Tuesday 8 May 2007

Coles and Tesco?




UK media reports suggest Tesco may be on the move to buy the Coles Group There have been several reports that Merrill Lynch have been engaged to provide advice on a possible bid.

With Tesco are under pressure with its huge US launch and some regulator interest in the UK it seems an unlikely scenario. It makes for interesting speculation though.

What might we expect if Tesco bought Coles? Some insight can be gained from Tesco's head, Sir Terry Leahy. Sir Terry recently commented on seven trends that will have a "swift and dramatic" impact on retailing:

  1. The consumers' desire for simplicity - its a fast paced life and we have too many choices.

  2. The consumers's desire to save time - its a fast paced life and who wants to spend it in the supermarket?

  3. The growth in categories that contribute to their health and looks - the baby boomer phenomena rolls on

  4. Globalisation as it impacts the economies of scale in the supply chain, but also in the optimisation of business processes - i.e. nearly all Tesco's IT is sourced out of India

  5. The availability of information makes the consumer choice process faster and easier, but has also introduced other decision criteria - i.e the ethical/environmental footprint of the retailer/manufacturer, the healthy heart tick, nutritional information

  6. Trust. In the age of the War on Terror, consumers are looking to for organisations and retailers they can trust.

  7. Environmental - we are indeed moving back to the greengrocer. With climate change, emissions and carbon footprint hot topics, consumers are looking for ways they can reduce their environmental impact. Consequently they seek retailers and products who support that.

"Just as the opportunities for businesses, which get it right, are greater than ever before, so the penalties for those who get it wrong are equally dramatic. There is no gentle decline, no hiding place for retailers or suppliers who fail to spot consumer trends or adapt to changing markets" - Sir Terry Leahy


So if Tesco did make a successful play for Coles what might we see change?

Who knows, but something needs to happen quickly.

For some, Coles have been fighting a rearguard action, mostly focussed on defensive activities to guard share, but more recently focussed on activities to optimise earnings and cash. With takeover offers from KKR, Wesfarmers already in the news, rumours fly of excessive internal pressure on buyers and store managers to keep inventories down and extract maximum terms from new lines and major promotions. With this sort of focus on maximising cash flow and short term profit, Coles needs to be sold soon. There is nothing sustainable about OOS and five types of canned asparagus. If the "For Sale" sign is in the yard for too long, Coles will see any P/E multiplier diminish as potential purchasers lift the bonnet and witness the ever growing strategic black hole.

What does these mean for KAM's?
  • Stay in touch with the financial imperitives of your category and buyer. These are changing weekly if not daily.

  • Failing that, propose promotional activities that meet the need for cash flow and short term earnings.

  • Keep on top of execution. Store management morale is reportedly low. We've had one report of a supplier paying for $1million for an end display and getting less than 70% of stores complying.
  • Expand your network. As things evolve, we're likely to see high level of churn. Staff at Coles are under excessive pressure and some will choose "to seek excellence elsewhere". Others will jump. Whatever happens there will be corporate memory loss. You need multiple contacts for continuity.

Remember a great KAM not only knows the people, plans, processes and measures, but also knows how they're changing. And aren't they changing!


Jason Wenn






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