The ACCC last night released the transcripts of its close questioning of Coles. This was a vital session because, as I pointed out, Woolworths chief executive Mike Luscombe had not been well prepared and was ambushed by the ACCC (Woolworths boss trips up at grocery prices inquiry).
The Coles team was not headed by the CEO but rather by its acting chief operating officer, Mick McMahon. Next August McMahon will be replaced as operating officer by Stuart Machin, who was a senior executive with Asda Wal-Mart in Britain. McMahon will be placed in charge of the Coles supply chain.
Both will report to new Coles managing director Ian McLeod who reports to Wesfarmers CEO Richard Goyder. So Samuel and his people were talking to a Coles executive who is about to have a change of role.
But McMahon and his Coles team showed they had studied carefully what had happened to Woolworths at the ACCC and had spent long hours preparing so that they would not get trapped. If Coles had said to the ACCC that they set their prices by matching the prices of competitors, then the door was open for an ACCC finding of little or no competition and nasty remedies would be required.
But McMahon did not fall into that trap and referred to a Choice survey that showed that Coles prices were 1% to 3% lower. However the ACCC kept returning to the subject of price setting. Here is one of them edited for clarity.
Graeme Samuel: “Woolworths gave evidence last week that says that on known value items, as they call them, that their store managers are under a management direction to lower prices to match (competitors). What I’m trying to figure out is this. If Woolworths matches, and you are 1% to 3% lower, bouncing around of course, as the way you have described it, when is the gap occurring? If Woolworths is catching up quickly how do we get this 1% to 3% gap?”
Mick McMahon: “Because, as I tried to describe earlier, we’re talking about 15 different dimensions of our pricing approach. What we call normal sell price and what the store manager can do on a local level is to make sure that across the full range at any point in time, we’re competitive… if we stood still we’d be caught, not only within months but certainly within weeks and possibly days. So it’s about each week as we go about agreeing or setting our promotional program, choosing which products we’re going to move on to get best value every day.”
To someone coming in from outside it would seem Coles was wiping the floor with Woolworths. And of course it’s the reverse that’s true and the beating Coles received was so great that control of the company passed to Wesfarmers. Woolworths’ returns on funds employed are more than twice that achieved by Coles – 76% for Woolworths and 30% for Coles. In both the Woolworths and Coles sessions before the ACCC there have been enormous debates about how these sums are calculated but it would seem about right. So how can Coles catch up?
Graeme Samuel: “You have stated publicly that Coles objective is to increase the EBIT margins.”
Mick McMahon: “Yes.”
Graeme Samuel: “Increase the gross margins as well. By increasing prices?”
Mick McMahon: “No. I don t think we’ve said publicly to increase gross margins at all. That’s why I made the point about the difference between unit prices versus generated gross margin dollars. Gross margin dollars are a product of unit price and selling more volume. So our drive to improve our EBIT margins will include offering better value to customers, generating more sales and more volume, lowering our cost right through the chain both on a unit cost basis as well as through structural improvement – a lot of which we’ve already done to simplify and take a lot of the overhead costs out of Coles. And there is still a lot of work to do, as I think is on the public record, to get our supply chain into the sort of shape it needs to be in to compete in this market.”
What is my take on it all? Woolworths is so far in front that it is becoming complacent. Coles is so far behind that they have a different goal set. Coles pricing may be better but its overall management has gone no where near Woolworths business.
With such a huge return gap Goyder, McLeod, Machin and MacMahon have a wonderful opportunity if they are good enough. Unfortunately for the ACCC, they are dealing with the present Coles management who are soon to be replaced. The Woolworths evidence means that the ACCC will introduce changes but just what changes they will be remains to be seen.
This story first appeared in Business Spectator
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