months of hard work ahead of us to make sure that we drive that proposition and have the right building blocks in place to give us a platform to grow the business,” he said.

“This isn’t about five years, it’s the next 10 to 20.”

Shares in Wesfarmers closed 6c lower at $28.95 yesterday.