Coles Group Limited (ASX:COL)

Steven Cain
CEO
Market Cap (AUD): 18.46B
Sector: Consumer Staples
Last Trade (AUD): 13.86 +0.02 (+0.14%)
Tab Bar

1. About

Coles Group Limited (formerly Coles Myer Limited) is an Australian public company. It is one of Australia’s iconic retailers, with over 2,500 retail outlets nationally. Coles Group retails a range of fresh food, groceries, general merchandise, liquor, flybuys, financial services, and fuel to 21 million of customers every week, through their retail outlets.

The company businesses are:

  • Coles Supermarkets - Coles is a national full-service supermarket retailer operating more than 800 supermarkets.
  • Coles Online - Coles Online provides their customers with an 'anytime, anywhere' shopping proposition, offering a choice of home delivery, including same-day and overnight drop and go services, or pick up from over 1,000 Click & Collect locations.
  • Coles Liquor - Coles is also a national liquor retailer with 900 stores trading as Liquorland, Vintage Cellars, First Choice Liquor, and First Choice Liquor Market and an online liquor retail offer.
  • Coles Express - Coles Express is one of Australia's leading fuel and convenience retailers, with over 700 sites across Australia, employing more than 5,000 team members.
  • Flybuys - flybuys is one of Australia's most popular loyalty programs with over eight million active members, covering approximately six million households.
  • Coles Financial Services - Backed by some of the biggest names in financial services, Coles Financial Services provides insurance, credit cards and personal loans to Australian families.
  • Spirit Hotels - Coles operates hotels in Queensland, Western Australia, South Australia and New South Wales under the Spirit Hotels brand.

2. Business model

 

The Group operates the following divisions:[1]

 

Divisions

Revenue  ($M)

% of Revenue

% of Profit (before Int & Tax)

Profit drivers[2]

Supermarkets

$30,200

76.9%

83.2%

  • Supermarket revenue has grown moderately since FY2016 due to increased levels of competition
  • Sales momentum has improved during FY2018, with comparable food sales growth of 1.1%, with the rate of growth improving in each quarter and increasing to 1.8% in the fourth quarter, 2018
  • Improving sales momentum was underpinned by growth in customer transactions, units sold and average basket size

Liquor

$3,314

8.4%

9.2%

  • Sales revenue has steadily improved under Coles Liquor’s five-year transformation plan to provide a more consistent offering to customers
  • Strong earnings growth has been driven primarily by improved sales growth exclusive liquor brand product expansion and productivity efficiencies

Convenience

$5,761

14.7%

9.4%

  • Revenue declined by 8.2% in FY2017 and by 6.1% in FY2018 due to lower fuel volumes in part due to a change in the commercial arrangements with Coles Alliance Partner (Viva Energy)
  • Earnings in FY2018 were $57 M lower than in the prior year primarily due to an increase in the wholesale cost of fuel, which resulted in a lower fuel margin

Other

$13

0.0%

(1.8%)

  • The Other division comprises Property and Coles’ 50% share of flybuys earnings, Fluctuations in the Property earnings are largely due to property divestments, which are accounted for in earnings but not revenue

3. Strategy

 

Key strategies include:[3]

 

Following the demerger with Wesfarmers, Coles intends to further develop its Fresh Tomorrow strategy which comprises six core elements:

 

  • Transform food offer

Building on a foundation of strong fresh sales growth, Coles will continue to innovate and improve its fresh offer, with a focus on offering great quality Australian-grown products that customers want, and will continue to partner closely with its suppliers.

 

  • Move towards Every Day Low Prices

Coles has consistently committed to providing trusted value to customers, having delivered nine consecutive years of price deflation. Coles will continue to invest in price, with more products to be offered on Every Day Low Prices and fewer, deeper and more relevant promotions.

 

  • Offer anytime, anywhere shopping

Coles recognises that customer expectations are rapidly changing and therefore it needs to continue to invest in a suite of convenient shopping alternatives including digital channels such as Coles Online and the Coles mobile application, and a range of convenient delivery options, such as home delivery and Click & Collect to ensure an end-to-end experience that meets customers’ needs.

 

  • Land the right offer in the right location

Coles will seek to continue to improve its extensive national store network by leveraging customer insights, innovations and technology to drive its store renewal programs, tailoring stores and product ranges to the shopping missions of local customers across its brands.

 

  • Reduce costs

Coles aims to streamline its cost base and leverage technology to deliver a simplified store environment and a modernised supply chain.

