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Following its purchase of Coles in 2007, diversified conglomerate Wesfarmers became one of Australia's two biggest retail groups, home to a wide range of different chains across over 4,000 stores. The most significant of these is Coles itself, the country's second largest grocery retailer, now battling to regain its lead over arch-rival Woolworths. The supermarket chain is partnered by a selection of other sizeable local brands including general retailers Kmart and Target and leading home improvement store Bunnings. Wesfarmers' acquisition of Coles Group, a business three times larger than itself, was designed to call a halt to several years of steadily declining performance as Coles struggled to make sense of its sprawling retail operations. It also brought greater focus to Wesfarmers itself, which up until then had dabbled in a wide variety of different sectors ranging from mining and chemicals to insurance and DIY. Following the Coles purchase, almost 90% of Wesfarmers' revenues are generated by retail. Coles and Wesfarmers both celebrated their centenaries in 2014. The group took its first steps into the UK in 2016 with a deal to acquire local DIY chain Homebase. That experiment proved disastrous, though, and Wesfarmers was forced to abandon the business after two years and losses of A$1.4bn.
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Wesfarmers is engaged in fierce competition with arch-rival Woolworth's to dominate Australia's retail landscape. Between them, they account for around 40% of all consumer retail spending. The two groups compete head-to-head in the supermarket and liquor sector, where Woolworths currently has the edge. However the old Coles Group was stronger in general merchandise thanks to the Kmart and Target brands, and it strengthened this business further by pulling out of the mid-scale department store and electronics segments. However continuing strong growth from Woolworths cost Coles its lead during 2006.
The following year, the Coles Group was acquired by Wesfarmers, originally a farmers' cooperative from Western Australia which has transformed itself over the past 30 years into a broadly diversified and highly profitable conglomerate with interests in mining, power generation and insurance. Less than a third of Coles Group's size by sales, Wesfarmers' deal created a substantial business which is now Australia's largest single private employer, with 200,000 employees. Coles Group's senior management team left the company, and the four former Coles retail divisions now report separately within Wesfarmers.
The turnaround of Coles was not easy. The company was still deeply entrenched in regional Western Australia, still considered something of a backwater by comparison with the states of Victoria or New South Wales. In addition, even at the discounted price it eventually secured, many analysts believe Wesfarmers overpaid significantly for Coles.
Coles is one of Australia's two leading grocery retail chains, in fierce competition with arch-rival Woolworths. It houses a network of around 780 supermarkets, operating primarily under the main Coles banner. Some stores still operate under discount brand Bi-Lo, acquired in the 1980s. Coles is Australia's #2 supermarket chain. It offers a wide selection of national grocery and home goods brands as well as private label products under the Smart But, You'll Love Coles and George J Coles brands. The company also offers an online ordering service in more populous areas of Queensland, New South Wales and Victoria. As a result of a concentration in its marketing on low prices, it is generally considered to be the more "mass-market" of the two major chains.
However performance had been very weak during the 2000s, as Coles was repeatedly outclassed by rival Woolworths, causing a sharp drop in both revenues and profits. Wesfarmers appointed Ian Macleod - former CEO of UK retailer Halfords - as the supermarket group's new CEO in 2008 and he pulled off a remarkable turnaround, rebuilding market share, increasing revenues and doubling profits, largely at the expense of Woolworths. More recently though, both Coles and Woolworths have faced a serious challenge from fast-expanding rival Aldi, named Supermarket of the Year for four years in a row by customer research agency Ray Morgan between 2013 and 2016. Much of Coles' success was credited to extensive use of celebrity chef Curtis Stone in its advertising, as well as a separate value-led campaign featuring aging rock band Status Quo singing a version of their "Down Down" hit, adapted to apply to prices. In a bizarre turnaround, rival Woolworths abandoned its "Fresh Food People" approach in 2014 to pursue a value positioning under the banner "Cheap Cheap". This in turn prompted Coles to steal the more upmarket "Fresh" approach for itself. In June 2017, Morgan Stanley estimated Coles' share of the local groceries market at 28.8%, behind Woolworths at 34.5%. IGA had 12.7% and Aldi on 7.7%.
