Coles Group Sets Cost-Cutting Target Of $1 Bn By FY23 Driven By AI And Automation

Coles Group Sets Cost-Cutting Target Of 1 Bn By FY23 Driven By AI And Automation

A leading retailer of the Aussie land, Coles Group Limited (ASX: COL) was initially a variety store and has progressed into becoming Australia’s first supermarket. It has a wide portfolio of prime retail brands under it, and the company is headquartered in Melbourne.

A Coles Store (Source: Company’s report)

Cost-cutting update and cause:

On 18th June 2019, the company made an announcement regarding its cumulative savings strategy until FY23. The new corporate strategy plans to cut down almost $1 billion in the company’s total cost to offset the effect of rising costs like energy and wage.

As per the company, this time frame is perhaps the toughest competitive environment in COL’s history, given the growth of competitors like Kaufland, Woolworths Group Limited (ASX: WOW), Costco, Aldi and Amazon. The competitive environment is posing difficulties for the company to enhance its profitability and eventually grow its market share.

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As per market experts, the company’s earnings have fallen by 19% over the past couple of years and are likely to fall this year, given the slow margin of sales growth, from rising prices.

Cost-cutting strategy:

With a long-term growth perspective, the new strategy is highly driven by factors like automation and artificial intelligence, while the company makes a reduction in the staff count that are almost 450 head-office jobs, which are 10% of the roles in COL’s HQ at Melbourne.

The company would shut down unprofitable stores, and there would be an overall reduction in manual operations. While expanding the company’s online and convenience businesses, the company’s FY20 roll-out plan include; 75 supermarket renewals, and around 10 new ones to open.

CEO, Steven Cain stated that the company aims to reduce costs and generate ample cash to fund further growth in areas of innovation, while it provides a good dividend pay-out ratio. The company would utilise requisite forums of data analytics and AI to meet customer requirements.

Besides this, COL would upgrade self-service checkout technology to make it much quicker and introduce upgraded anti-theft systems to deal with shoplifters. In this context, it should be noted that as per market research, a total of $9.3 billion retailers loses to shoplifters annually.

The company intends to reform its existing warehouse and stockroom practices. For this to occur, COL would build a couple of automated warehouses for the business of home delivery and has partnered up with Ocado, a British virtual supermarket. UberEats would aid the company into building and maintain its food delivery service sector.

On 18th June 2019, the key highlight announced by the company was regarding the refreshed strategy, which is based on three pillars– Inspire Customers, Smarter Selling and Win Together, as stated by COL.

Strategy update:

Throwing more light on these strategies, the purpose to inspire Customers is via providing better food and drink solutions, while expanding the company’s convenience and health offerings. AI and analytics come into use for the fulfilment of this need. Smarter Selling is most likely to generate approximately $1 billion in the cumulative savings by FY23, driven using automation technology and simplification of above-store roles which would remove duplication. This would directly aid in offsetting the rise of costs. The company is also aiming at the continuous growth of Coles Own Brand.

As discussed above, the motive is to win in the online food and drinks network, achieve long term structural cost advantage via AI and technological advancement and eventually be the country’s most sustainable supermarket.

Trading Update:

The company stated that it would announce its full year results on 22nd August 2019. The Net capex expectation for FY19 remains unchanged and is most likely to range between $700 million and $800 million. Other significant items in the trading end are depicted in the image below:

Significant items (Source: Company’s report)

Let us now look at the company’s updates from its Investor Day presentation:

Following the above update, the company conducted its Investor Day on 18th June 2019, the first after being listed on ASX last year in November. In the presentation, COL stated that it has completed 105 years in the retailing business in Australia and had 2,450 stores as supermarkets, liquor, fuel and convenience. As per the company’s report, 80% of Australians are a mere 10-minute drive away from a Coles store.

The company recorded sales of $36 billion and an EBIT of $1.4 billion in the quarter. There had been an investment of more than $1 billion in Witron & Ocado supply chain automation and almost $80 million worth meals are donated to SecondBite.

During FY16-FY18, the Industry reset had reduced the retail profit pool of the company, with an approximately 19% decline in the EBIT. Prior to this, in the period of FY09-FY16, there was an investment in management, stores and brand which had caused strong growth in overall revenue and earnings, with an approximately 125% growth in the EBIT.

Growth highlights over the decade (Source: Company’s report)

 

With the introduction of the new strategies discussed above, this scenario is likely to have an optimistic shift. The company has already made Early progress to address areas of improvement by taking the below mentioned measures:

  • Launched 75 convenience meals with more to come.
  • First Choice Liquor Market gaining good grip.
  • Viva Alliance had been restructured.
  • SAP support systems, high speed store network roll-out along with Optus.
  • Core retail focus maintained via QLD retail liquor JV with AVC.
  • NSW operational focus had improved sales.

Besides this, the company also stated that it had a focus on its meat export, a business that has an annualised revenue worth almost $400 million presently, spread across more than 40 countries. The company aims to expand it to other product areas as well.

Financial highlights:

The company has a Target dividend payout ratio of 80% – 90% of underlying earnings between 28 November 2018 to 30 June 2019 period, which would be payable in September this year.

Share price Information:

After the close of market on 19th June 2019, on ASX, COL’s stock was valued at A$13.780, up by ~4.13% compared to its previous day’s close. With a market cap of 17.62 billion, the company’s stock has generated a YTD return of 12.81% and its 6-month return is closely positioned at 12.71%.


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