Richard Goyder: Supermarket Price Wars

Richard Goyder, the CEO of Wesfarmers, talks about the strategy for their business, and the ongoing supermarket price wars

Introduction – Supermarket Price Wars

Ross Greenwood: Great to have your company here on Money News right around Australia. Of course, one of the things that really determines our lives, and to be honest I think our well-being in Australia, is our relationship with our retailers. The banks are important, sure, but the retailer’s because you’re shopping every week. You’ve certainly got views about, be it hardware or fashion or indeed when it comes down to the food you’re buying. People pass commentary on those companies.

One of the really good examples of this is, say, for example in Wesfarmers, which owns Coles, Bunnings Warehouse. It owns Kmart. It owns Target, Officeworks, those types of businesses. Well, they did a big investor presentation yesterday. Now, it was really interesting to see what they had to say. For one, Coles is going to invest more money to keep prices lower. The reason for that is because they realize that they’ve got to not only keep customers satisfied when it comes to price, but they’ve got to keep up with the opposition.

It’s really a dogfight. There is no question about that supermarkets right now, but the one slide that jumped out at me in this presentation was those customers of Coles. What did they say when they spoke to Coles about their experience? Well, one in three customers said they were dissatisfied with the price. One in five said they were dissatisfied with the service. One in six said they were dissatisfied with the fresh quality. One in five said they were dissatisfied with the range and availability. They can’t satisfy everybody.

There’s no doubt about that, but the question is, how do you actually juggle all those needs? Because if you take money from shareholders and put it into price and make the supermarket prices cheaper, well, then your shareholders aren’t getting the return that they would have liked. Let’s now go to one of the really good chief executives in this country over a long period of time and renowned for his discipline in using the shareholders’ money. That is the chief executive managing director of Wesfarmers, Richard Goyder, who I should also say is the chairman of the AFL Commission as well. Footy’s on tonight, so we should be pretty quick with him.

Richard, I appreciate your time.

Interview with Richard Goyder

Richard Goyder: It’s always great to be with you, Ross.

Ross Greenwood: Now, you watch this no matter whether it’s Target or whether it’s Kmart, whether it’s Bunnings, whether it’s Officeworks or whether it’s Coles. When those customers are giving you that type of feedback, how does a management respond?

Richard Goyder: Well, with that, with an absolute focus on the customer, I thought it was really terrific that somebody can put that slide up yesterday. Effectively not just telling investors, but also telling our employees that there’s more to do and notwithstanding the significant improvements that have been made in cars over 10 years. Those numbers would tell you there’s more to do. Satisfying customers is a never-ending journey, but it’s got to be our focus.

Over time, Ross, if we get that right, then the returns come to shareholders. We want to grow profits by growing our revenue, not by putting prices up and not by taking service out of stores. You’re right. It’s a very competitive sector and we’ve got to be as sharp as anyone in that sector than I am.

Ross Greenwood: Now, the reason why I raise it is because you are a chief executive and Wesfarmers is an organization that’s renowned for being prudent with the shareholders’ cash. You want to try and get the highest return on the shareholders’ capital as you possibly can. In retail right now, notwithstanding the fact that our supermarkets have been some of the most profitable on the planet, the fact of the matter is if you’ve got now a player 195 million dollars of the shareholders’ money in just try to compete with the other supermarkets and to maintain your market share, the question is, at what point do you say we need, the whole sector needs a new strategy as to whether actually price is the key determinant as to whether a person shops at Coles, at Woolworths or at Aldi?

Richard Goyder: Well, I think, Ross, it’s probably more value. Price is a big part of that, but also causing– Customers want quality, fresh products. They want reliable groceries, but most of our customers are on a budget and you will have talked to your listeners about wage increases and the lack of wage increases. I think it’s really important that we maintain a very strong focus on customer, on pricing.

The best way we can achieve that and maintain reasonable results for our shareholders is to make everything more efficient, make our supply chains more efficient, better arrangements with our suppliers, so it’s seamless end to end. We’re working really hard on that. As you pointed out, we’re investing some money ahead of that curve at the moment to ensure that we remain competitive and our customers are delighted with what we offer.

Ross Greenwood: There’s another aspect of this. For the past four years or so, in what has been a very flat retail environment, the share price of Wesfarmers has gone pretty much sideways. Now, sure, you’ve had Cole assets that haven’t necessarily fired for you during that time. Range different reasons can be there, but the truth is spending the shareholders’ money to actually put it into price to maintain the position as to where you are, that’s almost in some ways the antithesis of the way in which the value style investing that Wesfarmers has been renowned for with its shareholders’ money.

