Supermarket Talk: Coles struck a deal with Sainsbury's

Australian Supermarket Industry

Australian economy has recorded twenty-seven years of continuous growth and further anticipates realising average annual real GDP’s rise of ~2.8 % between the period 2019 to 2023. The entities holding the largest market share in the supermarkets and grocery Stores in Australia industry comprises of Woolworths Group Limited (ASX: WOW), Coles Group Limited (ASX: COL), Aldi Stores (A Limited Partnership) and Metcash Limited (ASX: MTS).

The two companies – COL and WOW have a significant influence to control prices, which in the long run would witness small retailers either merge via acquisitions to compete or close their doors as they cannot compete. In the supermarket segment, COL and WOW have been enhancing stores and digital capabilities to distinguish their brands from low cost supermarkets. Less direct price-based competition and a rising focus on high-margin products will likely place modest upward pressure on prices across the upcoming five years period.

Let us now discuss in detail about the Coles Group Limited:

Coles Group Limited (ASX:COL)

Coles Group Limited is one of the leading Australian retailers with more than 2,500 retail outlets nationally. The company operates as a national full-service supermarket retailer, operating above 800 supermarkets. Coles Group has three divisions, namely: Coles Liquor, Coles Supermarkets and Coles Convenience. The company is headquartered in Australia and currently managed by Steven Cain (CEO and Managing Director).

COL’s AGM 2019

On 13 November 2019, COL released Chairman’s address to Shareholders during the AGM held on the same date. The Chairman stated that during the year, various crucial initiatives have been taken up. The initiative comprised of 2 substantial tech-based commitments to enhance its product offering and competitiveness.

COL also took 2 substantial steps during the year’s period- the first step was taken at Coles Express, wherein COL re-structured its fuel arrangements with Viva Energy, in order to shift the retail fuel price setting responsibility to Viva. The second step was taken towards liquor business, wherein COL had restructured its earlier engagement in hotel operations via the establishment of a joint venture with Australian Venue Co.

During the AGM, CEO &MD Steven Cain also addressed the shareholders stating that FY 2019 has been one of the key change at COL, and additional substantial change is expected as the company implement its refreshed strategy to turn into the most trusted retailer in the Australian region. Also, as part of its plan to become on stop destination for health relations solutions, COL had launched new exclusive Own Brand ranges consisting of Wellness Road health products, Nature’s Kitchen vegan range and its products ‘I’m Free From’.

Coles signs deal with Sainsbury's

On 11 November 2019, the company announced that it had signed a deal with British supermarket Sainsbury’s. A three-year white label agreement has been signed by COL with Sainsbury, and it anticipates commencing stocking the first new products- comprising of packaged food along with other items by the close of FY 2020 period.

The private label range of COL witnessed a surge of approximately 30% of total sales. The CEO & MD of COL wants private label sales to reach 40 per cent over the period of time. Coles Group will source the private label goods from Sainsbury’s, which could boost the EBIT by 10 per cent. The agreement will free up resources for the company’s product development team in order to propel additional innovation in order to achieve its strategy.

The Coles Chief Executive (Commercial and express) Greg David commented:

Coles Group enters the Australian Debt Capital Markets

On 30 October 2019, the company announced that its wholly owned subsidiary, Coles Group Treasury Pty Ltd priced $600 million of fixed-rate A$ medium-term notes or Notes, comprising of $300 million of seven-year Notes and $300 million of 10-year Notes. The seven-year Notes were priced with a coupon of 2.2 per cent and, the 10-year Notes were priced with a coupon of 2.65 per cent. The notes were expected to occur on 6 November 2019, subject to satisfying customer conditions precedent.

The proceeds would be utilised to replace some of the bank debt facilities that were formed at the time of demerger from Wesfarmers Limited (ASX: WES) in 2018. The joint lead arrangers for the issue were National Australia Bank Limited (ASX: NAB), MUFG Securities and Westpac Banking Corporation (ASX: WBC)

Sales revenue increased by 1.8 per cent during Q1 2020

On 29 October 2019, Coles Group announced the first quarter of FY20 results period ending 29 September 2019. A Few highlights of the results are as follows:

• The group’s first-quarter sales revenue increased by 1.8 per cent to $8.7 billion compared to the previous corresponding year.
• The Coles Group Supermarkets’ comparable sales grew by 0.1 per cent in the first quarter of FY20, surpassing the strong sales achieved in the prior corresponding period.
• COL Liquor comparable sales rose by of 0.7 per cent with a strong performance in First Choice.

Strategic Highlights

• The company is restructuring the store portfolio with new format convenience, and efficiency-focused stores.
• COL is improving Own Brand range and value with new products launched including ‘Mum’s Sause’ which has raised approximately $200,000 to help sick children in hospitals around Australia.
• It helps dairy farmers by moving to direct sourcing of milk from farmers in Southern & Central NSW and Victoria.
• The company signed an agreement with renewable power generation company Metka EGN in order to secure three new solar power plants to provide 10 per cent of Coles’ national electricity usage.

The Group CEO Steven Cain Said:

The FY19 Financial Performance of the company can been seen here.

Dividend Re-Investment Plan

On 20 September 2019, Coles Group announced that it will implement a Dividend Re-Investment Plan (DRP) for its shareholders. It is likely that the DRP will operate for the eligible shareholders for dividends/distribution paid following the dividend, which was to be paid by 26 September this year. The participation was optional in the Dividend Re-investment Plan and was available to fully paid COL ordinary shares stakeholders with the registered address of New Zealand or Australia as at the relevant dividend record date.

• If the eligible shareholder of the company decides to participate in the Dividend Re-Investment Plan, he/she will either re-invest all or part of their dividend into additional fully paid COL shares.
• The shares acquired under the DRP, was supposed to have no brokerage, commission or transaction costs and was payable by the shareholder.
• Those stakeholders who became the company’s shareholders via Wesfarmers demerger will need to make a new DRP election for their Coles shares to participate in the company’s DRP.

Stock Performance

The stock of COL last traded at $15.160 on 13 November 2019, down by 2.382 per cent from its previous close. The company has approximately 1.33 billion outstanding shares and a market cap of $20.72 billion. COL stock’s 52 weeks low and high value was noted at $11.026 and $15.610, respectively. The stock has generated a positive return of 22.65 per cent in the last six months and a positive return of 33.76 per cent on year to date basis.

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