Management: Foundations & Applications, 1st edition

Strategic management Wesfarmers

Summary

In 2009, Wesfarmers appeared to be in serious strife. The world was in the grip of the GFC and Wesfarmers was struggling to repay the debt on its $20 billion takeover of the Coles Group, which includes the Kmart business. In this interview, Wesfarmers chief, Richard Goyder discusses the many changes that the Wesfarmers group have implemented across its range of businesses for 2010. This interview with Alan Kohler provides an insight into the strategic management process occurring within one of Australia’s largest conglomerates.

Transcript

Alan Kohler, Presenter: This time last year Wesfarmers appeared to be in serious strife.

It was the darkest days of the GFC and the big Perth-based conglomerate had launched an urgent and heavily discounted capital raising to help repay the debt on its $20 billion takeover of the Coles Group.

Since then Wesfarmers share price has doubled while that of its rival Woolworths has actually fallen a bit.

This week Wesfarmers announced an impressive $879 million profit, which importantly was driven by strong growth in its new retail assets, including the chronically under-achieving Kmart stores.

I spoke to Wesfarmers chief, Richard Goyder, from his Perth headquarters.

Alan Kohler (to Richard Goyder): Well, looking at your results this week Richard Goyder, I was struck by the fact that there were two 100 per cents; a 100 percent increase in Kmart's profit and a 100 per cent, or near enough to it, decrease in the profit from the coal-mining business.

So firstly, what's going on at Kmart?

Richard Goyder, MD, Wesfarmers: Well, a couple of things, Alan. Firstly, we put new management into Kmart under Guy Russo's leadership and he and the team have done a strategy reset of that business, and then they've got the employees in the business aligned to it. And that's very much with a customer focus, although they've done some good work in taking some significant costs out of the business both at non-store level and in supply chain.

But if you go to a Kmart store now you'll see a difference both within the quality of service and the product offering and the stores are neater and cleaner. And their strategy reset has been about making sure that Kmart offers everyday products at everyday low prices. And it's a much simpler proposition and it's one our customers are enjoying.

Alan Kohler: Yes well, I heard someone say that Kmart only used to make profits for three Management: Foundations & Applications, 1st edition months of the year or something. Is that correct?

Richard Goyder: Yeah, it was certainly for the minority of the year and Christmas was the maker or breaker of Kmart's year. And thus far for the financial year Kmart's been profitable every month. You know, it's important to put Kmart into context though, Alan.

It was a poor-performing business and Guy and the team have done a very good job in making it a better business, but there's a heck of a long way to go to make Kmart a really good business. The good news is we're confident that Guy and the team have got a strategy which will take us there.

Alan Kohler: And just on the coal mines, now that it's making virtually nothing at all, are you prepared to concede that you should have actually sold that business when you could have?

Richard Goyder: Not at all. We knew this would be a difficult half for the resources division, particularly because of the impact of the Curragh Coal Mine which exports metallurgical coal and its earnings were down mainly because of a significant fall in export coal prices. But we also had two other factors that contributed to the earnings decline.

One is we pay a rebate to the Stanwell Power Corporation in Queensland, a royalty in that. That royalty has a lag factor. And then we also had to close out some hedge losses in the half. So through the cycle we expect the resources division to be a very good division and of course the outlook is very promising. And I think over the medium to long term this is a terrific business.

Alan Kohler: Now you paid about $20 billion for Coles; do you think that it's worth more than that now? I mean, the market's valuing it, according to an analyst, at about $22 billion. Do you agree with that?

Richard Goyder: Oh, it's difficult to know. When you do some of the parts valuations and the like, Alan, we expected a turnaround in Coles to take all of five years and we've always said beyond that there'll be more benefits to be had out of Coles. And of course the Coles acquisition wasn't just the Coles supermarket business; it was Kmart, Target, Officeworks, the Coles liquor businesses and the Express business.

And we're very much on track. We're probably a little bit ahead of where we thought we'd be at this stage in the transformation in rebuilding the businesses and we've taken more capital out than we thought we would, which is good. There's a long way to go but it's satisfying that markets are starting to see that value in the business.

Alan Kohler: And speaking of capital, you actually raised a lot of capital last year, and the result of that is that your return on equity is in the, well, into the single digits, which is well below what you're used to and what you say you're aiming at. So you must be disappointed with that?

Richard Goyder: Well, that's right. I mean, we look at the long term, at total shareholder returns as being the key measure of our success as a company. But within total shareholder returns we look at return on capital at divisional levels and return on equity at a group level and it's not at a position or a point at the moment where we would say it's satisfactory. Management: Foundations & Applications, 1st edition

But the important thing is there's a strong focus in each of our businesses on improving return on capital and we expect over the years to come that we will improve that return on equity. The equity raising last year, the world was in a difficult space at the time and we did what we needed to do to ensure that Wesfarmers remained robust.

Alan Kohler: A striking thing about the results was that Bunnings is almost making as much profit as the Coles supermarkets. I mean, obviously Bunnings hasn't got a competitor at this stage, unlike Coles supermarkets does in Woolworths. But Woolworths has said it's going to go into the hardware business up against Bunnings, but that won't happen for a few years.

I mean, what do you think can happen in the meantime? Can Bunnings actually overtake the supermarkets?

Richard Goyder: Looking forward, we've got a very strong pipeline of new store openings. I think there's around ten stores currently under construction - we've got a lot of properties either tied up ourselves through leases or that we've acquired which will underpin new stores, and we've got some very exciting plans about what we are going to do with our businesses both in terms of product and service offerings. So we've said before, Bunnings has never been in better shape.

Alan Kohler: And what is your view of the industrial-relations situation at the moment and in particular on penalty rates?

Richard Goyder: We are certainly worried about penalty rates as it applies to the retail businesses. We're in discussions with parties on that and we're hoping, and I think this applies broadly across the retail sector, there needs to be a solution there otherwise there'll be a very big cost impost on business.

More broadly, the whole industrial-relations front, I think at the moment the jury is out a bit. There's new systems and processes - some of them seem to be a little bit tedious and time consuming and in some ways creating some barriers between employer and employee, but there's a fair bit of goodwill at the moment.

So within the Wesfarmers group, and we're a very large employer, we're seeing good cooperation between people at the moment. It's just things are taking a bit longer than we'd like to get formalised in terms of enterprise-bargaining agreements and the like.

Alan Kohler: But do you think the IR environment for a business like yours has gone backwards in the past two years?

Richard Goyder: I think the environment between the company and its employees is fine. I think the regulatory environment is a little bit more cumbersome than it was. We understand why those arrangements have been put in place and we now will have to work to make sure that they work properly.

Alan Kohler: Are you having more trouble with unions than you had in the past?

Richard Goyder: No, I wouldn't say that. We're not having ... we've got pretty good relationships with all our employees, obviously, and where they're represented by their representatives, there's always the potential, under the current arrangements, for some Management: Foundations & Applications, 1st edition conflict to arise. But thus far, we haven't had any.

Alan Kohler: Thanks very much for joining us, Richard Goyder.

Richard Goyder: Thanks Alan.