Coles Supermarket Essay Online for Free

Analyse the business environment for Coles supermarket chain.

 

1.0 Introduction

1.1 Background

Coles is a national supermarket chain; liquor, fuel and convenience retailer in Australia. It was acquired in 2007 by Wesfarmers, “a diversified Australian company with strong, established market positions and recognised brands with the objective of delivering satisfactory returns to shareholders” (Wesfarmers, 2013, p.4).. According to Wesfarmers (2013), Cole’s sole purpose has been to give the Australian people a shop they can trust, to deliver quality, value and service. The main sources of business include the following:

• 756 full service supermarkets
• 810 liquor outlets fewer than three brand and 92 hotels
• 636 fuel and convenience stores
• More than 99,000 team members

As of 2013, according to Wesfarmers (2013), Coles operating results and drivers were:

• Revenue of $35.8 billion, up 4.9 per cent
• EBIT of $1,533 million, up 13.1 per cent
• Return on capital of 9.5 per cent, up from 8.7 per cent
• Total food and liquor sales growth of 5.5 per cent and comparative store sales growth of 4.3 per cent
• Over four years of industry outperformance
• Continued investment in customer value funded from cost reductions and business efficiencies
• Continued investment in product quality particularly fresh categories
• Ongoing transformation of the supply chain
• Launch of 90 more stores in renewal format and opening of 6 larger format stores and net space growth of 1.6 per cent
• Good progress on multi-channel initiatives including trials of new Coles Online website
• Growth in financial services including Coles Insurance and flybuys loyalty program
• Strong customer response to fuel offers and better range and value in the convenience store network

1.2 Scope and Approach

This essay takes a critical look at the company, its current position, the internal capabilities, and its external environment, and considers strategic changes necessary to ensure Coles maintains its traditional offering of long term value creation. In developing this Business Analysis for Coles, the following tools have been used to assess present and future performance of the company:

• Situational Analysis,
• PEST Analysis,
• SWOT Analysis,
• 5 Forces Analysis

Furthermore, this essay gives consideration to the current growth strategies adopted by the company and questions if these practices are the best options going forward, for delivering sustainability of the group’s strategic framework.

2.0 Situational Analysis

2.1 Internal Market Audit

According to its 2013 sustainability report, Coles’ business focused on six key areas to improve its sustainability:

• Training and development of its team
• Customer trust in the produce range, value and quality
• Water savings and energy efficiency of the stores
• Workplace safety
• Supporting the local communities in which we operate
• Working with suppliers to further develop strong sustainable relationships.

2.1.1 Present Business Review

Wesfarmers’ “operating model is focused on ensuring each of its Group’s divisions has a very strong management capability and day-to-day operational autonomy, overseen by divisional boards and a well-established Group-wide framework where governance processes are coordinated over a 12-month operating cycle. This approach encourages strong accountability for operating results and assurance in areas such as:

• Strategic planning,
• Budgeting and monitoring of performance;
• Risk management, including internal audit and insurance protection;
• Group-wide human resource management systems such as executive remuneration and share schemes, talent development and key role succession planning;
• Centralised statutory accounting, tax, treasury and legal support.” (Wesfarmers 2013, p. 6)

Coles’ revenue in 2013 was $35.8billion, an increase of 4.9 per cent from the previous year. Its five year financial history report (See Appendix1) shows a steady growth in revenue generation. “Coles delivered earnings growth of 13.1 per cent to $1,533 million, building on the 16.3 per cent and 21.2 per cent earnings growth in the 2012 and 2011 financial years respectively” (Wesfarmers 2013, p. 3).  Figure 1: Five year Revenue Increase Source: Adopted from Wesfarmers 2013, Annual reports. Coles’ proposed strategies and prospects are to: Embark on second wave of transformation with a focus on quality, service and value. And take advantage of further store renewal opportunities, supply chain transformation and operating efficiencies; as well as investment in category innovation, Coles brand and development, multi-channel integration and a tailored loyalty offer and a culture of continuous improvement. “In 2013, the Coles turnaround strategy produced strong trading results by improving quality, service and value. The business continued to out-perform the industry and successfully completed the final year of a five-year turnaround plan” (Wesfamers, 2013, p.25)

2.1.2 Customer Analysis

From its various outlets nationally Coles handles more than 19 million customer transactions a week. Coles claims its customer-focused strategy continues to improve in efficiency and productivity, while investing in lower prices, delivering better quality through its ‘Australian First’ sourcing policy and developing a stronger store base through new store openings and renewing existing stores contributed to it steady revenue growth as the financial indicators have shown. “The transformation of Coles since its acquisition has progressed with operational efficiencies and continued fund reinvestment in price. As well as a sustained turnaround of the business, providing benefits for consumers, suppliers and employees for the past five years thus, delivering a much stronger platform for future growth” (Wesfarmers 2013, p.25).

