Finance Finance News How Wesfarmers will sell off Coles but hold on to Flybuys

How Wesfarmers will sell off Coles but hold on to Flybuys

Coles will have to go it alone after Wesfarmers ditches the supermarket in November.
Coles will have to go it alone after Wesfarmers ditches the supermarket in November. Photo: AAP
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Things are about to change dramatically at Australia’s second-biggest supermarket chain, Coles – though as a humble consumer you could easily miss the whole thing.

On Monday, Coles’ parent company Wesfarmers filled in some detail on its plan to “demerge” – i.e. split off – the supermarket and list it separately on the stock exchange, but hang on to its most valuable asset: the flybuys scheme.

If all goes to plan, by the end of November Coles will be its own listed company.

Why is it doing this, given Coles is the single most profitable company in the Wesfarmers family?

Wesfarmers’ answer was pretty simple: next to some of its more exciting brands like Bunnings and Kmart, Coles is too capital intensive and too low-growth to be worth hanging onto.

It is, in the words of Wesfarmers managing director Rob Scott, a “defensive company” – which means it will provide a reliable dividend, but is unlikely to grow much in value.

As a conglomerate, Wesfarmers is more interested in owning companies that it can grow, and it has decided Coles is not that sort of company any more.

However, it has determined that the flybuys program – the jewel in Coles’ crown – is worth hanging on to.

Why does Wesfarmers so value flybuys? It is, in Mr Scott’s words, all about “customer insights”.

“It enables us to make better decisions in our business, put stores in the right location, and put the right products in our stores. It enables us to do more targeted marketing to deliver better value to our customers,” he said.

Take away the positive spin, and what Mr Scott is saying is that flybuys allows Wesfarmers to collect a huge amount of information about individual shoppers’ shopping habits, analyse that information, and use it to give itself a competitive advantage.

It can tell, for example, that Mabel Pratt, 73, goes shopping every Thursday at 2pm, never buys anything organic, prefers Australian-made products, and always pays by credit rather than debit card – and that others in her demographic are similar.

And it can tell that Jeff Jeffreys, 28, shops around four evenings a week around 7pm, buys a large amount of ice cream, chips and frozen pizzas, rarely buys vegetables, pays by debit card and often gets cash back – and that others in his demographic are similar.

This rich mine of information, which spreads across the various brands and not just Coles, is of almost boundless value to Wesfarmers. Cleverly analysed, it can be used to drive growth in all sorts of ways.

But not, it would seem, to drive the growth of Coles itself, which Wesfarmers deems to have hit a bit of a ceiling in an increasingly competitive, crowded sector (think Aldi, Kaufland, Costco and Amazon Fresh).

The details of the demerger

If you have superannuation, you are probably a Wesfarmers shareholder, and will soon own a bit of the new Coles company.

Wesfarmers is proposing to give Coles to its shareholders, providing one Coles share for every Wesfarmers share. Mr Scott said the new company would pass around 80-90 per cent of profit back to shareholders in the form of fully franked dividends.

That means current Wesfarmers shareholders would not feel any material difference in the company’s first round of dividend payments next year – i.e. they would receive the same dividend in total as if the two companies had remained one.

And as far as shoppers are concerned, he said the demerger would be a “seamless transition”.

Wesfarmers itself will maintain a 15 per cent stake in the new company – “as a vote of confidence in the future of Coles” – and a 50 per cent stake in flybuys. Coles will hold the other 50 per cent of flybuys.

That means even if Wesfarmers sells its 15 per cent stake in Coles – which Mr Scott said was a possibility – it will still own half of flybuys. That means it will have a long, ongoing relationship with Coles.

Wesfarmers has chosen long-standing board member James Graham as chair of the newly-independent Coles – a move that raised a few eyebrows in Monday’s media briefing because Mr Graham was claimed to be an “independent” chair.

Mr Scott dismissed these concerns, saying Mr Graham was independently minded and his election was “a unanimous decision by the Wesfarmers board”.

In November, Wesfarmers will ask shareholders to vote on the proposed demerger. If the vote is in favour, the demerger is expected to be completed by the end of that month.

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