Coles' new-found sobriety will lift shareholders' spirits

Elizabeth Knight
March 6, 2019
The Age
Coles has been searching for ways to turbocharge its under-performing liquor business for years. It’s also long been keen to get out of the pubs business – or more particularly the poker machine business.
The decision to joint venture its Queensland pubs and bottle shops is an exercise in distancing itself from the ethical implications of gambling while still owning a gambling business.
But entering into a 50-50 joint venture structure under which each partner is entitled to a different earnings stream is quite a clever way to project the more wholesome business image of selling groceries and mitigate the more sinister public image of being part of problem-gambling.
The deal itself is not a large one for a company with an $18 billion market capitalisation.
(One of the more interesting out-workings of this deal is whether it will apply increased pressure on Woolworths to sell its pub business.)
So here is how Coles will structure it. Coles and its new partner Australian Venture Co (AVC) will each own 50 per cent of the assets that house the pubs and bottle shops but all earnings from the bottle shops will go straight to Coles and all the profits generated from the pubs will go straight to AVC.
In order to achieve this, each of the joint-venture partners will be issued with different classes of shares.
At least it will enable Coles to pledge that it doesn’t profit from gambling. It was always a sensitive issue for Coles’ previous corporate parent, Wesfarmers, whose management viewed it as a Corporate Social Responsibility stain.
However, the newly liberated Coles, which is now separately listed, is not playing the CSR card – well not with any great conviction.
Rather it sees the deal, under which Coles gets a handy $200 million in cash, as enabling it to expand the bottle shop business in Queensland without having to buy additional pubs.
Queensland’s system of liquor licensing is a peculiar anomaly from other states when it comes to selling alcohol. Bottle shops can’t be owned independently of a pub licence. Every pub licence allows the ownership of three nearby bottle shops.
This means if you want more bottle shops in Queensland you have to buy pubs.
The idea is that this joint venture can now starting buying Queensland hotels with bottle shops attached. And the best part for Coles is that its joint-venture partner pays for the pubs thus giving Coles a cheap option on building additional bottle shops.
AVC will manage the hotels but all those on the board of the joint venture, Queensland Venture Co, will have responsibility of the licences.
It’s a slightly messy way of skirting the arcane Brisbane licensing laws but it delivers the desired outcome.
Even before Wesfarmers acquired Coles in 2008, the supermarket group was never particularly keen on getting into the pub business. But even that far back Coles was battling to improve the financial performance of its liquor business which was under-represented in Queensland.
Today Coles says the pubs business “has never been material to Coles’ earnings”. It said the net impact on the liquor segment in the year to December 2018 would have been a $300 million reduction in revenue and would have cost earnings before interest and tax $13 million.
Small beer.
But for Woolworths it would be a very different story.
Woolworths operates its pub business in a 75-25 joint venture, ALH, with billionaire hotelier Bruce Mathieson. There was plenty of chat at the close of last year that a deal was brewing under which Mathieson would buy out his supermarket partner and move to separately list the pub business.
It seems Woolworths is also sensitive to the growing chorus of shareholders that don’t appreciate profiting from gambling. ALH is a far larger business with more than 300 venues. In the 2018 financial year, earnings before interest and tax came in at around $260 million – an increase of 11 per cent over the previous year. Sales for ALH topped $1.6 billion in that year. The company is worth an estimated $3.6 billion.
For Woolworths finding a way to fill that earnings hole would be a larger challenge. But the new breed of management under Brad Banducci will be more sensitive to the growing importance of a social licence versus a hotel licence.