He gave a fairly grim assessment of challenges facing the business, such as competitive pressures in NSW, where it is losing market share, and the need to boost profit margins in the fast-growing online business.

The Coles cost of doing business is growing faster than sales. This will be exacerbated in 2019 with the implementation of a new enterprise bargaining agreement that includes higher wages for staff.

Cain acknowledged Coles had been losing market share in the country’s most-populous state, where each store covers a population of about 45,000 people, while each Woolworths store covers a population of about 35,000.

Also, Cain said the company needs to invest in upgrading its computer systems. It is doing this through a partnership with German software provider SAP.

Cain gave a fairly grim assessment of challenges, such as competitive pressures in NSW, where it is losing market share, and the need to boost the online business’s profit margins.  Andrew De La Rue

As well as the Coles-specific problems holding back profit growth, Cain said there were marketwide factors, including rapidly changing customer behaviour, growth in convenience and discount food alternatives, and a loss of trust with customers from promotional campaigns.

Cain published a chart showing the eight golden years of profit growth under former chief executives Ian McLeod from 2008 to 2014 and John Durkan from 2014 to 2016. During that period, Wesfarmers invested in management, refurbishing stores and the brand.

Since 2016, the industry profit pool has shrunk and earnings before interest and tax at Coles have declined by 19 per cent.

Cain was always going to struggle with the “growth reset” strategy given that the primary justification for Wesfarmers splitting off the supermarket chain was to allow the parent company to be free of a company that was holding back its profit growth.

Wesfarmers sold the Coles spin-off as the opportunity for shareholders to own a company with an earnings profile “expected to be resilient through the economic cycles”.

Cain has a six-point plan for restoring profit growth over the long term including a “fresh tomorrow” strategy, which involves a new store format and improved online sales.

He wants to move faster to cut costs and invest $950 million over six years in world-class automated distribution centres.

The interim results were a bit messy because of various one-off items associated with the separation from Wesfarmers. Earnings before interest and tax of $744 million was slightly below the consensus of $733 million. Analysts had a range of between $705 million and $794 million.

The market has factored in flat earnings for fiscal 2019 and fiscal 2020. There are high expectations of a spike in profit growth in 2021 but even that spurt is modest at about 6 per cent.

The most impressive aspect of the result was the fact it marked 45 consecutive quarters of growth in comparable supermarket sales.

When questioned about the time it would take to return to growth, Cain responded by stressing that Coles is a “highly cash-generative business that has a strong balance sheet which we can use as a beachhead to grow into the future but it will take time”.

TONY BOYD

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