Coles to address need for refurbs
AS many as 257 Coles supermarkets are likely in need of refurbishment after the grocer invested too little in its shops in recent years, according to an industry expert.
It is a $500 million headache that will be handled by the new Coles team when the supermarket heavyweight is spun out of Wesfarmers this financial year.
The urgent need to refurbish stores – as well as invest another $200-$400 million on new fully-automated distribution centres – will place even further strain on the Coles accounts as it prepares for life as an independent company, investment bank UBS says.
In a report for investors, UBS analyst Ben Gilbert has argued Coles has let its store refurbishment cycle blow out to about 15 years over the past three years – well above industry norm of seven to 10 years.
Mr Gilbert said a “catch up” by Coles would cost upwards of $500 million.
However there would be a positive effect on sales, he said, with a doubling of refurbishments to add 1-1.4 percentage points to sales growth beyond this year.
Mr Gilbert said Woolworths was investing in its store network, both through small and large-scale refurbishments, which he believed placed it in a strong position to maintain market share gains next year and in 2020.
UBS now also believed Coles needed further investment in price, he said, with the grocer “anecdotally’’ marginally more expensive than Woolworths on so-called known value items, which include staples such as milk, bread and eggs.
The mounting refurbishment bill will be left to the new Coles board and its management team, led by incoming chief executive Steven Cain.
Perth-based conglomerate Wesfarmers is preparing to demerge and list Coles as an independent company.
Mr Gilbert says Coles’ capital expenditure was down about 33 per cent since peak levels about five years ago “despite increased investment from competitors (Woolworths, Aldi) and slowing industry growth’.
“Based on a 7-10 year refurbishment cycle, UBS estimates Coles has accumulated more than 250 under-invested stores since its last major push in fiscal 2010.’’
In addition to “catch up refurbishments’’, UBS believes Coles needs to also lift its rate of refurbishment from 50 to 55 a year now to about 90 a year.
At a strategy day last month, managing director John Durkan said Coles had $1 billion of capital expenditure in recent years, and the outlay would be about 20 per cent higher next year than this.
Coles chief financial officer Leah Weckert also confirmed at the strategy day that Coles would increase investment in its stores.
“We are expecting to see a step up in capital over the next couple of years,’’ Ms Weckert said.