Coles Myer vacated the
department store sector to concentrate on being good grocers. But with
well-sourced speculation emerging last week that Coles could be
planning to ditch the Bi-Lo brand, they’re now on the cusp of vacating
a significant chunk that sector too.

A recent AC Nielsen report on retailing 2010
says grocers will go big, go value, go niche…or go away. According to
the report, retailers can keep customers happy by “selling them unique
products, getting them in/out of stores quickly, smothering them with
good service, and/or saving them money.”

Coles offers “big”. Bi-Lo offers “value”. Last week The Age quoted an analyst
saying “The Bi-Lo store customer offer is pretty similar so you could
deduce from that that it is adding unnecessary complexity and cost to
the business.” These are clearly the words of an analyst, not a
retailer – or a customer.

Words like “synergy”, “economies of
scale” and “aggregation” are loved by analysts and accountants but it
is doubtful whether making Coles bigger by absorbing Bi-Lo will have as
big a result as vacating the discount grocery sector, creating a market
vacuum that will be filled by Aldi, Franklins and Metcash. From the
point of view of an accountant it might not appear “efficient” to run
Bi-Lo as a separate business unit, but from the point of view of a
retailer merging it with Coles could be a strategic disaster.

Meanwhile,
the company continues to be dogged by questions over the sale of the
department store business to TPG-Newbridge Capital. Did Newbridge pay
too much for what they got? During the process that resulted in the
sale of Myer, the early rumours had Westfield getting the Myer
Melbourne real estate, and South African group Edgars acquiring the
business. Newbridge trumped Edgars and Westfield by offering a big
price for the bundled real estate and business (and a sentimental but
irrelevant sweetener relating to the Myer family buying back the farm),
devastating Edgars.

Among the bidders, former Myer executive
Michelle Hamdorf, now with Edgars, probably had the best specialist
knowledge of the business and was in the right position to know the
right price for Myer. But Newbridge offered a higher price. Part of the
deal has Coles retaining a liability for $170 million relating to
leases. But could there be a bigger sting in the lease story?

Myer
is said to have had agreements with many centre owners to exclude
another department store – read David Jones – from a tenancy in the
centre. To get some leases assigned, several of these agreements to
keep other department stores out have been scrapped. David Jones,
having not been a serious bidder for Myer, might be a big winner. They
may now have access to centres from which they were previously
excluded. A big win for DJs, not so good for Myer.

Peter Fray

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