“There were two options for me as a CEO to consider,” outgoing Coles boss Ian McLeod said in 2012, reflecting on when he arrived at Australia’s second-largest – but flagging – grocer four years previously.
“Option number one, leave immediately. Or, option two, develop a cunning plan.” There is little doubt McLeod’s plan to revitalise Coles has worked.
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In February 2008, just months after buying Coles in what was Australia’s largest corporate takeover, Wesfarmers, which had faced criticism and scepticism about the deal in equal measure, hired McLeod from UK car parts retailer Halfords.
The tough-talking Scot had had stints at Asda and at the UK grocer’s parent Wal-Mart, albeit at the US company’s operations at Germany, which the world’s largest retailer quit in 2006.
Wesfarmers MD Richard Goyder said McLeod was the right man for the job. “I’ve said previously that the person we’d put into this job would need a track record of performance in retail, preferably including supermarkets, and would be a leader with a passion for the job as well as possessing a demonstrable and genuine people and customer focus,” Goyder said at the time. McLeod, he added, had the “international retailing expertise needed to lead the performance turnaround of Coles”.
McLeod has said he arrived at a retailer that had become a business of “poor standards, poor availability, poor quality”, with volumes falling and market share declining.
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By GlobalDataThe new Coles boss and his management team, which also quickly included John Durkan, the man who will replace McLeod in July, set about drawing up a five-year plan to turn around the business.
Coles aligned prices across stores, using what McLeod called 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.
Fast-forward five years to August 2013 and the results were clear. For the year to the end of last June, Coles booked EBIT of A$1.53bn, up 13% on the previous 12 months. The improved profits came on the back of a 5.5% increase in headline sales to A$28.1bn. Comparable-store sales were up 4.3%.
McLeod’s success in revitalising Coles helped the retailer’s sales outpace Woolworths and prompted its larger rival to act. In recent quarters, the arch-rivals have competed heavily on price and private label.
Wesfarmers is set to report its half-year results tomorrow. Its most recent update to the market on Coles’ trading was in October when the retailer’s first-quarter sales came in below analyst forecasts.
The company booked a 3.4% increase in comparable food and liquor sales for the three months to the end of September. However, according to Bloomberg, analysts were expecting a rise of 4%.
Nevertheless, for Woolworths’ fiscal first quarter, which ran on a similar time-frame until 6 October, comparable-store sales from its domestic food and liquor business rose at a slower pace, by 2.5%.
At the end of 2013, Coles’ share of the Australian grocery sector stood at 33.5%, compared to Woolworths’ 39%, according to local industry analysts Roy Market Research. The analysts said Coles had narrowed the gap to Woolworths and had seen its market share grow to its highest level since March 2008 – when McLeod took over.
COO John Durkan is set to take the reins at Coles and will of course have to be watchful for any Woolworths’ fightback. He will also have to keep an eye out for a growing Aldi, even if its 10% market share means it remains far in Coles rear-view mirror. Further investment online will also be critical to Coles’ future growth.
However, McLeod’s tenure at Coles should be judged a success, taking a retailer suffering from stock issues, long queues and falling sales and revitalising the business into one that looked one step ahead of its larger rival.
