Wesfarmers shares fell to their lowest level since February yesterday as investors gave the company’s annual investor day strategy update something of a thumbs down.
The shares fell under the $40 level to a day’s low of $39.96 and then crawled their way back to end the session on $40.23, down 2.85%. The shares most recent peak was on April 10 when the ended at $45.10 – that’s a 11% loss in value in two months.
Analysts said there were two things that emerged from the briefing that worried the market: Coles flagging further pressure on margins and some disappointing news out of the move into hardware in the UK which is taking longer to sort out.
CEO Richard Goyder said Wesfarmers’ 18 month-old Homebase business in the UK had experienced significant disruption and was likely to lose money in the second half of 2017 as well as the first half of 2018.
While trading in the key months of April May and June had been good, it was not enough to offset losses in the first half.
"We are still dealing with issues re bathrooms and kitchens – that will have some second half impact in that business," he said.
But the big concern was the contents of the briefing from Coles boss John Durkan who clearly indicated that the food and liquor retailer’s margins would come under further pressure in the June-half, because of stepped up investment in price and service instead of cost savings. as it battles a resurgent Woolworths and the continuing pressures from Aldi
In his address, Durkan made it clear that the rate of investment in lowering prices and lifting service (staffing more checkouts for example) “in the second half is notably above that in the first half.”
He said that Coles had invested about $65 million into reducing prices and improving service in the December-quarter and second-half investment was “triple that”.
“It remains today as strong as it did in Q3 – it’s a high level of investment but cost savings will come out over time," he said. “We believe our strategy will leave Coles well positioned for continued growth over the long term.”
Apart from cutting prices, Coles is rationalising its product range, improving its fresh offer, and using the Coles brand to differentiate from rivals while simplifying process such as store rostering to reduce costs.
Coles has cut its range by 5% (one cut is the Felix brand of catfood made by Purina) this year to clear space for new products, reduce duplication and make the shopping experience easier for customers.
“It’s not about removing choice, it’s removing duplication," Mr Durkan said. He also said Coles also plans to add small bakeries to another 180 supermarkets to provide freshly baked bread. "I want Coles to be famous for its fresh bread," he said, adding that Coles still ‘under-indexed’ in fresh food."(Investment in fresh) will also prepare us for the impact of any new entrants,” he said.
And after months of excitedly warning about the dangers from the impending arrival of Amazon in Australia, CEO Richard Goyder was far more relaxed yesterday in his final speech as CEO to investors he said Wesfarmers was well-placed to compete with all new competitors, as he changed tune and played down concerns that the conglomerate’s retail businesses are highly exposed to the arrival of Amazon.
“Wesfarmers has a strong record in operating businesses in dynamic environments, environments where new competitors come in, and they have," Mr Goyder told analysts and investors at the strategy briefing on Wednesday.
“Every day we’re dealing with new competitive threats, new regulatory threats," Mr Goyder said, citing Bunnings’ outperformance despite Woolworths’ failed Masters venture and the expansion of Aldi.
"New competition is not new to the business and never will be new – competition sharpens us up and Masters certainly sharpened the team at Bunnings," he said.
"A lot of people are worried about Amazon and the impact of Aldi – since Aldi came into Australian markets more than 10 years ago and has built a national market share of north of 10 per cent, Coles’ market share has increased over that time."