Richard Goyder: Yes. One of the slides I put up yesterday was our total shareholder returns over 10-year periods. Over 10-year periods, Wesfarmers has delivered for our shareholders and that’s through being patient with capital. Our view is, at the moment, that it’s important to invest particularly in Coles. Bunnings is screaming along, came out screaming along. Officeworks is good. We’ve got some work to do on Target. We would always have the option to extract more out of Coles, but we think that would do long-term damage to the business and ultimately to our shareholders. While it’s really important we get year-in-year-out profits and dividends, it’s also important that we increase the value of each of the businesses. That’s what we’re endeavoring to do.

We would always have the option to extract more out of Coles, but we think that would do long-term damage to the business and ultimately to our shareholders. While it’s really important we get year-in-year-out profits and dividends, it’s also important that we increase the value of each of the businesses. That’s what we’re endeavoring to do.

Ross Greenwood: Because you talk about the patient capital and also you and I’ve talked about before about the notion of who should diversify, should it be the shareholder who gets the chance to diversify or should it be that the managers themselves who get the chance to diversify to try and smooth out many of the dips and bumps of the economy by having different businesses? In your case, it could be gas or chemicals or fertilizers or ammonium or vinyls or coal or it could be retailers, hardware, whether it’s supermarkets, whether it’s liquor, whether it’s fashion retailing, all that type of thing. The question is now about this notion of patient capital. Capital is not as patient as it once was.

Richard Goyder: Yes, I agree. A lot of people look short-term. We say to investors in Wesfarmers, “We’ll try and make you wealthy over the longer term.” It doesn’t always work. As I said earlier, Ross, if you look at 10-year total shareholder returns, and that’s the share price and distributions to shareholders, Wesfarmers has been a pretty good investment. Indeed, Terry Bowen, our finance director suggested, we’ve paid in the last five years, I think, 13.2 billion dollars out to our shareholders. The models worked. The diversification has worked because we are very financially disciplined, focused, and we’ve got an objective of providing satisfactory returns to our shareholders.

Ross Greenwood: Just explain to me about running a very large organization in Australia, one as large as Wesfarmers. The difficulty, as I’d imagine, it would be trying to find opportunities that do create growth that add value to the shareholders long term. The real problem is there aren’t a whole bunch of things you can buy, so you’ve almost got to grow to a certain extent apart from what you can do internally with the economy. It makes it more difficult, doesn’t it, to really take on big bites like you did when, say, for example, you bought Coles?

Richard Goyder: Yes. It’s a really good point. We’ve got significant growth opportunities internally and we’re continuing to spend a couple of billion dollars each year on capital and about half of that is growth. You just look at the growth of Bunnings over 20 years or more and we think that will continue, but you’re right. You have to be patient because if you pay too much for an asset, then you’ve done a bad deal for your shareholders forever. Over time, we’ve been patient.

Opportunities do come along. It’s lumpy. It’s not like the supermarket brand growth. You’ve actually got to do the work, be patient, wait for an opportunity, and then be quick to move in. We’re confident we can deliver that over time, but it’s the crisis, the big challenge. For my successor, Rob Scott, who is now standing executive, it’s what people will focus on with Rob, I’m sure.

Ross Greenwood: Final one for you. Supermarket price wars. You’ve been at the point end of that with the “Down Down” campaigns through Coles. Is it likely to win anytime soon?

Richard Goyder: I think it’s going to be linked, Ross, to efficiency. I think it’s actually irrational market. It is competitive. Consumers are doing well out of it, I think, very much as a consequence of the initiatives of Coles over the last 10 years. By far, the largest investments in price have been able to be made because of efficiencies that all the businesses and certainly Coles has achieved. I think that’s going to be the battlefront, but consumers will be winners and I certainly trust shareholders will come out of it pretty well as well.

Ross Greenwood: The chief executive of Wesfarmers. Always great with his time here on the program and the AFL chairman of its AFL Commission, Richard Goyder.

Great to have you on the program. I know you’re stepping down officially in November. Know that we will talk before then. In the meantime, I know you’re off to the footy, so enjoy your evening.

Richard Goyder: Thanks, Ross. I’ll look forward to that.


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