Coles plans smaller supermarkets

ELI GREENBLAT
The Australian
July 19, 2018

Coles has been secretly working on a new small-store format codenamed Project 535 for the past two years, which will see the rollout of as many as 120 neighbourhood stores that fuse aspects of a convenience store with a full fresh and packaged grocery offer.

A hand-picked team drawn from all departments within the supermarket group has been working behind frosted security doors at the chain’s headquarters in Melbourne, putting the finishing touches to the new format. The first store will open in the leafy eastern Melbourne suburb of Surrey Hills later this year. 

The new small-store format is a strategic response to the problem Coles, Woolworths and other large chains face in finding sizeable blocks of land in congested capital cities for new standard-sized supermarkets.

This has forced Coles to rethink its store portfolio. It now believes there is land available and demand from shoppers for 80 to 120 of the small format supermarkets to be opened over the next five years.

The new stores will have as many as 1500 grocery items not available in larger Coles stores, with a special emphasis on health foods, artisan and vegan products. 

They are geared to more affluent big city neighbourhoods crammed with apartment towers full of young professionals.

It comes as Coles chief executive John Durkan told The Australian that the nation’s second-largest supermarket chain had not underinvested in its store network and, in fact, had spent $8 billion in the past 11 years of ownership by Wesfarmers. 

He also rejected analysis published this week by UBS analyst Ben Gilbert that Coles had let its store refurbishment cycle blow out to about 15 years over the past three years, well above the industry norm of seven to 10 years, and would need to spend as much as $500m to catch up to Woolworths and Aldi.

“Our average cycle of all stores we have done (refurbished) is circa eight years,” he said.

“When I joined Coles in 2008 it was somewhere closer to 17 years.

“We have invested the best part of $8bn over that time, and our top quarter stores are somewhere in the region of five to six years.

“Ben Gilbert can have his view on life.

“I’m giving you the facts, as you can see from today.

“We have new formats that we are investing in.

“You can see some of our Coles Express stores have been invested in.

“The Coles online business with 1000 sites that have click and collect we didn’t have a year ago — new technology coming online and other parts of our business.

“He (Mr Gilbert) can say what he likes — we might know, we might have a better handle on it.’’

UBS believes that since Wesfarmers bought Coles 80 per cent of its store fleet has been refurbished; Mr Durkan said it was 90 per cent.

He also rejected the argument that Coles had fallen behind its major competitors, Woolworths and Aldi in terms of updating and renewing its stores.

“We started refurbishing our stores in 2008 when our competitors weren’t doing that. For five to six years we invested heavily to get our 17-year refurb cycle down to below eight. For our biggest and best stores it’s down to five years, close to five. So we invested when they didn’t.”

Coles is believed to have spent $750m to $800m on capital expenditure over the past year and Mr Durkan has already pledged to increase that by 20 per cent next year with a larger chunk of that spending to go towards store refurbishment as well as on its thriving online business that is generating premium sales growth.

“We are going to change the technology in our online business over time — some money going into that. Undoubtedly we will put more technology into our distribution centres. They were virtually brand new in 2008 but now we will need to spend money in time there. 

“And we will have stores we need to renew. Some of them are big ones. They have come back on the cycle. They will cost more — bigger stores always cost more than smaller stores. That’s one part; the second part is we need to invest in areas like online.

“We look at what’s coming down the track for us and how our strategy is likely to evolve and what we will need to spend money on.

“Undoubtedly more people will be shopping online. We were prepared six years ago for that and now we are saying we need to go again.’’

Coles began investigating a new small-store format two years ago and gathered in a specialist Coles team a year ago to work on the Project 535 supermarket to fit a block of land of about 1800sq m — less than half the size of a standard full-line supermarket.

“We can’t get the size of the box we would ideally like in the high-density areas that we want — they are just not there — and what we can do is put a different offer in and we think there is anything between 80 and 100 sites across Australia where we can put these stores in,’’ Mr Durkan said. 

Mr Durkan said the new small-format store wasn’t like its existing convenience offer in that consumers could do a “full shop’’ there as well as pick up products that weren’t available in standard Coles stores.

Other categories would have a curated range, but most categories would be represented in the smaller stores. 

It comes as Wesfarmers puts the finishing touches on its demerger documents for the $20bn spin-off of Coles, which will emerge as an independent ASX listed company.