2.1.3 Financial Analysis

As of the last 2012/2013 financial year, Coles was able to generate earnings before interest and Tax (EBIT) of $1,533m as can be seen in figure 2 below.  Figure 2: EBIT Source: Adopted from Wesfarmers 2013 Financial Reports. Tables 1 & 2 below show the key financial indicators and Coles’ performance over the past few years. Table 1: Key Financial data

Coles	2012	2013
Revenue $m	35,780	34,117
Earnings before interest and tax $m	1,533	1,356
Segment assets $m	20,367	19,940
Segment liabilities $m	4,145	3,676
Capital employed $m	16,114	15,572
Return on capital employed %	9.5	8.7

Source: Adopted from Wesfarmers 2013 Financial Reports Table 2: Key Financial Indicators

For the year ended 30 June	2009	2010	2011	2012	2013
Revenue ($m)	28,799	30,002	32,073	34,117	35,780
Earnings before interest and tax ($m)	831	962	1,166	1,356	1,533
Capital employed (R12) ($m)	15,140	14,886	15,018	15,572	16,114
Return on capital employed (%)	5.5	6.5	7.8	8.7	9.5
Capital expenditure ($m)	606	683	840	1,218	1,181

Source: Adopted from Wesfarmers 2013 Financial Reports. As reported in the Wesfarmers 2013 Financial Reports and shown in table1 above it can be observed that, for year 2012/2013, Coles has generated a healthy return on capital employed (ROE) of 9.5%, and improvement from 8.7% for the previous year. An increase in capital expenditure and liabilities has been due to the company’s support for net capital investments across the Group. This is up to an increase of $1.5 billion to $1.9 billion in 2014. “The group also managed strong credit ratings with Moody’s Investor Service upgrading Wesfarmers’ issuer and senior unsecured long-term debt rating from Baa1 (positive) to A3 (stable) consistent with the Group’s credit rating from Standard and Poor’s of A- (stable)… It settled all outstanding debt in the name of the Coles group and continued to neutralise the dilution that would otherwise have occurred from the Dividend Investment Plan and Employee Share plans”(Wesfarmers 2013, p. 13). Interests, income and expenditure are however not allocated to operating segments at Wesfarmers. This type of activity is managed on a group basis. Revenue and earnings of various divisions are also affected by the effect of high seasonality such as, for the retail divisions like Coles, earnings are typically greater in the December half of the financial year due to the impact of the Christmas holiday shopping period on the retail business.

2.2 External Market Audit

Given the nature and scale of Coles’ business, the impact of macro and micro forces on its operations is considered to be relatively large compared to the standard in the industry. The external market has been assessed based on PEST analysis and Competitor analysis.

2.2.1 PEST Analysis

To explore how the macro environment has impacted the supermarket chain industry and Coles specifically, a PEST analysis has been used, which consists of Political, Economic, Social and Technology factors as shown below.  Figure 3: PEST ANALYSIS – Coles Group Ltd Source: Author.

i. Political Factors

The supermarket chain industry attracts a great deal of attention from the government, non-governmental organizations and even advocacy groups. Due to the size of the industry and how significant a component of the economy and social welfare of countries it is, it has trigged debates on the future and current state of the industry on a global basis. The industry is mature in many countries and in Australia, it is considered a ‘duopoly’, which is a market situation where “two companies own all or nearly all of the market for a similar product or service” (Kumar & Sharma 1998, p.229). With regards to Coles and the supermarket chain industry in Australia, the political situation as described in the preceding paragraph holds true. According to the Australian Competition and Consumer Commission, Australia is one of the largest importers of grocery products and it's a key contributor to the economy of neighbouring countries. Coles is also an equal opportunities employer which provides equal employment opportunities nationwide. Coles also sources products responsibly and contribute positively to the communities in which it operates. Other political factors that have an impact can include:

