Recently, Wesfarmers Limited (ASX: WES) announced that its shareholders have approved the demerger of Coles Group limited from Wesfarmers as the board believed that Coles is of a scale where it should be owned and operated separately. Wesfarmers will retain a minority ownership interest of 15.0% in Coles and a 50% interest in the flybuys joint venture with Coles.
Coles was acquired by Wesfarmers in 2007 and as per Coles Managing Director Mr. Steven Cain, the transformation of Coles under Wesfarmers ownership has been remarkable - with the store base renewed, a step change in fresh food quality, and a significantly better value position all aimed at improving its offer to Australian consumers.
After eleven years of working as a subsidiary of Wesfarmers, Coles Group is going to step out on its own into an immensely different retail environment than when it was acquired. There are several new players in the market now and foreign competitors like Costco and Aldi have already made their presence felt. Further, online shopping has changed the rules of retail businesses. Recently, Amazon Australia added food and beverages to its Australian e-commerce site and started selling pantry food on its website.
It will be challenging for Amazon in Australia to offer a one-stop-shop, particularity with regards to fresh food as currently, Amazon does not have a chilled supply chain which is a reason why Amazon is not able to sell fresh foods in short- to medium-term. Coles here might have an upper hand at this point of time as it has spent the last 10 years reinvigorating and securing a supply of fresh food in abundance and with quality which is why it will be very difficult for other companies to replicate Coles. It was revealed by Mr. Cain that Coles recently sent a reconnaissance team to Germany to look what German retailer Kaufland is offering so that when they come to Australia Coles will be all prepared.
Deloitte recently conducted a survey on the retailers in which it was revealed that 90 percent of respondents believe that Amazon hadn’t affected their business since its launch in late 2017. According to the national leader of Deloitte's retail, wholesale and distribution group Mr. David White, the opinions regarding size and timing of Amazon’s impact are divided right now, however, this Christmas will provide a better picture regarding the progress of Amazon so far. Recently, Coles revealed that its total sales have been increased by 5% to $9,838 million in the first quarter of FY 2019 as compared to the corresponding quarter of the previous year.
In the last three months, the share price of Wesfarmers decreased by 13.08 percent, traded at a PE level of 42.870x. WES’s shares traded at $44.390 with a market capitalization of $51.44 billion as on 16 November 2018 (AEST 4:00 PM).
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