The latest threat to Wesfarmers' chains and other traditional retailers in Australia is the arrival of a full Amazon ecommerce service, expected towards the end of 2017.
The group is also Australia's leading specialist retailer of alcoholic beverages, with more than 830 standalone stores and 90 "hotels" nationwide. (Australian pubs traditionally offer accommodation as well as alcohol, and are as a result often classified as hotels). Traditionally the core brand in this business has been Liquorland, but it was superseded in 2004 by the launch of a new superstore format under the 1st Choice banner. Vintage Cellars claims to be Australia's pre-eminent retailer of fine wine, with 50 stores in major cities as well as an online nationwide delivery service. The liquor business was steadily expanded during the first half of the 2000s with a series of acquisitions including Australian Liquor Group and the Leda Hotel Group in 2001; the New South Wales division of Theo's Liquor in 2002; more than 250 Hedley, Talbots and Mr McCorks hotels, bars and shops in Queensland in 2006. The hotels business operates under the banner of Spirit Hotels.
The group's intense rivalry with Woolworths spilled over into the petrol service station sector in 2003. To combat Woolworths' Petrol Plus chain, Coles Myer (as the group was then known) formed a partnership with Shell to take over management of the latter's network of gas stations across Australia, and upgrade them to become gas and convenience store outlets under the Coles Express banner. This partnership now claims to be the country's #1 fuel and convenience retailer with 690 sites. (Woolworths responded by forming a similar partnership with Caltex, but eventually called time on that division in 2017, selling the outlets back to the petrol company). Coles also has a substantial private label charge card business. It launched the Coles Source Mastercard in 2003. Reward scheme FlyBuys is Australia's biggest loyalty card scheme with 5.2m households signed up.
The Coles business has undergone a substantial restructure in a bid to claw back market share from Woolworths. Around 40 underperforming supermarkets were divested in 2009 to smaller competitor Foodworks. For the year to June 2016, Coles reported revenues of A$39.20bn, and EBIT of A$1.86bn.
The second largest division within the group serves as an umbrella for three different home improvement and office supplies chains. Bunnings was already a subsidiary of Wesfarmers, acquired in 1995. It is Australia's dominant DIY and outdoor living retailer, selling a vast selection of home and garden improvement products and services. It caters to trade customers as well as ordinary householders. There are around 248 large-format warehouses, as well as 73 smaller stores and 33 trade centres spread across Australia and New Zealand. Woolworths launched its own home improvement chain, Masters, directly in competition with Bunnings in 2012, but this proved a huge failure and was shuttered in 2016.
In January that year, Wesfarmers agreed to expand its DIY operations to the UK with the acquisition of local home and garden retailer Homebase for £340m from Home Retail Group. The Bunnings name was extended to the UK for the first time in 2017 for a test Bunnings Warehouse. Other stores continue to operate at Homebase. The experiment proved disastrous. Wesfarmers finally extracted itself from the UK in May 2018, selling the entire Homebase operation to turnaroudn specialist Hilco for just £1. Net losses on the two year gamble are expected to hit A$1.4bn.
Wesfarmers' combined home improvement sales for the year to 2016 were A$11.57bn, with EBIT of A$1.21bn.
Previously part of the DIY division, Officeworks is now a standalone unit within the group, catering for the needs of small business, the home office and students, with over 5,500 office products all under one roof. The group acquired the Australian arm of Viking Office Products in 2003, and there are now 128 Officeworks outlets across the country. It reported revenues of A$1.85bn in ye 2016, with EBIT of A$134m.
There are two other retail businesses. Kmart is Australia's leading discount department store, selling a wide variety of clothing, toys, sporting goods, bedding, kitchenware and outdoor furniture. The store offers a number of private label brands including Living with Deborah Hutton homewares, Now and Girl Xpress apparel, and World for Kids toys. The group now has 200 Kmart outlets in Australia and New Zealand, as well as 240 Kmart Tyre & Auto Service centres. The Kmart brandname is used under license from the US company of the same name. Revenues for ye 2016 were A$5.19bn with EBIT of A$470m.
