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Australia | Retail | Food & Beverage
Market capitalisation   AUD 16,807.5m
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Overview

COL retails groceries, liquor and general merchandise primarily through its network of Coles supermarkets and Liquorland, Vintage Cellars and First Choice liquor stores. It also owns and operates a chain of Coles Express petrol stations and convenience stores as well as a portfolio of licensed pubs, clubs and hotels.

Business Lines

COL generates most of its operating revenues from the sale of groceries, liquor and general merchandise in Australia. 87% of the AUD39.3 billion it generated in the 2018 financial year is estimated to have come from the sale of these products and 13% from the sale of fuels and lubricants. Geographically, all of its revenues were generated in Australia.

COL purchases groceries, liquor and general merchandise from domestic and international suppliers that it retails through its network of retail stores and hospitality businesses in Australia:

  • Supermarkets. COL owns and operates around 900 Coles supermarkets (www.coles.com.au) in Australia. Each sells a mix of dry groceries, fresh and frozen produce, bakery, tobacco and everyday general merchandise that can be purchased in-store and online. COL is able to sell alcohol in its supermarkets in several Australian states, but currently chooses not to [1];
  • Liquor. COL owns and operates around 900 Liquorland (www.liquorland.com.au), Vintage Cellars (www.vintagecellars.com.au) and First Choice Liquor (www.firstchoiceliquor.com.au) stores across Australia. Each retails a range of beer, wine and spirits that can be purchased in-store and online. Many of its stores are also attached to its Spirit Hotels (www.ourhotels.com.au), which owns and operates around 100 licensed pubs, clubs and hotels in Australia. The largest of its hotels are the Leichhardt Hotel in Rockhampton, the Hotel Allen in Townsville and the Currimundi Hotel on the Sunshine Coast;
  • Convenience. COL owns and operates around 700 Coles Express petrol stations that are co-branded with Shell which retails petrol and lubricants as well as a limited range of groceries and general merchandise. COL has an alliance with Viva Energy Australia, the exclusive licensee of the Shell brand in Australia whereby COL earns a commission on the volume of petrol sold. The alliance arrangement expires in 2029.  While COL manages the day-to-day operations of its petrol stations and convenience stores, Viva determines the retail petrol price.

COL has a 50% equity interest in Loyalty Pacific, the owner and operator of the ‘Flybuys’ loyalty programme. It also operates a credit card business in partnership with Citigroup and a home, car and landlord insurance business in partnership with IAG.

Strategy, Risks and Opportunities

Grocery retailers are often characterised as high volume and low margin, but relatively stable because of the non-discretionary nature of the products they sell. Companies try to build economies of scale by developing national retail networks that optimise their buying power and supply chain efficiencies. Specifically, COL has indicated its near-term focus is to: transform its food offer by improving its fresh food offer, grow its home-brand sales, move to an every-day-low-price (EDLP) pricing strategy; offer anytime, anywhere shopping by investing in digital channels and delivery options; improve its physical store network; reduce its operating costs structure and focusing on a team culture across the group. It has also indicated that it is reviewing its Spirit Hotels business with a potential transaction that could result in the economic separation of its hotel and gaming revenues [2].

COL competes directly with a range of large company operated chains, small independent operators and speciality retailers. Its larger competitors within the supermarket sector are Woolworths, Aldi and Metcash (under its IGA banner group) in Australia. Its larger liquor retailing competitors are Woolworths (through its Dan Murphy’s and BWS retail chains) and Metcash (under its Cellarbrations, Bottle O and IGA Liquor banner groups). Its petrol stations compete with the Caltex, BP, Mobil (7-Eleven) networks and other independent providers like Puma, United, Freedom and Costco.

COL has successfully established a national presence and strong channels to market across Australia with a network of retail stores and distribution centres. Going forward, it should continue to benefit from increased sales and economies of scale through organic growth, expanding its product range and geographic presence, optimising its operations and supply chain as well as undertaking complementary and value-accretive acquisitions. Its possible downside commercial risks could include: an inability to adapt to structural changes within the retail industry with increased online purchases, changes in consumer trends and new instore consumer experiences; a broader economic slowdown that could affect the propensity of consumers to purchase discretionary groceries, liquor and general merchandise products; erosion of market share and gross margins from other multinational and domestic competitors; loss of a key customer, supplier or employee; changes to the availability, quality and delivered price of products and third-party supplier costs that are unhedged and cannot be passed on to customers through pricing increases; a depreciation of the AUD, which would increase the unhedged cost of its imports (equally, however, this could reduce the propensity of domestic customers to source alternative products from other competing international suppliers); and any inheritance of undue liabilities or commercial risks through new product offerings, store openings, acquisitions and entrances into new markets.

