Explainer: why Wesfarmers is ditching Coles



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Whoever buys Coles will have a huge store network.
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Gary Mortimer, Queensland University of Technology

Coles will soon be an independent company again, with more than 800 supermarkets, nearly 900 liquor stores, 700 service stations, and 88 hotels.

Spinning off Coles is a great example of how good Wesfarmers is at entering and exiting markets. Buying the ailing Coles in 2007 was a smart move.

But the supermarket sector has changed dramatically in the past decade in relation to intense competition, with the growth of discounters like Aldi and the emergence of price-conscious shoppers who simply shop across multiple brands of supermarket each week.

Customers have benefited from price deflation, but it is a different story for suppliers.

The nature of these relationships has regularly been criticised and investigated.

A new owner will bring these matters back to the forefront. Ultimately, private equity firms and global businesses only purchase companies and enter markets where considerable return on investments can be made.




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Cash cows and dogs

Most first-year business students deal with these conundrums and often rely on simple models like the classic Boston Consulting Group’s Matrix.

Boston Consulting Group’s growth share matrix.
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Businesses move around in these quadrants, depending upon external, macro-level impacts. A stronger Kmart will push Target from a “Star” into the “Dog” category very quickly.

Wesfarmers has successfully moved Coles from “Dog” status 10 years ago to “Cash Cow”, but profits have slid in recent years.

Coles also accounts for a staggering 61% of the capital deployed in Wesfarmers’ entire portfolio (which includes other retail brands, industrial, mining and energy businesses), but contributes just 34% of earnings before interest and tax.

The supermarket sector has seen a huge increase in competition in recent years, with the growth of discounters like Aldi. There is also a possibility of more international competition from the German discounters Kaufland and Lidl.

This month, Fred Harrison, chief executive of Ritchies, Australia’s largest chain of independent supermarkets, called for an end to the “price wars”. Metcash, a wholesaler for independent supermarkets, recently delivered a loss in its food and grocery business.

Coles itself has signalled a move away from its strategy of slashing prices.




Read more:
Down, down but not different: Australia’s supermarkets in a race to the bottom


Other than putting cash back on Wesfarmers’ balance sheet, spinning off Coles creates two long-term revenue streams for Wesfarmers.

To begin with, Wesfarmers will aim to a hold 20% stake in Coles. So some profits will continue to flow back to Wesfarmers.

More importantly, Wesfarmers intends to retain “substantial” ownership in Flybuys, Coles’ loyalty program.

The value of loyalty programs is best highlighted by Woolworths’ purchase of Quantium in 2013 for almost A$20 million.

These programs hold a vast amount of data, giving Wesfarmers huge customer analytics capabilities with which to tailor promotions, product ranges and store layouts across all of its other retail businesses.

The new owners of Coles will also be eager to access this data.

Who will buy Coles?

While Wesfarmers will remain a minor shareholder, there will be plenty of interest in the majority share among private equity investors and international players (such as Walmart and Carrefour).

Walmart entered Canada through an acquisition, Mexico through a 50-50 joint venture with Cifra (Mexico’s largest retailer), and Brazil through a joint 60-40 (in favour of Walmart) with Lojas Americana.

Likewise, French retail giant Carrefour has adopted a range of approaches to international expansion, including joint ventures and acquisitions.




Read more:
Can Coles (Fly) buy shopper loyalty?


Ultimately, private equity investors and global businesses will only buy companies and enter markets where they can make a considerable return on investment.

Considering the declining margins in supermarkets, driven by low-cost operators like Aldi, it is likely that this will be done by squeezing suppliers.

On the other hand, a new Coles will no longer be constrained by Wesfarmers’ conglomerate ownership model. One of the challenges faced by large conglomerates is “strategic inertia”.

The ConversationA separate business will lead to faster innovation, greater investment and potentially another battle for market share between Australia’s two big supermarkets.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology

This article was originally published on The Conversation. Read the original article.

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‘Down down’ and ‘cheap cheap’ are gone gone: why supermarkets are moving away from price



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Coles was once the market leader thanks to its ‘down down’ low pricing marketing.
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Gary Mortimer, Queensland University of Technology and Louise Grimmer, University of Tasmania

On January 26, 2011, Coles fired the first shot in what would soon be dubbed the “supermarket price wars” by reducing the price of its own-brand milk to A$1 per litre. Woolworths fired back, triggering seven years of intense price competition.

But now Coles has waved the white flag, indicating a move away from price-based marketing, to a focus on other attributes, such as sustainability, local produce and community.

Coles’ new ad campaign.

Research shows if price is the main selling point, shopper loyalty decreases and customers become more conscious of price. Price wars are also costly for retailers.

While operational costs (wages, rent, bills) remain fixed or go up, prices can’t keep coming down. You eventually run out of margin.

Coles recent half yearly results reflect this, with a drop in earnings of 14.1% from A$920 million to A$790 million.

In contrast, Woolworths announced an 11.1% increase in earnings for their supermarket business. But Woolworths dropped their “cheap, cheap” price cutting campaign nearly two years ago.




Read more:
Down, down but not different: Australia’s supermarkets in a race to the bottom


Other retailers also get caught in the cross fire of price cutting. Case in point is Aussie Farmers Direct, which fell into administration this week saying they were:

…no longer able to compete against the domination of the major two supermarkets.

While it may be overly simplistic to blame the two big supermarkets for the downfall of Aussie Farmers Direct, price conscious consumers and thin grocery margins certainly contributed.

How this strategy came about

Supermarkets are now looking beyond price to stand out.

Both Coles and Woolworths are very similar in the brands they offer, prices, layouts, weekly specials and online channels. The move away from price gets shoppers thinking about what is unique to each chain.

So, rather than price, the focus has shifted to service quality, social programs and connecting with the community.




Read more:
Unit pricing saves money but is the forgotten shopping tool


Shoppers who are continually exposed to loyalty program logos, may eventually stop noticing these logos, or “switch off”. This is because of a behavioural tendency called “habituation”.

What these new strategies are trying to sell

So, if Coles are no longer selling themselves on price, what are they selling?

Coles’ new approach is more subtle, selling themselves through aspirational stories and employing classic advertising techniques to do it.

These techniques are used in advertising to convey positive feelings and emotions associated with a particular experience. A simple way to achieve this in advertising is to feature people telling their own stories – as seen in the new Coles advert launched this week.

Woolworths ad campaign.

With the Commonwealth Games near, both supermarkets are also featuring sports stars in their marketing. Woolworths new campaign features athletes and their connection with fresh food, positions the company, once again, as “Australia’s Fresh Food People”.

Meanwhile, Coles have partnered with Uncle Toby’s for their Sports for Schools campaign. Their advertisements feature an array of young, fit, attractive and successful athletes linking the athletic success with the purchase of products from Coles.

By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called “internalisation”. This is where people accept the endorser’s position on an issue as their own.

Internalisation is a powerful psychological mechanism because even if the source used in the campaign is forgotten, the internalised attitude usually remains. Price doesn’t create this effect.

While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes.

The ConversationFaced with the expansion of Aldi across South Australia and Western Australia and the entry of German supermarket Kaufland, Coles has recognised they can’t keep fighting a battle on price alone.

Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of Technology and Louise Grimmer, Lecturer in Marketing, Tasmanian School of Business and Economics, University of Tasmania

This article was originally published on The Conversation. Read the original article.