Coles boss says it’s ‘right time’ for Wesfarmers to spin off the supermarket chain

Outgoing Coles boss John Durkan says it’s “the right time” for Wesfarmers to demerge the $20bn supermarket chain.

Outgoing Coles boss John Durkan. Picture: Justin Kennedy

Outgoing Coles boss John Durkan said it was “the right time” for owner Wesfarmers to demerge the $20 billion supermarket chain and that he didn’t believe a newly independent Coles would be handicapped by too much debt, allowing it to step up its investment in stores, technology and staff.

He argued Wesfarmers would “do the right thing” when it came to deciding the level of debt Coles will carry when it ultimately lists on the ASX.

Wesfarmers announced in March a decision to demerge Coles after owning the supermarket group for 10 years, creating a company worth around $20bn that will be a top 20 ASX company by market capitalisation.

Addressing the Australian Food and Grocery Council conference in Melbourne this afternoon, Mr Durkan said he only saw upside for Coles as an independently listed ASX company with plans afoot to ramp up investment in its business.

There have been concerns raised from some investors that when Coles is demerged by Wesfarmers (WES) at the end of the year it will be saddled with too much debt, constructing its ability to fund new investments and remaining competitive in price. Estimates range between $1.5 billion and $2.5 billion on the debt Wesfarmers could leave in Coles when it splits off.

“This is the right time,” Mr Durkan told the audience of food and grocery suppliers.

“It won’t make a difference to our capital expenditure, in fact we are probably going to spend more in the next few years than in the last few, we will accelerate some of the things we have been doing,” Mr Durkan said.

“I don’t see very much changing at all, apart from the fact our team members ... across the country are going to be able to own shares in a company that is now listed.”

After his speech to the AFGC conference, Mr Durkan told The Australian he believed Wesfarmers wouldn’t handicap Coles by overburdening it with debt.

“I don’t see that happening. Wesfarmers are going to own a percentage of the stock going forward, they are absolutely going to do the right thing in terms of debt.

“It (Coles) will have to have some debt, and in reality it has debt today and I don’t see that changing.”

Wesfarmers will emerge after the demerger with around a 20 per cent stake in the ASX listed Coles, and Mr Durkan said talks had been ongoing to hit upon the right amount of debt levels that made sense for the supermarket group.

“Wesfarmers want to see it successful, and all the conversations with myself and (wesfarmers ceo) Rob Scott suggest that it is going to be the right level of debt.

“We have had a conversation. A two way conversation that goes on between Wesfarmers and Coles.”

Previously in his speech to suppliers at the conference he criticised the high level of promotions pushed by food and grocery brands, calling it “the madness of promotions” which he said had gotten considerably worse since the start of 2018.

He said food and grocery manufactures were relying too heavily on weekly promotions and that Coles preferred an everyday low pricing model, which customers also favoured as it gave them greater trust in prices.

Mr Durkan said he had recently met with supplier CEOs to discuss the “mad” level of promotions but instead of it moderating they had “doubled down” in the last few months to make it even worse.

He said the total proportion of Coles items on promotion were in the mid 30 per cent range but it needed to be lower as it moved to every day low pricing.