Despite the similarity of its logo and branding, Australia's Target retail chain has no direct connection to its US counterpart. It is a more style-oriented clothing and home goods store chain, positioned halfway between a traditional department store and a mass discounter. It is Australia's biggest retailer of women's apparel, selling a range of private labels including Piping Hot and World Industries, as well as national brands. There are 300 outlets mostly in urban locations. Rural fashion chain Fossey's was rebranded as Target Country during 2001 and 2002. Target contributed sales of A$3.46bn in ye 2016, but the chain was revealed to have inflated past profits through a supplier rebate scheme. Four senior managers left the group following that discovery, and Wesfarmers took a A$1.27bn impairment charge against the business for the year to 2016.
Aside from its retail interests, Wesfarmers is also one of Australia's leading utilities' producers. It has coal and mineral operations in Queensland, Western Australia and New South Wales, and also produces natural gas, LPG and speciality gases for industrial and scientific use. Another subsidiary, CSBP, is one of Australia's leading manufacturer of fertilisers, PVC and other chemicals. The group is also involved in wholesaling of industrial equipment. The group sold its insurance division during 2014 to IAG. Combined industrial revenues were A$4.67bn in ye 2016.
The group is also a 50% shareholder in private equity fund Gresham Partners, whose investments include Australia's biggest electrical appliances retailer Noel Leeming.
The combination of Coles Group and Wesfarmers' original operations created Australia's largest private sector employer, with almost 200,000 employees. Combined revenues for Wesfarmers for the year to June 2014 rose 4% to A$62.3bn (US$61.4bn). Continuing revenues excluding insurance were A$60.18bn. Net profit jumped 19% to A$2.69bn (US$3.76bn). That figure included a A$1.1bn profit from the sale of the insurance division. Retail now accounts almost 90% of group revenues. Revenues for the year to 2015 were up only marginally at A$62.45bn. Net profit slipped 9% to A$2.44bn.
Performance for ye 2016 was dented by a large impairment charge against retail division Target and the heritage coal mining operations in Queensland. Net profits plunged to just A$407m, despite a 6% increase in revenues to A$65.98bn. Excluding impairments, adjusted profit was down 4% to A$2.35bn.
George Coles opened his first variety store in 1914 in Victoria to sell a range of low-priced goods for under a shilling. He teamed up with two brothers in 1919 to open a larger store offering "nothing over 2/6", and the business grew rapidly. By 1928, GJ Coles & Co had 11 outlets, generating combined sales of over £1m. The biggest expansion came during the 1950s, as Coles acquired a series of businesses including Selfridges in NSW, F&G Stores, Manton's department store, Penneys and grocery chains Beilby’s and John Connell Dickins. In 1962 the company acquired the Matthews Thompson grocery chain, with 265 stores. The group opened its first discount store, Colmart, in 1968, and entered into a joint venture with American chain SS Kresge (later Kmart Corporation) to open Kmart discount stores in Australia. By 1975 Coles had 559 stores and 36,000 staff, and was the first Australian retailer to achieve annual sales of over A$1bn. It bought out Kmart's Australian stores in 1978, as well as a collection of liquor stores across the country which were combined to form the Liquorland chain.
The group's biggest deal, however, was its offer to acquire another diversified retail group which had been created around the Myer department store business. Sidney and Elcon Myer had opened their first drapery store in 1900 in the suburban town of Bendigo, Victoria. A second store opened up a few years later, and at the end of the decade, the brothers began to buy up rivals, including a much larger clothing and furnishing store in state capital Melbourne in 1911. In 1916 Elcon Myer moved to England to open a buying office in London. Sidney Myer took the business public in 1925, and it became a major force in Australian retail over the next two decades. By 1933, Myer Emporium had outlets throughout Australia.
In the early 1960s, the group moved into the grocery business as well, taking over the Farmer & Company food chain and Western Stores Group. During the following decade it launched a nationwide chain of shopping centres under the Target brand, each with a discount store, supermarket, restaurant and takeaway food service. A further series of acquisitions swelled the group portfolio during the early 1980s, including Country Road Fashion Houses, Red Rooster fast food restaurants and Grace Bros department stores. By mid-decade Myer Emporium was Australia's biggest department store chain and the #3 retailer overall. But the group had over-expanded and profits began to slip. Entrepreneur Solomon Lew bought a controlling stake in the company in 1983 and began to steer it back to health.
