Coles supermarket Essay Online For Free - Free Essay Example

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, â€Å"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’ â€Å"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. â€Å"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. â€Å"In 2013, the Coles turnaroun d 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. â€Å"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. â€Å"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 â€Å"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 its a key contributor to the economy of neighbouring countries. Coles is also an equal opportuni ties 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, â€Å"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 independ ent 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 me dium 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 Australias 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, ‘Its 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 20 14, 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