Why Walmart will be a new owner of Coles
Monday, August 13, 2018/
In May this year, Sue Mitchell, the AFR’s well-respected retail journalist, ran a story that predicted Walmart would likely be a new owner of Coles. The story never gained traction, but I believe she’s right.
Two reasons led her to this conclusion.
Firstly, the merger of the UK Asda/Walmart grocery chain with Sainsburys has freed up of a bit of cash (about $5 billion Aussie dollars).
The second reason was due to Wesfarmers’ announcement they would parcel up Coles, float in on the ASX, and allow its management team to allocate its own capital to grow. This is a process which, according to Emilie Feldman at US business school Wharton and GE’s new CEO John Flannery, is the best path to growth for free standing businesses within larger corporations.
Now, I’ll add three reasons of my own.
The Aussie market is a perfect fit
Thirdly, having worked closely with Walmart International over the years, and having spent time at their US and Chinese head offices in Bentonville Arkansas and Shenzhen in Southern China, I can say that Australia has always been on their radar as a natural market to expand into.
The Australian market is logical, well-regulated, speaks English and can be reached via direct flights from LAX and DFW or on Walmart’s private jets from Rogers Municipal Airport in Arkansas. What’s not to like?
There are also a good number of successful Australian retail executives, who have current and in-depth knowledge of Coles and Woolworths, that have moved to both Walmart International and Walmart USA over the years.
Plus, Walmart has been competing with Aldi and Trader Joes in the US for a long time, so it already understands Aldi. This type of in-depth knowledge always builds confidence in decision-making for international expansion.
The timing is right
Fourthly, there has never been a better time in the economic cycle for US companies to buy Australian assets. The US economy finally has ‘tail winds’ driving growth in jobs, sales volume and prices. This has led to improved profits, inflation, higher interest rates and a strong US Dollar in relation to our Aussie dollar.
Excess money being made in the US can, therefore, be used to fund ‘bargain basement’ acquisition prices in Australia. We’re a growing country, and as our economy catches up with the US, our interest rates and currency will rise again and Australian asset values in US dollars will appreciate too.
US Corporation Tax rates have been dropped
Fifthly, the US Federal Government finally realised that unless they dropped US Corporation Tax rates, US companies wouldn’t maximise profits or pay out dividends.
Now that has changed, there is an interest from US corporations in economies that have companies with strong defensible market shares and dependable earnings that generate cash for dividends. Coles in Australia fits that criteria.
I like that we have international retailers investing in Australian jobs and assets. We gain from global best-practice, wider choice, improved service and better prices.
However, in the past decade, Australia has seen a European wave of investment, with Aldi leading the charge, followed by Zara, H&M, Decathlon and soon Kaufland.
Costco and TK Maxx have been the only traditional US retailers to fly the stars and stripes in Oz so far, with eBay and Amazon investing physically to support their online businesses, so it would be nice to see another major US retailer investing here too.
Time will tell.
Disclaimer: the author owns shares in Wesfarmers.
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