Questions about the bosses of the demerged Coles

How close is the incoming chair of spin-off Coles to Wesfarmers? Has the supermarket chain’s new CEO improved as a leader?

The soon-to-be demerged Coles is financially well-placed. Pic: Bloomberg

The issue with James Graham is not his independence on the Coles board — it’s how close he is to Wesfarmers and, given it will only own 15 per cent of the retailer, whether it should be entitled to two directors.

Wesfarmers today confirmed the report here a month ago about Graham’s imminent appointment as chair of a demerged Coles, and disclosed former Walmart International and Asda executive David Cheesewright will be its representative on the board.

The other director nominees are first rate in former Fonterra (among other roles) executive Jaqueline Chow and former Foxtel boss Richard Freudenstein.

Graham, the 25-per-cent-plus owner of Gresham, the advisory house which has collected $88.6 million in fees from Wesfarmers, stepped down today after 20 years on the Wesfarmers board.

Wesfarmers owns 50 per cent of Gresham and its staff the rest, with Graham being the majority owner.

He will collect more fees from Gresham’s role as the adviser to Wesfarmers on the demerger along with Macquarie, Goldman Sachs and Herbert Smith Freehills.

James Graham will be chairman of Coles spin-off.

Archie Norman, the Lazard UK and Marks & Spencer chair who was tapped by Wesfarmers 10 years ago to be its retail adviser will hand that job to Cheesewright and instead take on an advisory role at Coles.

This makes sense given it was his idea that Steven Cain be the new boss of Coles and the two used to work together when Cain was at Norman-led Asda.

Norman was also instrumental in getting Ian McLeod and John Durkan to lead Coles but is said to be very close to Cain, who has spent the last few years at Metcash, having served for 14 months as Coles boss under previous owners.

A review of Cain’s time at Coles, according to one insider, was that he was;

— “A lone wolf who didn’t share ideas or consult with his team before taking decisions”;

— “Someone with big and good ideas but who couldn’t get traction because he was unwilling/unable to engage his team on the journey”;

— “Probably better suited as a consultant (which he has been). Did not have the leadership skills necessary to introduce change to a large complex company while maintaining the strength of the core business”;

— “Steven was hired to bring about change but he simply didn’t possess the leadership skills to do it.”

Over the last three years Metcash supermarkets have not only lost market share but the absolute sales are lower today than what they were in 2015. EBIT margins have been flat.

Cain left Metcash in March 2018 and was replaced by Scott Marshall, who was the head of Metcash’s liquor operation.

When asked, Wesfarmers boss Rob Scott, who used to work at Coles for Wesfarmers, indicated full support for Cain and said he was “far more inclusive” than he had been.

As expected, the spun-off Coles business will have just $2 billion in debt.

Its lease commitments will be $9.5 billion compared to $20 billion at Woolworths, so it is financially well placed.

But with earnings this year expected to be around $1.5 billion plus $650 million in depreciation and amortisation a question mark lies over its ability to pay out 85 to 90 per cent of earnings as dividends at a time when it is in the midst of a capex upturn.

On this point Scott noted that when Wesfarmers acquired the business back in 2008 the average age of the stores was 17 years, in between refurbishments.

That has now fallen to eight years and five years among its top 25 stores.

The point being, the store network is in good shape.

Let’s hope so because Rob Scott’s remuneration is based partly on how well Coles performs.

Over the long run of course Wesfarmers’ return on capital must improve with Coles off its books given it accounts for $16.5 billion or 61 per cent of operating division capital.

Coles was returning nine per cent last year against 47 per cent by Bunnings, which uses just $3 billion capital.

If management does better by boosting return on capital then Rob Scott’s move on behalf of all shareholders to reduce capital can only help.