 

  • Win together

Coles recognises that it is through its team members feeling proud to work at Coles, its customers feeling proud to shop at Coles and the community feeling proud to partner with Coles that everyone truly wins together. So Coles is focussed on having safety in the DNA of Coles, being famous for building great careers and growing talent and being known for community engagement, underpinned by our leadership behaviours to deliver sustainable results over the long term.

4. Markets

 

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate

Supermarkets and Grocery Stores

$103 billion (2018)

2.1% (annual 14-19)

Convenience Stores

$5 billion (2018)

0.2% (annual 14-19)

Liquor Retailing

$12 billion (2018)

2.4% (annual 13-18)

Fuel Retailing

$35 billion (2017)

(2.7%) (annual 13-18)

Department Stores

$18 billion (2018)

(0.9%) (annual 13-18)

Consumer Goods Retailing

$174 billion (2018)

0.5% (annual 14-19)

5. Competition

 

Major competitors include:[5]

 

  • Wesfarmers Limited (ASX:WES)
  • Woolworths Group Limited (ASX:WOW)
  • Metcash Limited (ASX:MTS)
  • Caltex Australia Limited (ASX:CTX)

6. History

 

1914[6]   

The first Coles variety store opened in Collingwood, Victoria

 

1960   

The first Coles supermarket opened in Balwyn, Victoria

 

1980   

Coles acquired a number of liquor businesses, including the Liquorland and Vintage Cellars brands

 

1985   

Coles merged with The Myer Emporium Limited to create Coles Myer Limited

 

1987   

Coles Myer corporate headquarters opened in Hawthorn East, Victoria

 

1994   

The flybuys loyalty program was launched and has since grown to one of Australia’s most popular loyalty programs

 

1999   

Online shopping was first trialled by Coles in 23 Melbourne postcodes, paving the way for the current Coles Online offering

 

2003   

Coles entered into a Alliance Agreement with Shell whereby Coles operates the Shell convenience outlets;by 2004 Coles had established a nationwide network of Coles Express convenience stores

 

2006   

Coles Myer sold Myer to Newbridge Capital and The Myer Family Company for $1.4 billion (with Coles Myer renamed Coles Group)

 

2007   

Coles Group (which included Coles, Kmart, Target, and Officeworks) was acquired by Wesfarmers. Under Wesfarmers’ ownership, a new management team led the turnaround of the business

 

2010   

Coles launched the successful ‘Down Down’ campaign, and established an ongoing program of trusted value by reducing prices on thousands of items to reduce the cost of the average customer’s shopping basket

Coles commenced its responsible sourcing program by introducing no added hormone beef. In the following years Coles introduced Coles Brand sow stall free pork, RSPCA approved chicken and responsibly sourced seafood

 

2012   

The flybuys brand and program was relaunched

 

2017   

800th Coles supermarket and 700th Coles Express site opened

 

2018   

1,000th Coles ‘Click & Collect’ location delivered and 900th Coles liquor store opened

7. Team

 

Board of Directors[7]

 

James Graham – Chairman

Steven Cain – Managing Director and Chief Executive Officer

David Cheesewright – Non-Executive Director

Jacqueline Chow – Independent Non-Executive Director

Abi Cleland – Independent Non-Executive Director

Richard Freudenstein – Independent Non-Executive director

Wendy Stops – Independent Non-Executive Director

Zlatko Todorcevski – Independent Non-Executive Director

 

Management Team

 

Steven Cain – Chief Executive Officer

Leah Weckert – Chief Financial Officer

Greg Davis – Chief Operating Officer

Paul Bradshaw – Chief Store Operations Officer

David Brewster – Chief Legal Officer

Alister Jordan – Chief Executive Coles Express, Online & Corporate Affairs

Thinus Keeve – Chief Property & Store Commercial Officer

Daniella Pereira – Company Secretary

Cathi Scarce – Acting Chief Executive Liquor & Hotels

Roger Sniezek – Chief Information & Digital Officer

Matthew Swindells – Chief Supply Chain Officer

Kris Webb – Chief People Officer


read more

8. Financials

 

Financial Year 2017/2018 (ended 30 June):[8]

 

Divisions

Revenue ($M)

% Change

Profit (before Int & Tax) ($M)

% Change

Supermarkets

$30,200

1.5%

$1,176

(0.8%)

Liquor

$3,314

2.8%

$130

(5.8%)

Convenience

$5,761

(6.1%)

$133

(30.%)

Other

$13

(18.8%)

($25)

(412.5%)

Total

$39,288

0.4%

$1,414

(7.1%)

9. Risk

 

Major risks include:[9]

 

Economic conditions

Low economic growth affecting Coles’ key markets or continued global economic uncertainty may significantly impact the Coles businesses and key markets.