The merger of Coles and Myer, completed in 1986, created a new national giant in Australian retail with almost almost 1,520 stores and sales of over A$10bn. Although the fit between the two businesses was generally quite comfortable, the portfolio of stores was restructured over the next few years. Country Road was spun off as a separate business in 1987, and other non-core stores were divested. The group also went on a new acquisition drive buying up Australian regional supermarket chain Bi-Lo, as well as New Zealand's Progressive Enterprises, which owned the Foodtown and 3 Guys supermarket chains. (Spun off in 1992, Progressive was later acquired by Woolworths). Mail order business Myer Direct launched in 1989. During the 1990s, the group launched World 4 Kids toy and leisure superstores and Officeworks discount warehouse-style office supplies superstores. There were also a series of spin-off brands from the Target and Kmart chains such as Baby Target and Target County fashion stores, as well as new superstore brands Megamart, Mycar and GoodBuy Warehouse. The group purchased computer retailer Harris Technology in 1999.
However Coles Myer also became embroiled in a management scandal during the decade when former finance director Philip Bowman sued the company for wrongful dismissal. He claimed he was sacked because he was investigating an unorthodox investment by US bank Yannon in a holding company which owned shares in Coles Myer. It transpired that the Australian group had agreed to part-fund the deal, and the resulting allegations of financial impropriety led to the resignation of chairman Solomon Lew, although he remained a director, and one of the group's biggest shareholders. In a separate incident, former CEO Brian Quinn was jailed for two years in 1997 for defrauding the company of A$4.5m to pay for extensive renovations to his Melbourne home. In 2002, the company was rocked by further management upsets after Lew repeatedly and publicly criticised the conduct of Stan Wallis, his replacement as chairman. Wallis finally resigned from the group and demanded that Lew also stand down as director. Lew refused, despite pressure from other group directors. He was finally forced out by a board majority.
These and other distractions caused sales growth to slow, with the result that rival Woolworths steadily encroached on the market share of the once mighty Coles supermarket business, while the Myer department store struggled to keep up with its own larger competitor David Jones. In 2002, the group sold its Red Rooster fast-food chain as well as the Myer Direct mail order business, and boosted the Bi-Lo and Coles supermarket chain with the purchase of around 30 former Franklins supermarkets (a further 70 were purchased by Woolworths). As rivalry with Woolworths increased, Coles Myer briefly entered the bidding war for pub and liquor store group Australian Leisure & Hospitality in 2004. Demerged from Foster's Group in early 2004, that business was already the subject of a tug-of-war between Woolworths and a US private equity group when Coles Myer made its own offer of almost A$1.2bn. That bid was topped by a revised offer of A$1.33bn from Woolworths, prompting Coles Myer to withdraw from the fray.
The loss of its position as the country's leading supermarket chain in 2006 was a significant blow to the morale of the group, and it led to a more radical overhaul. The Myer department store division was sold that year to a private equity consortium led by Newbridge Capital and the Myer family. The same year, Coles confirmed that it had begun talks with private equity groups including Kohlberg Kravis Roberts regarding a private buyout of the group. Global retail giant Wal-Mart was also said to be monitoring the situation closely. The original talks with KKR stalled, but were restarted in early 2007. At the same time, negotiations were opened with an Australian consortium led by conglomerate Wesfarmers and Macquarie Bank. The various private equity partners pulled out of talks over the next few months, but a deal was finally agreed in July under which Coles would be acquired by Wesfarmers.
However the initial deal value of A$22bn, to be paid mainly in Wesfarmers shares, was undermined by investor nerves over the conglomerate's ability to turn around Coles' performance. The value of the Wesfarmers stock plunged, and a revised deal worth A$19.3bn was agreed in September. Following completion, virtually the entire senior management team of Coles Group, led by chairman Rick Allert and CEO John Fletcher left the business.
Last full revision 3rd July 2017
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