History

2018: Coles was founded by George Coles in 1914 when he opened his first general merchandise store in Victoria, Australia. Coles was first listed on the Australian Stock Exchange in 1929 (CGJ.AX) and by 1933 it had opened stores in every state of Australia. Its growth accelerated after the war with the acquisition and integration of other variety stores including Selfridges in 1950, F&G Stores in 1951 and Penneys in 1956.

CGJ entered the food retailing sector in 1958 through the acquisition of John Connell Dickins grocery stores. This was followed by the acquisitions of Beilby’s in 1959 and Matthews Thompson in 1960. CGJ opened its first dedicated Coles supermarket in 1962. CGJ entered the discount retailing sector in 1968 when it opened its first Kmart store as part of a joint venture and exclusive Australasian licensing agreement with S.S. Kresge of the United States. CGJ continued to expand into new retail categories with the acquisitions of the liquor chains Claude Fay Cellars and Liquorland in 1981, the footwear retailers Edward Fay and Eazywalkin in 1981 (later sold in 1988) and the women’s clothing retailer Katies Fashion in 1984.

CGJ undertook its largest transaction in 1985, merging with the Myer Emporium to form Coles Myer (CML.AX). The merger added a national network of Myer department stores, Grace Bros department stores, Target discount stores, Fosseys discount stores, Country Road clothing retail stores (sold the following year) and Red Rooster fast-food stores. It continued to focus on acquisitions, which included the Bi-Lo and Shoey’s discount grocery chains and the Charlton Feedlot beef and dairy production business in 1987. This was followed by its first international acquisition of Progressive Enterprises of New Zealand in 1988. The acquisition included the Foodtown supermarkets, 3 Guys discount supermarkets and Georgie Pie restaurants. CML acquired another complementary liquor business called Vintage Cellars in 1992 and opened its first Officeworks stationery store in 1993.

CML began to face increased scrutiny over falling profits and insider trading allegations. These eventually led to the rationalisation of its property portfolio and the sale of Progressive Enterprises and the Charlton Feedlot in 1993. CML launched its ‘Flybuys’ customer loyalty programme in partnership with Shell and the National Australia Bank in 1994 and by 2004, it had also established a network of Coles Express petrol stations and convenience stores after securing a petrol wholesaling agreement with Shell. It also acquired Mr Corks Liquor Group in 2006, which it later rebranded First Choice Liquor. Its financial performance, however, continued to wane and in 2006 it rebranded Katies Fashion, Fosseys and Grace Bros under the Myer umbrella before selling it later that year. Bi-Lo was also rebranded under the Coles umbrella and its Red Rooster fast-food chain was sold the next year.

CML was renamed Coles Group, shortly before it was acquired by the Australian-listed conglomerate, Wesfarmers in 2007. Wesfarmers chose to demerge and relist Coles on the Australian Stock Exchange (COL.AX). At the time, it owned and operated around 900 Coles supermarkets, 700 Coles Express petrol stations, 900 liquor outlets and 100 pubs, clubs and hotels across Australia.

2019: The terms of the alliance with Viva Energy (the distributor of Shell oil & petroleum products in Australia) changed to COL receiving a commission on the volume of petrol sold through the Coles Express petrol stations. COL formed a JV with the Australian Venue co with it effectively selling its hotels/gaming business. COL formed a partnership with Ocado, a grocery online technology provider

Governance

COL was first listed on the Australian Stock Exchange on 24 September 1929 and after various machinations was relisted on 21 November 2018. It had 1.3 billion shares on issue at the time of listing, 15% of which were owned by Wesfarmers and the rest by a mix of approximately 500,000 retail and institutional investors.

