Wesfarmers today (16 August) outlined its plans for Australian supermarket group Coles, which it expects to finally buy in November.


The strategy includes plans to split the business into three new divisions and an investment of about A$5bn (US$3.9m) in the Coles’ businesses over the next five years.


Wesfarmers said it had earmarked an estimated A$1-1.2bn investment for each of 2008/09 and 2009/10.


Managing director Richard Goyder said: “Our detailed assessment of all the Coles businesses shows they meet our key investment criterion in that they will deliver a positive net present value for Wesfarmers and will therefore create value for our shareholders. Target and Officeworks will be value accretive from the date of acquisition and we see substantial value creation in the food, liquor and convenience businesses in the medium term.”


However, the sheen from the announcement was spoilt a little by the news that Wesfarmers delivered a net profit of A$786.3m for the year ended 30 June, a fall of 25% on the year. Operating revenue was A$9.8bn, an increase of 10.1% compared to A$8.9bn in 2005/06.


Wesfamers said that three new business divisions will be created to integrate the Coles operations into its organisational structure: food, liquor and convenience; big box retailing (Bunnings and Officeworks) and Target.


The company said that Kmart will be operated as a separate division while Wesfarmers undertakes a detailed strategic review of the various options for the business to optimise shareholder value.


The options available include improving the trading performance of the businesses as it now is; converting some stores to other formats; and a sale of part or all of the business.


“It is my strong preference to retain Kmart but all ways of maximising shareholder value need to be considered, including a combination of the three options identified,” said Goyder.


Supply chain cost savings are projected to reach A$540m a year by 2013, including the A$90m achieved to date, a statement said.


Goyder said Wesfarmers and its supply chain consultants had thoroughly reviewed the current cost savings programme.


“The programme is well designed but end-to-end implementation needs to be improved to deliver the programme’s full potential. Wesfarmers has detailed strategies to address implementation issues.”


The company added that the short-term focus will be on reversing current sales momentum as the first step in targeting comparable store sales growth in line with the market (3-3.5%) by 2009/10.