Coles Plans to Invest in Supply Chain: Is that To Match Up with Woolworths?

After Coles become the standalone company, it would be deploying the funds towards the supply chain so that it can match up the competencies of its competitor, Woolworths. On October 5, 2018, Coles state that it would be coming up with the two new automated warehouses with the duration of the next five years. However, the market participants are little concerned about it as they anticipate that it would cost the company over $1 billion.

The parent organization, Wesfarmers, plans to make the standalone company listed on the Australian securities exchange or ASX on November 21 after the necessary approvals which are required from the shareholders. In the new company, these shareholders would be receiving the shares and Wesfarmers would be holding ownership of 15%. In order to remain in the competition, Coles’ supply chain needs to be improved in comparison to the supply chain of Woolworths. According to Bank of America Merrill Lynch, Coles’ investment in regard to its supply chain has not been up to full potential.

The company’s competitor, Woolworths, is making deployments in the range of $1.5 billion- $1.7 billion towards the capital expenditure or CapEx per year. This CapEx includes investments towards automated warehouse as well as towards new information technology or IT systems. After the demerger of Coles, it would be witnessing strong CapEx cycle and the uncertainty regarding the cash generation is still looming. The question here is whether or not the company would be capable enough to generate sufficient cash in order to meet the dividend payout ratio which it intends as well as CapEx requirements. The company has intended 80-90% as its dividend payout ratio.

The management of Wesfarmers stated that it had given approximately $9 billion to the Coles since the year they have bought Coles i.e. (2007). They also added that now is the correct time to evolve the supply chain procedures and the decisions related to the supply chain was taken by Coles. According to them, the substantial amount of work has been executed towards the improvement of the supply chain and advancements related to the robot technology had been strong in the previous 5 years. If Coles had deployed earlier, they would’ve missed the chance of availing these improvements which have been carried out recently. Wesfarmers’ management is optimistic about the outlook for Coles. [optin-monster-shortcode id="wxhmli4jjedneglg1trq"]

Wesfarmers believe that the deployments related to the supply chain initiatives have already been considered at the time of setting payout ratio as well as net debt level of Coles. They also stated that Coles would be booking provisions in the range of $130 million-$150 million in the next year. On October 5, 2018, the Supreme Court of Western Australia allowed Wesfarmers to move ahead for the demerger of Coles thus allowing the latter to be listed on the Australian Securities Exchange or ASX. As compared to Coles, Woolworths is ahead in terms of the automation and thus, there is an urgent need for Coles to make advancements in the supply chain.

At the time of writing, the share price of Wesfarmers Limited stood at A$49.320 thus implying an intra-day fall of $0.250 or 0.504%. The company has a market capitalization amounting to $56.2 billion. The stock price is trading in the higher range.

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