Keeping up with the competition

John Durie
AUGUST 21, 2014
THE AUSTRALIAN

WESFARMERS posted an impressive 18.9 per cent increase in profit last year, but earnings in continuing operations edged up just 3.5 per cent to $3.8 billion.
Just as chief Richard Goyder was outlining his latest figures, the ACCC lodged another case against his supermarket chain.
This time the allegations were centered on breaches of section 45 between the major petrol retailers and independent price-monitoring service Informed Sources.
The organisation established in 1987 by Allan Cadd and Allan Price in Brisbane until June this year was supplying data on contract to the ACCC as well as the big petrol retailers.
Section 45 outlaws agreements that substantially lessen competition, and in this case the ACCC argues that by supplying the company with price moves they are hurting competition by allowing each other to know what the other is doing.
The case has been considered for many years by ACCC administrations and Rod Sims is to be congratulated for taking on what is a test case of his powers. It should also be noted the ACCC has asked the Harper review for an extension of its powers to combat price signalling for all industries, not just banks.
Such a change would make it easier to take aim at the petrol companies, but Sims is making the move now under the substantially lessening competition test, which is the right one.
He has Coles in court on misleading advertising and unconscionable conduct cases, but Goyder noted Coles had delivered annual savings to its customers of $570 a year. Some suggest this is at the expense of suppliers, pointing to the increased margins at Coles, which at 5.3 per cent and a return on capital of 10.3 per cent shows the retailer is finally making a positive contribution.
The question is at whose expense and, with the ACCC on the war path, whether returns will continue to grow? Coles boss John Durkan has no doubts they will and he is happily now in charge with a new team and a desire to push more autonomy back to the stores while head office gets moving with its supply chain revamp.
The concern on Wesfarmers growth is not so much on how the company is being run — its just that at a stockmarket multiple of 22 times it is trading on a fancy premium which demands more growth than is on offer right now. At group level, returns are ­finally just matching cost of capital with 9.4 per cent returns on ­equity against cost of equity of about 7.8 per cent and debt at 5.4 per cent.
The $1bn return to shareholders is a welcome continuation of a recognition that at the end of the day it’s shareholder money.
The question that needs answering is whether the market premium for a growth stock is justified when on present evidence it is just scraping through.
Canned heat
COCA-COLA Amatil chairman David Gonski materially failed the company’s shareholders by leaving Terry Davis in the top job for as long as he did, as evidenced by the dismal 15.6 per cent fall in net earnings reported yesterday.
Hindsight is a wonderful thing and it must be stressed incumbent boss Alison Watkins was careful. But the reality is Davis was in the job for 13 years, three times the ­average tenure of ASX 200 company bosses, and while sometimes tenure is beneficial in this case it plainly was not.
Gonski presided over this excessive tenure, which explains why he deserves condemnation, and his board sat around while Davis did wonders on cost saving, but missed the changes in the consumer market and relied on a strategy of shipping fridges to the route trade. The Coke brand is under fire worldwide and today’s results presentation was noticeable for the number of times Watkins said she was working with her major shareholder to help address the problems.
The Davis era at CCA was ­noticeable for his attempts to differentiate himself from his effective parent company. In October, the Amatil board in a pre-arranged event will head to Atlanta to talk with the major shareholder, the first board sojourn to head ­office in at least the past decade. Davis was also a frequent visitor, but he didn’t talk it up so much.
Granted, it’s a tough consumer environment and star divisions such as Indonesia have suffered from macroeconomic conditions, but new Australian boss Barry O’Connell and Watkins implied that Davis and his team were asleep at the wheel. Worse, they chased profits by cutting route-trade promotions in the second half of last year, among other cost-cutting efforts plainly designed to meet short-term earnings targets.
O’Connell said: “The market landscape changed markedly over the last five years with increased sensitivity to sugar-based drinks and increased preference for still beverages.” What, you may ask, was Davis doing while the market was changing under his nose in such a way that flavoured milk, on a value basis, now outsells Coke in convenience stores? Coke has its own iced-coffee on the market under the Barista Bros name, so the empire is striking back.
Watkins described present conditions as “difficult and disappointing”. She added the company was slow to adapt to changes in market conditions and consumer preference.
If there has been a more damning statement on previous management of a market-leading, fast-moving consumer goods company it was many moons ago. Watkins and her team will respond with a strategy briefing in October and, while noting earnings in the second half would be above the $182.3m for the first, said the year would be difficult.
Here’s the News
THE media world has a wonderful way when reporting on itself of ­selecting facts at a particular time as purported evidence of reality at another time.
Case in point being yesterday’s reports of big losses at News and this paper in 2012-13, which was a period of massive change at the company and indeed the industry.
Revenues fell during the period, as did operating income, but since that time, which is now some 14 months ago, trends have reversed, the losses have halved and on present trend The Australian is heading on a path towards break even.
The paper’s chief, Nicholas Gray, noted recently stronger advertiser demand to­ ­investments in new products ­including Access­One, which automatically extends print advertising campaigns to the masthead’s newly launched tablet app at no extra cost.
“The Australian has experienced three consecutive months of year-on-year growth in print advertising,” Mr Gray added.
Those facts, and the context of the past turmoil, were noticeably absent from reports elsewhere.

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