Wesfarmers grapples with First Choice, a Masters-style liquor disaster

Simon Evans
May 27, 2015
The Age
Wesfarmers is grappling with its own version of a “Masters disaster”, albeit on a smaller scale. It is now 10 years since Coles rebadged its big box liquor chain to First Choice from Quaffers, but it’s been a decade of headaches. First Choice continues to be a serial underperformer as the Woolworths big box chain of Dan Murphys outpoints it, having built up a dominant position which seems almost impregnable. In many ways its the liquor retailing sector’s own version of the Bunnings and Masters duel, except in reverse.
Dan Murphy’s, with its 190-plus outlets is delivering stronger growth in a segment of liquor retailing which is growing faster than the convenience offering. More customers want to go and load up on beer, wine and spirits by the trolley full at a big barn outlet, than pick up a bottle or two on the way home from work at a smaller store like a BWS owned by Woolworths, or a Liquorland or Vintage Cellars owned by Coles.
First Choice, with around 75 outlets, was late to the party in big box retailing and most of the prime sites were already snapped up by its rival, helped along by Woolworths $1.4 billion purchase of pubs group Australian Leisure & Hospitality in 2005 which delivered 30 additional prime sites as its joint venture with pubs and pokies billionaire Bruce Mathieson went into overdrive.
Those who are big believers in the theory of first mover advantage have two rock solid case studies in hardware and liquor retailing in the relatively small market in Australia with a population of 24 million, where duopolies have a habit of being entrenched in industries such as aviation, paper and packaging and supermarkets. Bunnings is streets ahead of Masters, which has burnt through $3 billion so far in its hardware joint venture in Australia with the US retailer Lowes, after starting from a long way back. First Choice is possibly in a better position against Dan Murphy’s but in 10 years hasn’t shown any real signs of closing the gap.
The much bigger upside from getting the Coles supermarkets business right after Wesfarmers paid $19 billion for the Coles Group retailing empire in 2007 meant that supermarkets were the main game and most of the energy went into that business when Ian McLeod was hired to turn it around. The success has delivered enormous value to Wesfarmers shareholders and now Woolworths is seriously on the back foot in supermarket retailing and chief executive Grant O’Brien is under serious pressure to claw back some gains.
New Coles food and liquor boss John Durkan is trying to be methodical. The Liquorland chain has cut the prices on 300 of the chain’s main products, and overhauled the range of products it stocks. Across the Coles liquor business 32 stores have had the shutters put up in the past 12 months in a clear indication that underperformers won’t be tolerated.
It is intriguing though that Coles hasn’t been able to get the big box liquor offering right after first entering the market with the Quaffers brand in the late 1990s, given the extent of the turnaround over the road in the Coles supermarkets. Incoming Wesfarmers chairman Michael Chaney may have his own views.
Wesfarmers outlined where it is headed last week in its annual strategy day across its various businesses, but the general concensus in the market is that liquor retailing might be a black spot for quite a while.
Deutsche Bank’s Michael Simotas says he’s not confident about a turnaround in liquor at Coles, but there is a significant opportunity if it can get it right.
The Liquorland and Vintage Cellars chains are showing signs of improvement “but the big box channel will need to be completely reset”, he says.
Mr Simotas thinks big box liquor retailing “will remain tough” for Coles and that’s a problem because big barn retailing is the fastest growing segment of the market.
“We see a lot of parallels in the first Choice/ Dan Murphy’s and the Masters/Bunnings equations”, he concludes.
The other plus for Woolworths in liquor is that Coles management have signalled that aggressive price cuts aren’t really the answer for First Choice.