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Woolworths picked as the winner in Wesfarmers-Coles demerger

The AFR reported that Woolworths is tipped to emerge as a major winner in Wesfarmers' demerger of Coles "as a decade of aggressive price cutting comes to an end". Fund managers are speculating that the demerger will lead to the most benign industry conditions in almost a decade as a stand-alone Coles will have less capacity to invest heavily in price while spending $1 billion automating its supply chain and distributing 80%-90% of earnings in dividends. Once again, fundamental information was missing from the article. What about the impact of Aldi, Costco, and soon Kaufland on the supermarket segment? Both Woolies and Coles will come under ever-increasing pressure from the international raiders.

Keeping the market honest

According to The Mail in the UK, Tesco's CEO has called for a tax on the sale of online goods to prevent the demise of brick-and-mortar stores. Apparently, the UK Chancellor of the Exchequer acknowledged that the government would need to tax internet giants such as Amazon and Google. We are all for levelling the playing field, but we think that such tax penalties shouldn’t be related to the size of the organisation but to its Profit and Loss statement. If a company runs at a loss for a number of years, it should be investigated, as it's clearly burning borrowed, or shareholders’ funds in order to distort the market.

Retail spending August 2018

Multiple media outlets reported on the modest increase in retail spending of 0.3% in August over a flat July. In one article, the National Retailers Association called this increase the “weakest back-to-back results for 2018", noting that these figures emphasise the need for governments to put retail-friendly measures in place ahead of the looming holiday period, urging for extended trading hours to be considered. Again, we had to turn to the ABS to find year-on-year figures (YoY), which indicate that retail spending grew around 3.5% against August 2017 - a totally different picture to the month-on-month comparison.

Wesfarmers outlines strategy post Coles demerger

In documents released to the ASX last week Friday, Wesfarmers said that the move to spin off Coles into a separately listed entity will enable it to invest in businesses with higher future earnings prospects. Coles contributed just 35% of Wesfarmers’ earnings in the 2018 financial year, despite accounting for 64% of the conglomerate’s employed capital. The group said its strong balance sheet and cash generative assets will create new investment opportunities post-demerger, while Coles, with 31% market share in the Australian supermarket sector, is expected to benefit from Australia’s population growth and improving disposable income and consumer sentiment metrics moving forward. Shareholders will vote on the demerger on 15 November 2018.

Cashing in on the collapse of Toys 'R' Us


The Wall Street Journal reported that as the festive season approaches, US retailers are rushing to fill the holiday hole left by Toys ‘R’ Us. The toy retailer's collapse has its rivals fighting over billions of dollars in holiday toy sales and is also likely to make it harder for shoppers to get their hands on some of the year’s hottest items. Walmart Inc., Target Corp. and other chains are setting aside more floor space for toys in hundreds of stores. Even Inc. is planning to distribute toy catalogues to shoppers. But, will they have enough inventory for the annual crush of last-minute shoppers?


More positive predictions from the US

Reuters reported that the NRF expects US Christmas-period sales in 2018 to increase between 4.3% and 4.8%, boosted by a strong economy. According to the NRF, the combination of more jobs, improved wages, tamed inflation and an increase in net worth all provide the impetus to spendThis is a good prognosis for Australian retailers who operate in the US market.

David Jones launches "shoe heaven"

The AFR reported that David Jones is emulating overseas department stores with its new luxury shoe floor, which opens today after a multi-million refurbishment of level seven of the retailer's Elizabeth Street store. The shoe offering is the largest in Australia and one of the largest in the world, raising the bar for Australian retailers who have, according to a retail expert from RetailOasis, historically lagged behind their international counterparts due to a lack of access to global brands and a "middle-of-the-road" strategy. The refurbishment will increase pressure on Myer, which lacks the cash to undertake similar renovations, but will also increase pressure on Woolworths Holdings to make a decent return on its investment. Woolworths outlaid $2.1 billion for David Jones in 2014 but wrote down the value of its investment by $721 million in January. This is a big move, that has to work.

Coles' margins to fall short of Woolworths

The AFR reported that Coles' margins will fall after its demerger from Westfarmers, and that margins in food, liquor, and convenience/fuel will undershoot those at Woolworths. A JPMorgan analyst notes that Coles' total earnings before tax will fall from a reported $1.5 billion in 2018 to $1.49 billion in 2019, with $55 million in new corporate overheads (as if their cost base wasn't too high already). In review of the article, there is some fundamental missing information - what about the impact of Aldi, Costco, and soon Kaufland on the supermarket segment? And, let us assure you - it will continue to grow.

Metcash cuts waste, but where is the strategy?

The AFR reported about Metcash's Working Smarter cost savings program, citing that the wholesaler has folded its supply chain and logistics operations into the supermarket and liquor businesses to streamline functions, reduce operating costs and enable faster decision-making to improve service to its customers. The three-year, $125 million program, which has helped Metcash offset the impact of falling sales, comes to an end this year. Metcash's fate has been somewhat linked to that of IGA, whose market share has halved to approximately 8% in the last decade due to mounting pressure from the likes of Aldi. Of course, cutting waste is pragmatic, but it is not a long-term strategy.

Concerns about the global economy

Geopolitical Futures predicted that the International Monetary Fund will release some pretty discouraging forecasts next week, as various risks in the global economy begin to materialise. Foremost among them, according to the IMF head, is the US trade war, which threatens to negatively affect trade, investment, and manufacturing worldwide. And, the bad news doesn’t stop there. The IMF reports also bode ill for emerging markets, whose portfolios could lose as much as $100 billion. Argentina, Turkey, Indonesia, South Africa, and Pakistan are especially vulnerable. Finally, the reports made sure to note how concerned the IMF was about total global debt, which now stands at $182 trillion.

Frictionless shopping

The NRF looked at Home Depot's digital strategy, aimed at "frictionless shopping".  It is pleasing to see that some retailers have clarity about the future and work on creating and refining what we call a 'Digital Path to Purchase'.  The key objective of the DPP is to generate sales - full stop. Not online sales, but simply sales - anywhere in the business. Home Depot does this really well, it's customers collect around 50% of their online purchases in-store (aka Click & Collect).    

The unstoppable Aldi

Reuters reported that Aldi is progressively claiming market share not just in Australia, but also in the UK. Aldi's UK CEO said the firm opened 70 stores in Britain in 2017 and was on track to open 70 more in 2018 and 130 between 2019 and 2020. After that, the grocer plans to open 50-60 stores a year to reach 1,200, focusing on towns where Aldi was not yet present.  In Australia, if Coles and Woolworths are not scared by Aldi, they should be.  It is very difficult to compete with a supermarket business that has adopted and perfected Operational Excellence as their underlying business model.