Coles targets $1b in cost cuts by 2023

Sue Mitchell

AFR

Jun 18, 2019

Coles is aiming to cut costs by about $1 billion by 2023 to reinvest in its stores and supply chain and grow sales at least in line with the $100 billion food and grocery market.

In a strategy update on Tuesday, the first since Coles demerged from Wesfarmers last November, chief executive Steven Cain said the “refreshed” strategy was based on three pillars – inspiring customers through best value food and drink solutions to make their lives easier, smarter selling through efficiency and pace of change and winning together with team members, suppliers and communities.

“We’re trying to restore growth in profitability and give (investors) long term shareholder value,” Mr Cain told analysts and investors on Tuesday, “creating  a new era at Coles which is based around growth.”

Coles shares rose almost 6 per cent to $13.52 on Tuesday, their highest level since the demerger and compared with $12.75 on the first day of trading.

Coles plans to differentiate itself from Woolworths, Aldi and Metcash’s IGA retailers by optimising its store and supply chain network, growing private label brands from 30 per cent to 40 per cent of total sales, becoming a destination for health foods and creating Australia’s most sustainable supermarket by cutting food waste and packaging.

“For us the space race is over and we want to focus only on high quality space going forward where we’ll be the leader in that location,” Mr Cain said.

Mr Cain is aiming to grow revenues at least in line with the market over the long term. Coles has been losing market share to Woolworths over the last two years, with same-store sales growing less than 2 per cent.

“We believe maintaining or even growing our share would be a terrific result given the competition we face over the next five years,” he said.

The food and grocery market would become more competitive than it had ever been as new players such as Kaufland entered the market and sales shifted online, which is less profitable than bricks and mortar due to delivery costs.

Sales density, or sales per square metre, would start to decline unless Coles was more discerning about new sites and closed more underperforming stores, he said.

Net new store growth would be lower than in the past and new stores would be focused on growth corridors and areas where Coles has low market share.

Coles will also tailor up to 40 per cent of floor space in stores to meet the needs of local customers.

Mr Cain is also aiming to cut costs by about $1 billion over four years using technology to automate manual tasks, simplifying above-store roles to remove duplication and better sourcing goods for sale and not for resale (procurement) to offset rising energy and  labour costs.

This cost savings target does not include savings from two new fully automated distribution centres, which are due to open in 2024, and will replace five older warehouses, or savings from two highly automated fulfilment centres to be built in conjunction with UK online retailer Ocado and due for completion in four years.

The ‘smarter selling’ cost reduction program kicked off last week, when Coles cut 450 jobs or about 10 per cent of the roles in its Melbourne head office.

Coles would maintain an “attractive” dividend payout ratio, Mr Cain said, reaffirming the 80 per cent to 90 per cent dividend payout ratio target slated at the time of the demerger from Wesfarmers.

“Our strategy directly aligns with the creation of long-term shareholder value by growing revenue at least in line with the market, reducing costs, and generating sufficient cash to fund growth and innovation while delivering an attractive dividend payout ratio,” he said.

Coles did not announce a major investment into reducing prices, as some analysts had expected.

However the retailer will continue to move towards every day low prices and reduce its reliance on ineffective promotions. Promotional intensity is falling by 200 to 300 basis points a year.

Mr Cain has also identified growth opportunities, including increasing Coles’ meat exports, which are currently around $400 million a year from 40 countries, and leveraging its FlyBuys joint venture with Wesfarmers.

“We see that becoming an increasingly important business over time,” he said.

In a brief trading update, Mr Cain said June-quarter same-store supermarket sales were expected to grow by more than 1.85 per cent, compared with 1.5 per cent (adjusted for New Years Eve) in the  December quarter and 2.2 per cent (adjusted) in the March quarter.

This is a slightly better outcome than that flagged at Coles’ third quarter sales results, helped by an improved performance in NSW, which had been dragging the chain.

Net capex for 2019 was unchanged at $700 million to $800 million and would rise to between $700 million and $900 million in 2020, skewed towards growth initiatives and efficiencies.

Coles will renovate 75 supermarkets in 2020, up from 50 in 2019, using four different formats to cater to different demographics, and open 10 new supermarkets while expanding its convenience foods range and online business.

Coles said it expected to book between $91 million and $131 million of one-off costs in 2019 stemming from  supply chain restructuring, (the closure of warehouses), its new fuel agreement with Viva Energy and a new liquor joint venture in Queensland.

It also expects to book $15 million to $20 million of restructuring costs, but these will be offset by other initiatives.

Coles’ earnings rose 125 per cent between 2009 and 2016 but have fallen 19 per cent over the past two years as sales growth has slowed and margins have come under pressure from rising costs.