• Government initiatives and subsidies for local produce and foreign export policies
• Legislation for local farmers’ protection
• Market deregulation for foreign groceries to compete

ii. Economic Factors

The Supermarket chain industry is a high-risk industry, which requires a substantial strategic planning process, customer satisfaction and significant investment. To compete many companies have pursued alliances and joint ventures with shared facilities and outright buy outs to maintain the cost. The global recession of the past years has also had a significant impact on smaller retailers and the supermarket industry as a whole. Other economic factors that have had an impact include:

• Rise in currency rates
• Competition from developing countries
• Competitor rivalry
• Mergers and Acquisitions of big players
• Market seasonality and trade cyclesSupplier and customer drivers

iii. Social Factors

Aging populations and longer life expectancies, changing taste, healthy living styles and specific dietary requirements have increased demand for more organic food, and have been an important factor in the growth of new brands. In the US and UK, greater life expectancy will depend on diet, exercise and a positive attitude to life and increasing knowledge, according to Newell et al (2006). The Australian government’s plays an important role in promoting exercise, healthy living and a positive culture, which in effect can reduce consumption of certain brands and product demographics for Coles.

iv. Technological Factors

Increased use of the Internet has helped to reduce media costs and also made room for increase innovation in the supermarket chain industry. Coles has capitalised on the internet to continue to develop its online sales platform which has thus managed to attract interest from younger audiences and increased sales significantly.

2.2.2 Competitor Analysis 5 Forces

The Five Forces model developed by Michael Porter provides a frame work to identify the competitive nature of an industry. Even though extremely subjective, a broad Five Forces analysis indicates that competitive rivalry within the supermarket chain industry is medium in Australia.  Figure 4: Porter’s Five Forces Model Source: Author Based on the research and competitive analysis carried out and relative to Porter’s five analyses as shown in figure4, it can be observed that: As a known fact that, “Australia’s grocery markets is one of the most concentrated in the world, Woolworths and Wesfarmers (owner of Coles) account for almost 80% of supermarket sales, 60% of alcohol retail, 50% of petrol retail and 40% of all retail in Australia” (Ethical Consumer Group 2014). With their large market share they have and continue to exert considerable influence over suppliers and make the playing field extremely tough for much smaller independent retailers such as IGA, Foodland, 7-Eleven, Lucky 7, BP and several other liquor retailers. See figure 5 below.  Figure 5: Australian Grocery Market Share Source: Ferrier Hodgson - Ferrier’s Focus May 2011 from Wesfarmers and Woolworths annual reports 2010, NARGA November 2010 Report, Master Grocers Australia December 2010 Thus, Coles has only one major competitor – Woolworths; and a few direct competitors such as Aldi and Metcash. These four, Coles inclusive make up the big players in the industry. With each of them having a different and unique operating model, competitor rivalry is therefore high to medium. The market concentration of private label brands from these giants have been blamed for Australia having the fastest rising grocery prices in the developed world. Threat of substitution is therefore also high to medium because there are only four main competitors with similar prices. This is the same reason why customer bargaining power is medium to low, and threat of market entry to compete with the big four is very low. Other competition therefore can only come from local harvests, independent grocers and small supermarkets and recently Costco.

3.0 SWOT Analysis

As a result of the internal and external market audits undertaken, a complementing SWOT analysis for Coles’ group will help to evaluate areas of strength, weaknesses, growth opportunities and threats for the company. Results are shown in figure 5 below:  Figure 6: SWOT Analysis for Coles Group Source: Author

4.0 Conclusion

In conclusion, there are no real threats or key issues for Coles presently except for the recurrent price wars with its major competitor and concerns about the sustainability of these battles. With continuous market dominance however, leading to Australia's powerful supermarket duopoly, this could be termed as inhospitable and leaving consumers to revel in cheaper staples. A key to survival of any business is the need to increase revenue and reduce dependence upon financing via debt bearing instruments. Coles, in respect to these strategic options is already in the process of developing new initiatives by reducing its debts and focusing on quality, service and value. Coles is in the forefront of innovation by taking advantage of further store renewal opportunities, supply chain transformation and a strategic approach to improved operational efficiencies and continued fund reinvestment in price.