 

Market risks

As with any investment in an ASX-listed company, the trading price of Coles Shares may fluctuate depending on the financial and operating performance of Coles, as well as other external factors over which Coles has no control.

 

Interest rates

Coles will have external interest bearing liabilities after the Demerger and, accordingly, will be exposed to movements in interest rates. While Coles will take reasonable steps to protect itself from rising interest rates through the use of hedges, a rise in rates may still adversely affect Coles’ interest payments for floating rate instruments.

 

Movements in currency and commodity prices

Coles, through its international sourcing and exports, is exposed to movements in exchange rates and, to the extent that Coles raises debt denominated in a foreign currency or establishes operations overseas, it would be further exposed to movements in exchange rates. As a retail business, Coles buys and sells commodities or commodity based products and uses commodities in its operations (such as fuel in transportation). Coles’ margins and operating costs could be adversely impacted by movements in currency or commodity prices.

 

Taxation

Variations in the taxation laws of Australia could affect Coles’ financial performance. The interpretation of taxation laws could also change, leading to a change in taxation treatment of investments or activities. Consistent with other companies of the size and diversity of Coles, Coles could be the subject of periodic information requests, investigations and audit activities by the ATO.

 

Insurance risks

Coles will largely continue to have the benefit of Wesfarmers’ insurance policies until those policies expire on 31 May 2019. When Wesfarmers’ insurance policies expire, Coles intends to place insurance policies with insurers of acceptable security and at an appropriate level of retained risk and coverage for the business activities of Coles. However, adequate insurance coverage for potential losses and liabilities may not be available in the future on commercially reasonable terms (any insurance obtained may be subject to large deductibles and premiums). If Coles experiences a loss in the future, the proceeds of the applicable insurance policies, if any, may not be adequate to cover replacement costs, lost revenues, increased expenses or liabilities to third parties. This may adversely impact Coles’ financial performance.

 

Litigation

Disputes or litigation may arise from time to time in the course of the business activities of Coles. There is a risk that any material or costly dispute or litigation could adversely impact on Coles’ financial performance, or require a material change to Coles’ operations.

 

Accounting

Changes in accounting or financial reporting standards may adversely impact the financial performance of Coles. In addition, Coles’ financial performance may be impacted by changes to accounting policies after the Demerger or differences in interpretations of accounting standards. In particular, a new accounting standard for leases (AASB 16 Leases) will be applicable to Coles from 1 July 2019.

References

  1. ^ Information Memorandum 2018, P. 46
    https://www.listcorp.com/asx/col/coles-group-limited/news/information-memorandum-including-scheme-booklet-2024762.html
  2. ^ Information Memorandum 2018, P. 47
    https://www.listcorp.com/asx/col/coles-group-limited/news/information-memorandum-including-scheme-booklet-2024762.html
  3. ^ https://www.colesgroup.com.au/about-us/?page=our-strategy
  4. ^ https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/food-retailing/supermarkets-grocery-stores.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/food-retailing/convenience-stores.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/food-retailing/liquor-retailing.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/fuel-retailing/fuel-retailing.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/other-store-based-retailing/department-stores.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/other-store-based-retailing/consumer-goods-retailing.html
  5. ^ http://www.hoovers.com/company-information/cs/company-profile.coles_group_limited.3a9d18d4f2a00862.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/food-retailing/supermarkets-grocery-stores.html
    https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/fuel-retailing/fuel-retailing.html
  6. ^ https://www.colesgroup.com.au/about-us/?page=our-history
  7. ^ https://www.colesgroup.com.au/about-us/?page=board-of-directors
    https://www.colesgroup.com.au/about-us/?page=executive-leadership-team
  8. ^ Information Memorandum 2018, P. 46
    https://www.listcorp.com/asx/col/coles-group-limited/news/information-memorandum-including-scheme-booklet-2024762.html
  9. ^ Information Memorandum 2018, P. 65-69
    https://www.listcorp.com/asx/col/coles-group-limited/news/information-memorandum-including-scheme-booklet-2024762.html