Coles in digital sweet spot

Cain is building a reputation for delivering what he promises. In some areas he is exceeding expectations.

The Smarter Selling tech initiative delivered $250 million in cost savings in 2020, well ahead of the $150 million promised.

Smarter Selling, which promises $1 billion in cost savings by June 2023, includes increased automation of manual tasks, faster checkouts, the use of artificial intelligence for stock ordering, and smarter planning in distribution centres to improve availability.

"The pace of change in the business is accelerating, particularly with our digital assets and capabilities, and we are demonstrating true agility on a week-to-week basis," Cain says.

He says the hiring of Ben Hassing, who previously ran Walmart's e-commerce business in China, is making a huge difference to the Coles digital strategy.

Other important hires were Ian Bowring as group executive of transformation, and Sally Fielke as general manager of corporate affairs. Bowring previously worked at Metcash and Qantas. Fielke, who worked at Sydney Airport, has been critical to managing government relations through the pandemic.

The move to a digital future includes dumping the printing of consumer catalogues and setting up the Coles & Co digital communications arm.

COVID-19 has brought forward significant changes in consumer behaviour and this is driving higher profits.

In the year ended June 30, Coles lifted its gross margin 30 basis points to 25.1 per cent thanks to a "favourable mix, strategic sourcing benefits and a more efficient supply chain".

The COVID-19 second wave in Melbourne contributed to a surge in online shopping, with online sales up 60 per cent in the first six weeks of the new financial year.

Coles almost doubled its online capacity in 2020 through a rapid rollout of contactless Click & Collect.

It re-engineered its main online sales website, coles.com.au, as well as all three liquor websites. Liquor sales rose 8 per cent to $3.3 billion, with comparative store sales growth of 7.3 per cent.

Liquor is implementing a new strategy under Darren Blackhurst. Cain says he is "probably the most experienced trading director in the world". Blackhurst spent 20 years at Tesco and also worked at Walmart and UK supermarket chain Morrisons.

The other big digital investment in 2020 was in its consumer loyalty program, flybuys. Coles built a cloud-based data analytics and loyalty management platform which it says will "benefit members through a seamless digital experience".

While online sales in 2020 were only 6 per cent of total sales, the opportunity to lift this significantly is evident from trends overseas where online sales range between 15 per cent and 20 per cent in Western countries and about 25 per cent in China.

Cain says the toughest part of the digital transformation is the integration of Coles' computer systems into those of its partners, including Witron and Ocado.

Life-for-like supermarket sales in the fourth quarter of financial year 2020 rose 7.1 per cent, beating market expectations.

Several analysts expressed concern about COVID-19-related costs affecting the business in 2021, but earnings are expected to grow about 9 per cent in the year ahead.

Coles shareholders enjoyed a total shareholder return of 31.5 per cent in 2020, including a 14.6 per cent increase in the final dividend to 27.5¢ a share, taking the total annual dividend to 57.5¢ a share. The dividend in 2019 was 35.5¢ a share.