Terry McCrann: Move by Wesfarmers chief signals big changes in store for retail

THE decision by new Wesfarmers CEO Rob Scott to move immediately to unwind his predecessor Richard Goyder’s signature deal is all about “shrinking to (hoped-for) greatness”, writes Terry McCrann.

THE decision by new Wesfarmers chief executive Rob Scott to move immediately to unwind his predecessor Richard Goyder’s signature deal — the $20 billion takeover of the Coles Group — is all about “shrinking to (hoped-for) greatness”.

COLES DUMPED FROM WESFARMERS IN DEMERGER

WESFARMERS SPINS OFF GROCERY GIANT COLES

It certainly won immediate endorsement from investors, with the Wesfarmers share price jumping more than 6 per cent on Friday in an otherwise generally skittish and increasingly risk-averse market.

On the surface, nothing much changes — either for a Wesfarmers shareholder or the dynamics of either retailing in general or supermarkets in particular. Or, indeed, for the overall Australian stock market.

Before Friday, a Wesfarmers shareholder held shares in a company that covered the spectrum of retailing — from Coles, through Bunnings and on to Kmart, Target and Officeworks. Plus some other non-retail businesses.

After Friday that shareholder will have exactly the same stake in exactly the same mix of businesses, except it will now be held through two holdings — the continuing one in Wesfarmers and a second, separately, in a stand-alone Coles.

Similarly, before Friday Coles was locked in a titanic head-to-head struggle with Woolworths. After Friday, it will be locked in exactly the same struggle.

TERRY MCCRANN: WHY WESFARMERS CEO IS SHAKING THINGS UP

Wesfarmers chief executive Rob Scott.

Indeed, interestingly and coincidentally the — current — Coles chief executive John Durkan emphasised just exactly that the day before, on Thursday; that the great battle of the aisles would continue — to the great, great benefit of shoppers, I would add.

Interestingly, because Friday’s announcement said he would be replaced as Coles chief executive — before, and clearly designed for, the launch of Coles as a separate company — by Steve Cain, who actually used to work for the pre-Wesfarmers Coles.

Also, life and all its 21st century challenges for retail will go on as before for Kmart, Bunnings (especially in Britain) and even more especially for Target.

So, a lot of shuffling, but not much change? Actually, everything changes — not just in and around Wesfarmers, but almost certainly, the move will spark major and continuing change across retail more broadly.

From the investment perspective, Wesfarmers will be transformed. Coles was a major drag on its pre-takeover success, which had been built around the fabulous profits and never-ending growth in Bunnings.

Bunnings is now much bigger than it was in 2007 when Coles was bought; but just as profitable and with seemingly still the same growth profile as back then.

Coles chief executive John Durkan. Picture: AAP

Woolies of course tried to steal some of that with Masters, but that’s now gone away; and the rest of the hardware and home improvement players don’t seem able to stop the Bunnings juggernaut.

So, tomorrow’s Wesfarmers will be even more a Bunnings-centred company than it had been in 2007 — albeit with its own “mini-Masters” to be resolved in Britain.

It will also be a more tightly focused non-food retailer. Kmart and, on a smaller scale, Officeworks are going very well. But Target is a serious operational and arguably even more strategic problem. My belief is that it will be disposed of one way — unpleasant — or the other, less unpleasant.

Wesfarmers is also though, in a funny sort of way, returning more to its conglomerate roots that Goyder and his predecessor as chief executive (and now Scott’s chairman) Michael Chaney always insisted it had never left.

Getting rid of Coles doesn’t only instantly improve the performance metrics, it positions Wesfarmers for new investment or acquisition.

After Coles and Bunnings Britain (and Target?), I doubt that will be in retail.

From both an investment and an operational business perspective, we are going back to two broadly similar supermarket giants going head-to-head.

Woolies either has to be the ‘consolidator’ in that discount general retail space or get out. Picture: AAP

Woolies, a pure supermarket group; what about Big W? I suggest that Big W will ultimately go the same way as Target.

Woolies either has to be the “consolidator” in that discount general retail space or get out. It makes no sense for it to try to consolidate off the weak
Big W base. It will exit.

From an investment perspective, out of this will come three cleaner retailers in Wesfarmers, Woolies and Coles. They will also be better and stronger businesses better able to respond to what the 21st century is going to keep throwing at them.

At the same time it will indirectly spark further investment and business activity in the non-food space, as Target and Big W inevitably come on or exit the market.

In non-food we were already “over-shopped”, running into digital disruption. The disruption is now sweeping over fashion retail.

The fine print the — very good headline — results of Solomon Lew’s Premier retail group, showed it is struggling to just hold sales in most of its core women’s fashion brands.

Premier scored impressive growth in its two key category killer brands of Peter Alexander sleepware and Smiggle stationery, but was hit by sales declines across most of its speciality fashion brands.

Life is going to stay very interesting in retail.

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