The COL Board collectively owned 0.0 million shares at the time of relisting. The Board currently comprises:

  • James Graham (AM) has been the Independent Chairman since November 2018. James comes from an engineering and corporate finance background and is the founder and Chairman of Gresham Partners. James was an Independent Director of Wesfarmers from 1998 to 2018;
  • Steven Cain has been a Non-Independent Director and the Managing Director since November 2018;
  • David Cheesewright has been a non-Independent Director since November 2018 and is the Wesfarmers’ nominee to the Board;
  • Jacqueline Chow has been an Independent Director since November 2018. Jacqueline is also a Director of NIB Holdings and Fisher & Paykel Appliances;
  • Abi Cleland has been an Independent Director since November 2018. Abi is also a Director of Computershare, Sydney Airport Corporation and Orora;
  • Richard Freudenstein has been an Independent Director since November 2018. Richard is also a Director of REA Group;
  • Wendy Stops has been an Independent Director since November 2018. Wendy is also a Director of Altium and the Commonwealth Bank of Australia; and
  • Zlatko Todorcevski has been an Independent Director since November 2018. Zlatko is also a Director of Adelaide Brighton and The Star Entertainment Group.

Steven Cain has been the COL Managing Director and Group Chief Executive Officer since November 2018. Steve comes from a retail background, having previously been the Chief Executive Officer of Metcash in Australia and Carlton Communications in the United Kingdom. He was also the Managing Director of food, liquor and fuel at Coles Myer before it was acquired by Wesfarmers.

References

Unless otherwise stated, all numbers are based on those reported at the end of the prior financial year.

COL’s historic Annual Reports, Presentations, Prospectuses and Other Announcements can be viewed below or they can be sourced from its website (www.coles.com.au) or the Australia Stock Exchange (www.asx.com.au) or when it was a division of Wesfarmers from its website (www.wesfarmers.com.au)

COL.AX Demerger Scheme Booklet 2018COL.AX Demerger Presentation 2018

[1] Refer to Part 3, Division 5, Section 29 of the New South Wales Liquor Act 2007 and Part 2, Section 11 of the Victoria Liquor Control Reform Act 1998

[2] Refer to page 24 of the COL Demerger Scheme Booklet 2018

Comparative Metrics

Summary Income Statement (AUDm)

FY17AFY18AFY19FFY20FFY21F
Revenue 39,126.0 39,288.0 39,672.0 36,921.5 38,490.6
Revenue growth -0.1% 0.4% 1.0% -6.9% 4.2%
EBITDA 2,101.0 2,029.0 1,971.2 1,984.8 2,105.5
EBITDA Margin 5.4% 5.2% 5.0% 5.4% 5.5%
NPAT normalised 985.8 933.3 889.6 933.6 995.6
NPAT reported 1,025.8 940.3 878.4 933.6 995.6
EPS normalised - - 66.7 70.0 74.6
EPS growth - - - 5.0% 6.6%

Summary Balance Sheet (AUDm)

FY17AFY18AFY19FFY20FFY21F
Total assets 0.0 9,539.0 9,468.8 9,272.2 9,565.0
Net debt 0.0 1,580.0 591.5 826.1 844.1
Total liabilities 0.0 6,604.0 5,655.4 5,378.9 5,529.9
Shareholders' equity 0.0 2,935.0 3,813.4 3,893.3 4,035.2
ROCE - 24.7% 24.1% 24.0% 25.1%
WC to revenue 0.0% -3.3% -3.3% -3.3% -3.2%
Net debt to capital - 35.0% 13.4% 17.5% 17.3%
Interest cover >25.0 24.2 22.8 >25.0 >25.0

Summary Cashflow Statement (AUDm)

FY17AFY18AFY19FFY20FFY21F
Operating free cashflow 1,580.8 1,597.3 1,529.7 1,469.2 1,685.7
Capital expenditure 811.0 762.0 750.0 850.0 850.0
Distributable cashflow 0.0 0.0 988.5 619.2 835.7
Post-tax DPS declared - - 33.1 59.5 64.0
Franking - - 100.0% 100.0% 100.0%
Payout - - 49.6% 85.0% 85.7%
Dividend cover - - 2.1 1.1 1.2

Summary Discounted Cashflow Valuation (AUDm)

Financial year end30-JunShares on issue1,333.9
WACC8.9%TV/DCF63.5%
Explicit value19,442.3Terminal value12,349.8
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