Liquor gives Coles a hangover

BLAIR SPEEDY
APRIL 07, 2014
THE AUSTRALIAN
IAN McLEOD will justifiably be remembered for transforming Coles from a near-basket case to Australia’s agenda-setting supermarket, taking the fight to Woolworths by cutting prices and boosting fresh food quality, winning back customers lost over the previous decade of lacklustre management.
Since his first full year of running the business in 2009, Mc­Leod has overseen a 24 per cent increase in revenue from Coles’ food and liquor business, while earnings before interest and tax have grown even faster, up 84 per cent.
It’s an enviable record, which has included consistently outperforming Woolworths on sales growth from existing stores — a trend that in its early stages could be dismissed as coming from a low base but is now looking simply like better retailing.
So good did Coles become at wooing customers that Woolworths had little choice but to ­follow its lead, matching audacious price moves such as dollar bread and dollar milk and even countering Coles’ phenomenally successful red “Down Down” pointing-finger logo with a strikingly similar campaign featuring a green boxing glove.
But while the numbers tell an impressive story, they conceal the fact that Coles’ 1st Choice, Liquorland and Vintage Cellars chains are a long way behind Woolies’ Dan Murphy’s and BWS chains — and don’t look to be catching up any time soon.
Under McLeod’s watch, Coles has grown its liquor store portfolio from 761 to 824 stores, closing nearly 170 underperforming outlets and opening a total of 250 new stores, including 52 new ­superstores trading under the 1st Choice banner conceived by Coles’ former owners as an ­answer to Woolies’ market leading Dan Murphy’s chain.
Internal strategy documents seen by The Australian in 2011 revealed that Coles planned to increase its liquor portfolio to 958 stores by 2015 — a target it now looks very unlikely to meet. Meanwhile, total liquor selling area has shrunk 22 per cent since 2007 to 204,000 sq m.
Over at Woolies, the liquor store portfolio has grown from 1154 stores at the end of the 2009 financial year to its current level of 1381, including more than 70 new Dan Murphy’s outlets, even as the company has made a concerted push into online and direct sales with the acquisition of wine club business CellarMasters and fine wine auction house Langton’s.
Neither company typically reports liquor sales separately, but Citi analyst Craig Woolford reckons Woolies drew $6.71 billion in revenue from liquor last financial year, more than double Coles’ $2.76bn — a number, incidentally, that has not grown in the past three years.
Even more importantly, Woo­lies makes more profit on every sale, generating earnings before interest and tax of $450 million — equivalent to 6.7 per cent of revenue — while Coles made just $75m, a margin of just 2.7 per cent.
For all the store reshuffling, Woolford says Coles’ liquor business has made no progress in five years, while the 1st Choice chain lacks scale and generates about half the sales per store as Dan Murphy’s.
Coles has in the past blamed previous management for rushing the rollout of 1st Choice, opening stores in poor locations and cannibalising sales from its Vintage Cellars chain.
The long-running newspaper advertising campaigns in which both Dan’s and 1st Choice promised to beat each other’s prices appeared to end with Dan’s being crowned the winner, as a recent survey by Roy Morgan research found 72 per cent of respondents rated Dan’s as the best value liquor store, ahead of 1st Choice on 63 per cent.
But Dan’s has positioned itself as not just the cheapest in the market but also a reliable vendor of high-quality wines — which offer significantly higher margins than the slabs of beer that are often sold below cost.
While Coles retains Vintage Cellars as its home of fine wine, it’s hard to see how 1st Choice can flourish. McLeod in February acknowledged the job Coles has ahead of it under his successor John Durkan, who is set to step up from his current role of chief operating officer in July.
“We’re significantly changing our liquor network to ensure it is better positioned to capture emerging consumer shopping habits to improve performance, but a key priority remains reshaping the store network,” he said following the release of second quarter sales numbers.
Coles is trialling a new big-box format, opening five new stores under the banner of Liquorland Warehouse, but Woolford says they need to move faster and close up to 100 liquor stores, including some 1st Choice and small format Liquorland outlets that are losing market share to Dan Murphy’s. “A recovery in liquor is needed to become bullish about Coles’ recovery,” Woolford says.
McLeod has defensively reminded analysts, who have continually quizzed him on the underperformance of the liquor division, that it accounts for less than 10 per cent of Coles’ revenue and less than 5 per cent of EBIT — apparently missing the point that it doesn’t have to be that way.
When McLeod came on board, Coles’ new parent Wesfarmers said it would take five years to turn Coles around.
Durkan, one of a small hand-picked crew of British retailers recruited by McLeod, doesn’t have that sort of time on liquor.