I read with interest, Laurie Giuseppini’s article, Woolies widening the gap on Coles, which appeared in Crikey on 24 April 2008. At the outset, let me say I agree with everything he has to say about the stark differences between Coles and Woolworths supermarkets.

Woolies is presently streets ahead of Coles in terms of design, presentation and décor, even down to such details as staff uniforms. Furthermore, behind that which the customer sees and draws them to shop at Woolies, lies an experienced team of executives responsible for buying, logistics, computer systems and finance, led by Michael Luscombe. Michael has served in Woolies, man and boy, worked in many different roles and knows the business inside out.

All of the above gives Woolies a great advantage, as things stand at the moment. On the other hand, Coles, now owned by Wesfarmers, is in a state of flux. They have a new “owner”, which is large, profitable, very well managed and intent on bringing a completely different culture and style of management to Coles. They know retail from their experience with Bunnings and will have the benefit of Archie Norman’s input on ways to lift the game at Coles.

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Norman may not be well known here in Australia, but he was the saviour of (British supermarket chain) Asda, which at the time of his appointment, was more or less a write-off. The new CEO of Coles (supermarket and liquor division), Ian McLeod (himself ex-Asda) takes over this month and will know what Archie Norman expects and how to go about it – having been a former protégé.

Do not forget Coles is by no means a disaster case; it may be less successful in terms of growth than Woolies, but it is quite profitable and has a respectable return on funds employed. Its problems stem from a series of bad decisions made in the last 20 years, such as Myers, shareholders discounts and not least, awfully poor management appointments.

Corruption at high levels also sapped morale but, despite all this, it’s not dead in the water.

Wesfarmers made a good buy; that is, provided they successfully execute their strategy to compete effectively with Woolies. The stakes are high for Wesfarmers and failure would be costly. Don’t expect any “quick fix” – these things take time and it’s going to be a fascinating battle.

For those investors who think Coles’ task is impossible, let me remind them of the position of Woolies in 1986/7. The newspaper headlines for September 11, 1986, tell the story:

  • WOOLIES IN DEEP TROUBLE – The Sydney Morning Herald
  • WOOLIES POSTS $5.2 M LOSS AFTER MEAGRE GROWTH – The Australian
  • WOOLWORTHS PROFITS PLUMMET BY 89% – The Age
  • PROFIT COLLAPSES AFTER WOOLIES GETS IT WRONG – The Australian Financial Review

There were plenty more, equally grim.

I came back to Woolworths as Executive Chairman in May 1987, after nine years’ absence, to find a demoralised team, but they quickly identified and addressed the problems, set about fixing them, launched “The Fresh Food People” and, in the space of two years, took sales from $5.47 billion to $6.22 billion – up 34% – and profit from a loss of $5.2 million to profit of $100 million. Since then, of course, it’s been a story of remarkable growth, under successive, excellent CEOs.

Looking back and reflecting on the period 1987/95, I have concluded that about 60% of our success can be attributed to Woolies’ good management and 40% to our competitor’s mismanagement or poor judgement. I suspect the competition, on reading the ’86 media, believed Woolies to be a spent force; took their eye off the ball and failed to consolidate their dominance.

My message is – don’t write off Coles; they have a solid core business. Negative media will stir them to action and under the new ownership and management, Coles could well surprise.

Let’s hope so, as we need some really honest competition.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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