Talking shop - McLeod's Coles turnaround
Coles MD Ian McLeod has revitalised Australia's second-largest grocer
Executives often talk about how they plan to turn around struggling businesses but it is less common for the grand ideas to result in improved performance.
Ian McLeod's work at Coles, the second-largest retailer in Australia, is an example of how an ailing company has become stronger and is now thriving.
McLeod, a former executive at Asda, joined Coles in 2008, just months after the company was acquired in what was the biggest takeover in Australia's corporate history. Local conglomerate Wesfarmers snapped up Coles for a cool A$19.7bn in November 2007 and admitted immediately the retailer's supermarkets were performing "poorly". It said it would take five years to turn around Coles.
Fast-forward almost five years and, in London last week, McLeod outlined how Coles had become a retailer that was "outperforming" its rivals in Australia and, he claimed, even some of its international peers.
Before the Wesfarmers deal, Coles, McLeod told the World Retail Congress on Friday (21 September), had become a business of "poor standards, poor availability, poor quality", with volumes falling and market share declining. "The management lost sight of what the customer's looking for," he said.
In an entertaing presentation, which included a montage of empty shelves and long queues (Michael Jackson's Bad played as the photographs were shown), McLeod walked delegates through how Coles had turned itself around.
"There were two options for me as a CEO to consider. Option number one, leave immediately," McLeod said as a slide showing a Qantas plane taking off appeared behind him. "Or, option two, develop a cunning plan." (And yes, the next slide showed Blackadder's sidekick Baldrick).
"We had a five-year plan around three phases: building a solid foundation, delivering consistently well, driving the Coles difference. We worked with pace, strength and drove it hard but you have to pace yourself as you cannot do everything all at once," McLeod said.
He argued the "two key things" needed to implement the strategy were creating a "strong top team" and embedding "cultural change" into Coles. "It's important to engage the shop floor. We are here at the centre to support the stores. That's where our customers are and without customers we do not have a retail base," McLeod said.
The strategy itself had six elements, including "truly better value", fresh food of "stunning quality" and "excellent availability".
However, what appeared key to Coles' success was improving its perception among consumers on price. McLeod said almost 30 years of rising inflation had led to severe criticism of supermarkets in Australia. "It got to the point where everyone felt they were ripping customers off," he said. Coles embarked on a strategy aligning prices across stores, using fewer but "stronger and more competitive promotions" and developing its Down, Down marketing campaign, which emphasised the retailer's prices, especially on key items like milk and bread, were lower and staying lower. Coles also invested heavily in private label.
The retailer's actions, McLeod claimed, led to falling food prices in Australia. Looking at the sector, Coles' initiatives look to have made arch-rival Woolworths Ltd act, with both retailers competing heavily on price and private label.
Of course, Coles' moves to cut prices of products like milk attracted criticism from some quarters fearful at the impact on the Australian food sector. However, McLeod insisted Coles had looked to support farmers and insisted the retailer was simply looking to give shoppers more value.
"We gave milk processors price rises before we did it, we funded it all ourselves, but we still got pretty heavily criticised for it," he said. "We end up with eight aggressive Senators grilling me about our insidious plot to damage Australian agriculture forever and all we are doing is trying to give better prices to consumers."
The strategy seems to have paid off. Coles saw profits increase 16% in its last financial year on the back of sales boosted by more transactions at its outlets. The company booked EBIT of A$1.36bn (US$1.43bn) for the year to the end of June, up 16.3% on a year earlier. Sales were up 6.4% at A$34.12bn. Wesfarmers, said the retailer had seen "strong" comparable food and liquor store sales, which increased 3.7% despite prices falling 2.9%.
There is, of course, no suggestion Coles and McLeod are resting on their laurels as we approach the fifth anniversary of the Wesfarmers takeover. Richard Goyder, MD of Wesfarmers, was quoted in the Australian press when Coles' annual results were issued last month as saying the retailer has "a long way to go".
"While we're pleased with the progress Coles has made, we think there are significant opportunities to improve the business on all fronts and Ian McLeod would wholeheartedly agree with that," Goyder said, according to the Sydney Morning Herald.
In his presentation to the World Retail Congress, McLeod said, for instance, Australian manufacturers and retailers were facing a "rapid growth" in wage costs and warned retail growth in the country was "slowing to international levels". Australia has been a market in which a number of food manufacturers have recently found the going tough and, speaking on the sidelines of the World Retail Congress to just-food, McLeod said Coles' recent work on price and private label meant the "status quo is changing".
However, there is no question Coles' performance is improved since the dark days of the Noughties and, on a Friday afternoon, towards the end of a tiring three-day conference, McLeod would perhaps have given other retailers facing challenges ideas to turn around their own businesses.
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