Reference List

Ethical Consumer Group 2014, viewed 08 May 2014, <www.ethical.org.au/get-informed/issues/supermarkets-in-australia/> Kumar, R & Sharma, R 1998, Managerial Economics, New Delhi: India Atlantic Publishers & Distributors Newell, RG, Jaffe, AB & Stavins RN 2006, ‘The effects of economic and policy incentives on carbon mitigation technologies’, Energy Economics, vol. 28, p. 563 – 578. Wesfarmers, 2013, Wesfarmers Annual Report 2013. viewed 08 May 2014, https://media.corporate-ir.net/media_files/IROL/14/144042/wes/WESFARMERS%20ANNUAL%20REPORT%202013.pdf

Bibliography

Brownlee II, ER, Ferris KR & Haskins ME 1990, Corporate Financial Reporting: Text and Cases, Boston: BPI/Irwin, Grant, RM 2010, Contemporary Strategy Analysis, 7th edn, West Sussex, UK.: John Wiley & Sons Ltd, Johnson, G, Scholes, K & Whittington, R 2009, Fundamentals of Strategy, Essex, England: Pearson Education Kruger, C, Greenblat E & Butler, B 2012, ‘It's all shelf interest in a price war’, Sidney Morning Herald, 21 April, viewed 08 May 2014, <https://www.smh.com.au/business/its-all-shelf-interest-in-a-price-war-20120420-1xcms.html#ixzz31Bc7Z5gu> Mableson, T & Stewart, J 2011, Supermarket shootout: Will the independents survive?, Ferriers Focus, p.2. Porter, ME 2004, Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Press,. Slack, N, Chambers, S, Johnston, R & Betts, A 2009, Operations and Process Management: Principles and Practice for Strategic Impact, 2nd edn, Pearson Education, Essex, England. Stuart Alexander 2014, viewed 09 May 2014, <https://www.stuartalexander.com.au/aust_grocery_market_woolworths_coles_wholesale.php> Wickham, PA 2004, Management Consulting - Delivering an Effective Project, 2nd edn, Essex, England : Pearson Education Zehner, D & Sanders, M 2012, The new reality for grocery suppliers in Australia, Bain & Company, viewed 14 May 2014, <https://www.bain.com/offices/australia/en_us/publications/new-reality-for-grocery-suppliers-in-australia.aspx>  

Appendix : 5 year financial History

All figures in $m unless shown otherwise	2013	2012	2011	2010	2009
Summarised Income Statement
Sales revenue	59,422	57,685	54,513	51,485	50,641
Other operating revenue	410	395	362	342	341
Operating revenue	59,832	58,080	54,875	51,827	50,982
Operating profit before depreciation and amortisation, finance costs and income tax	4,729	4,544	4,155	3,786	3,803
Depreciation and amortisation	(1,071)	(995)	(923)	(917)	(856)
EBIT	3,658	3,549	3,232	2,869	2,947
Finance costs	(432)	(505)	(526)	(654)	(951)
Income tax expense	(965)	(918)	(784)	(650)	(474)
Operating profit after income tax attributable to members of Wesfarmers Limited	2,261	2,126	1,922	1,565	1,522
Capital And Dividends
Ordinary shares on issue (number) '000s as at 30 June	1,157,194	1,157,072	1,157,072	1,157,072	1,157,072
Paid up ordinary capital as at 30 June	23,290	23,286	23,286	23,286	23,286
Fully-franked dividend per ordinary share (declared) (cents)	180	165	150	125	110
Financial Performance
Earnings per share (weighted average) (cents)	195.9	184.2	166.7	135.7	158.5
Earnings per share growth	6.4%	10.5%	22.8%	(14.4%)	(9.0%)
Return on average ordinary shareholders' equity (R12)	8.9%	8.4%	7.7%	6.4%	7.3%
Fixed charges cover (R12) (times)	3.0	2.9	2.8	2.5	2.2
Net interest cover - cash basis (R12) (times)	12.2	10.8	9.5	6.8	5.0
Financial Position As At 30 June
Total assets	43,155	42,312	40,814	39,236	39,062
Total liabilities	17,133	16,685	15,485	14,542	14,814
Net assets	26,022	25,627	25,329	24,694	24,248
Net tangible asset backing per ordinary share	$4.69	$4.45	$4.12	$3.61	$3.13
Net debt to equity	20.2%	19.1%	17.1%	16.3%	18.3%
Total liabilities/total assets	39.7%	39.4%	37.9%	37.1%	37.9%
STOCK MARKET CAPITALISATION AS AT 30 JUNE	45,936	34,846	36,913	33,171	26,337

Source: Adopted from West farmers 2013 Annual Report

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