Coles’ rebirth as a standalone public company hasn’t been as polished as Wesfarmers chief Rob Scott (a Davos man, worryingly) might’ve hoped and prayed, but then if the supermarket group’s “runway” was all growth, he wouldn’t have demerged it, would he?
There is plenty enough schadenfreude to go around. Firstly we must marvel at the interrogation of new Coles CEO Steve Cain by Bank of America Merrill Lynch’s David Errington’s on an investor call on Wednesday, convened after Coles and newly-listed Viva Group announced they’d recut their petrol deal at joint Shell and Coles Express-branded service stations. The announcement shaved $100 million of Coles’ earnings guidance. “That’s pretty material,” Erro chided. “You informed the market of a deal. You didn’t inform the market as to how bad the business had been performing.”
Having been a strident opponent of Woolworths’ foray into hardware with Masters, then of Bunnings’ British expansion via Homebase, Errington remains one of the few remaining sell-side analysts worth his price of admission. And we hate saying nice things about anyone.
Back in October (so only a month before its relisting), Coles management was blowing up deluxe at Viva (which itself only listed in July) as the oil price rose, the retailer’s volumes continued dropping sharply and its convenience and fuel profits fell from $190 million to $130 million. Remember, Coles set its own bowser price so could freely choose to either maintain its retail margin while sacrificing volume, or instead to sacrifice some margin to boost volumes. Yet instead, Coles argued, Viva should forego its ironclad contractual terms and slash its own margin so its customer could eat his cake and have it too.
Ah, the delicious irony. Former Murray Goulburn farmers (their co-op destroyed by, among other maladministrations, a 10-year deal to supply Coles with $1 milk) not to mention every primary producer and FMCG company across the land will seriously enjoy this reversal of fortunes. Faced with declining margins beyond their control, now Coles wants good faith partnership. What a concept!
Having steadfastly refused to budge (and as a public company itself, how could it?), Viva on Wednesday put Coles over a barrel and extracted magnificent revenge. The nation applauded! Viva Energy will now set the bowser price and pay Coles a sales commission, while Coles still operates the stores, paying rent to Viva Group which it passes on to the Viva REIT or third party landlords. Viva’s shares are up 3 per cent since, while Coles are down 1 per cent. Isn’t karma beautiful?
Extracted from AFR