Critical changes to flow at Coles

Adele Ferguson
February 28, 2012
The Age

DAYS before Woolworths is due to announce its profit results, with its liquor business expected to produce another solid performance, Wesfarmers is restructuring its liquor business to stop the drag on its revenue.

It could be the start of a bloody war as both supermarket giants slug it out for the billions of dollars in revenue that is spent each year in liquor stores. But unlike most wars, the ones in the crossfire will be the suppliers of liquor, rather than the supermarket giants.

Coles heard the wake-up call when its latest results showed that liquor is slicing at least 0.5 per cent off its supermarket revenue. In sharp contrast, Woolworths is getting a lift of at least 0.5 per cent from its liquor business.

To this end, it has rejigged management, it plans to roll out some big-box stores, sell off non-performing smaller liquor stores and revisit terms with some of its suppliers. It is also believed to have hired a broker to offload three hotels and is believed to be keen to find a joint-venture partner for its national hotels and pubs business. If there is a change in government in Queensland and the legislation is changed, the talk is that it would get out of hotels completely.

As one industry source said: ”The simple fact is that both Woolworths and Coles make lousy hotel operators. I know several publicans who sold their pubs to Coles and Woolies, and the facts are they have all gone backwards. It’s another case of corporates straying too far outside their areas of skill. Running a pub is very different from running a supermarket. Different customer base, different buying motivations, different staff skill sets.”

Internally, Coles management has made it clear it does not consider hotels a core business. It is concerned about the reputational issues associated with owning poker machines as part of the hotels business.

Coles has 95 hotels and pubs in its portfolio, which it bought at an average price of $9 million each, valuing the group’s entire portfolio at more than $900 million. The bulk are in Queensland due to a legislative requirement that liquor outlets must be tied to hotels.

Liquor is a highly profitable business and a decade ago Coles reigned supreme, while Woolworths was the laggard. However, some poor management decisions taken before Wesfarmers bought Coles allowed Woolworths to wrest control. This included a decision by Woolworths to buy the hotel group Australian Leisure & Hospitality (ALH) late in 2004, as well as a decision to accelerate the expansion of the Dan Murphy’s liquor superstores across the country. This, combined with a decision by Coles to shift its liquor head office from Sydney to Melbourne, which resulted in the loss of more than 80 per cent of its staff, cemented Woolworths’ position as No. 1.

The upshot is that Coles generates about $2.7 billion revenue from liquor, while Woolworths generates more than double that. Put simply, liquor is going nowhere at Coles and needs to be fixed.

Under new owners, Coles is trying to reclaim market share. But its strategy is different from Woolworths. It plans to increase the number of big-box stores to go head to head with Woolworths’ highly successful Dan Murphy’s, and it will close underperforming smaller liquor stores. It has also realised that its strength isn’t running hotels or poker machines, so it will try to find a joint venture partner. Woolworths, on the other hand, found a good joint venture partner when it bought ALH and is consequently increasing its footprint in hotels and poker machines.

There is also an expectation that suppliers will be squeezed – yet again. Suppliers are in a quandary. With both supermarkets owning more than 50 per cent of liquor chains, they have to acquiesce.

Small winemakers are in an even worse position: as the chains gobbled up independent liquor outlets, it became easier and cheaper to get their stock from the few top wine companies rather than buying a few bottles from each of the boutique wineries. Being struck off the chains’ lists has left small companies struggling.

Although consumers benefit from the discounting in the short term, they could end up losers as the chains reduce their range of brands. The real possibility is the chains will raise prices once they win control of the sector, as has happened in groceries, dairy and fresh foods.

In addition, the chains are substantially reducing the number of labels they stock. This means that many fine-wine labels will simply disappear from the supermarket liquor outlets, while others will be discounted to death. At the same time, an oversupply of grapes has resulted in a flood of ”cleanskins” on the market, and this, coupled with a decision by the two big chains to increase their private-label brands, will further reduce the range available.

It is the old story: the premium or large-scale companies with the size and the profit margins to support continuous brand equity building will survive. Those in the middle will either close or be sold.

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