Coles Myer share price is at near record levels, a sign the 1985 merger is finally paying off. But reports from within the giant retailer tell of poor morale, executives under pressure, more restructuring and a drive to control costs that’s impacting on staff and stores.

There’ll be grins all round when Coles Myer reports record 2003-2004 earnings on September 22. The company estimates net profit will be around $565 million, but a few analysts are a bit north of that now after looking that the company’s stunning sales results, and the impact the Coles Express petrol offer is having on the powerhouse supermarkets business.

The offer has boosted sales, earnings and efficiencies at the company’s Supermarkets chains, Coles and Bi-Lo, and saved the reputations of the board, management and senior executives. That would normally be a source of pride as the supermarkets business gets a few whacks back at the dominant Woolworths chain with superior top line and comparable store sales growth.

But that’s not necessarily the case. Coles Myer management’s plans to merge the buying teams in the Coles and Bi-Lo supermarket are just the start of a far-reaching set of changes in the company’s most important division that are damaging staff morale and causing an enormous rise in stress levels for harried executives and staff. So bad has morale been hit that many executives are wondering if they will have jobs next year and if the jobs that they will have, will be worth taking in the changes.

There’s talk of people recording phone messages, such is the level of unease among executives. News of the merger of the buying teams was reported recently in the media as you can see from this SMH piece.

To some older hands in the company it has all the hallmarks of the merger of the Myer and Grace Bros buying teams, a move rival retailer, Gerry Harvey, is on the record as saying helped Harvey Norman enormously and was poorly executed.

He said it removed the ‘local approach’ in buying that had existed and was the case of many of the problems in Myer for years later.
Merging the supermarket buying teams won’t be as dramatic. Regional variations in Australia do not seem to have as much impact in food and liquor as they do (climate, preferences and the like) in department stores and value chains (Kmart etc). Woolworths merged its state-based buying teams into one national structure several years ago in an early part of the Project Refresh revamp of the company’s logistics chain. That went off without a bump.

This merger is being done for similar reasons, to produce a more rational structure, with fewer points of contact for suppliers and buyers(not having to talk about terms twice and bargaining with two groups of Coles buyers). It will lower costs and should (the hope is) produce a better set of terms and keep everyone happy. Except, it seems, executives and staff.

The idea years ago behind buying Bi Lo (which was an Adelaide-based low cost supermarket chain) was to stop Woolworths getting it, and then to sit it under the price level of Coles Supermarkets to take on the then strong Franklins chain which was operating on a gross margin of less than 3c.

But as Franklins wandered up market, lost its way and was broken up, Bi-Lo stores (which are located in second tier shopping centres and small suburban and regional centres) were tarted up, losing the cheap as chips look and edging closer to Coles in appearance.

With the remaining Franklins and the revamped IGA stores fighting each other there doesn’t seem to be much of a case for Coles to have a presence in this sector. It can’t compete with super discounter Aldi, and any competition with IGA can be done through the Bi Lo chain using the marketing and buying clout of the combined group.

Insiders say the merger is the start of a move by Supermarkets chief, English retailer Steve Cain, to merge all of the operations of the Coles and Bi-Lo chains . Check out what he has said on the issue in the past here.

Despite ruling out joining Coles and Bi-Lo under one brand, there are suggestions inside Coles that this could be still on the cards as the merging of back offices continues. Coles recently out sourced its payroll business to EDS, shedding around 100 of the 120 staff involved.

The much discussed revamp of the warehouse and logistics business is well behind what Woolies has been doing with its Project Refresh.
Labour costs are under pressure as managers are told to trim all costs to help absorb the impact of the Coles Express fuel discount. As more and more people use the Coles and Bi-Lo supermarkets, staff levels haven’t kept pace and overtime budgets are being closely monitored.

Coles management is intent of boosting every cent of extra profit they can get from the higher traffic levels flowing from the petrol offer.

Coles presently have around 480 supermarkets (employing almost 60,000 people) and Bi-Lo has more than 205 stores, employing around 15,000 people. Merging the two chains would see more than 660 stores operating from the one back office. That would give a buying clout not that far short of Woolies which currently has around 710 stores.

Coles and Bi Lo generated most of the $500 million-plus of earnings before interest and tax inside Coles, but insiders say $30 million has been set aside to finance redundancies from the restructurings. Liquor has already been relocated to Melbourne from Sydney and slimmed down with many people in Sydney not choosing to move south.

This is how that was analysed in a good article in BRW earlier this year by Adele Ferguson.

“An example of the group’s attitude to staff was its decision to change the headquarters of its liquor business from Sydney to Melbourne. The result has been the loss of key executives, including chief executive Craig Watkins, with Liquorland for more than 15 years, who has taken early retirement. A senior sales executive in the liquor industry estimates that more than 35 key managers from Liquorland, which includes Theos, have either left or will leave before the end of the year. They will take with them much industry knowledge and many contacts.

“The sales executive says: “Many are leaving not because of the move to Melbourne but because they don’t like the strategy the company is adopting or the style of management. There is a definite loss of management capability but their [Coles Myer’s] view is that they will get better people. Companies can’t afford to lose too many people with experience.” Companies such as Southcorp and Foster’s Group are talking to some of the departees.

“Coles Myer is trying to achieve better synergies between the liquor unit and supermarket by basing their managements in the same office in the Melbourne suburb Tooronga. Coles Myer’s head of food and liquor operations, Steven Cain, recruited from Britain last year, is expected to make further changes to the $17-billion division. Cain is expanding fresh food offerings in supermarkets and the number of house-brand products in supermarkets and liquor stores.

“Cain wants to lift house brands in the Coles supermarket chain from 9% to 16% by mid-2006. The Bi-Lo chain will increase house brands from 15% to 30% over the same period, and Liquorland is expected to increase its house brands from 20% to 40%. It is unclear whether this will work on alcohol, especially wine. Strong brands are selling cheaply due to the wine surplus.”

The chosen way for the re-organisation is to make people re-apply for their jobs (there are fewer jobs than executives). Those who lose out are paid out and flicked. Company sources say there’s a concentration on older executives (40 years and more), especially in Bi-Lo with the feeling in that group that they will lose out to Coles executives in the merger.

To rub salt into the wounds caused by these changes and their speed, Coles is expected to start advertising soon for store managers because it feels there are not enough internal candidates. Sounds like another way of pressuring internal executive ranks!