Is our debt putting the economy at risk?

Ross Greenwood speaks to Rob Scott, the incoming CEO at Wesfarmers,  about how deflation in fruit and vegetables is good for consumers but has seen soft growth for Coles.

Introduction: Is our debt putting the economy at risk?

Ross Greenwood:  I want to start now the program by talking about those inflation numbers but have a play out into business and your shopping habits. The reason for this is we know that retail is tough in Australia today, but today calls its quarterly figures on a same store basis. The food sales and liquor sales were up by point four percent, now it’s relatively slow growth. Now the whole point about this is that it’s a situation where while you have got that slow growth coming through the say, the slowest it’s been seen there since around 2008, there is obviously other things at play.

Is it that households incomes are not raising fast enough? Is that you have got broadly pressures on households as a result of rising electricity prices? And that was certainly said in the inflation numbers today. Massive jumps in electricity in South Australia, in Canberra was gas, in western Australia was electricity prices as well, big big price rises. But then also there’s a situation where there’s competition out there. Let’s now go to Rob Scott who was the deputy CEO of West farmers but he also from November this year will be the incoming chief executive of one of Australia’s most important employers and also important companies as well. Many thanks for your time Rob.

Interview with: Rob Scott, Wesfarmers, Incoming CEO

Rob Scott: Thanks Ross.

Ross Greenwood:  When you sit there and look at these sales numbers right now, are you conscious of the pressures inside Australian households as we speak?

Rob Scott: Yes Ross, we do see some pressure within Australian householders but what we see from our results is that when you offer a very compelling offer to customers as we are doing within Bunnings Australia New Zealand, time out on Office Works. We’re delivering very strong growth. We still say that consumers are prepared to spend their money when we’ve got the offer right.

Ross Greenwood:  But if I put together say, Bunnings Australia New Zealand if I put Kmart and also Office Works all together, I come up with roughly around half of the sales that Coles food and liquor comes up with for you. In other words it is important that Coles as a supermarket structurally but also from the offer you put out to the public, is firing because that’s the powerhouse of the sales even though of course Bunnings has got the margins and Bunnings quite clearly has enormous growth over a long period of time.

Rob Scott: Yes Coles is a very important part of our group and actually we were recently placed with the first quarter performance. You are right that some store sales growth was more subdued but it was quite an unusual quarter as it relates to the deflation that we saw particularly in fruit and vegetables and this does happen from time to time. Whilst it was great for customers, growing conditions were very strong and that led to some really significant price decreases in things like bananas and vegetables in particular, where we saw a prices on average for about seven to eight percent across the baskets.

Ross Greenwood:  Yes really picked up in the CVR numbers today because you can actually say in that quarter, the vegetable prices down by 10.9 percent during that period of time. The real problem I would imagine is for households who are coming in shopping in your super markets, that when I say electricity price raises 8.9 percent, when I see the profit health insurance premiums rising, when I also don’t see their wages rising quickly enough that they are pressured. Do you see inside that supermarket business especially any change in the shopping patterns or the habits of the consumers?

Rob Scott: Yes Ross, some of the trends we are seeing, when we’ve called this out for a while now. We are seeing customers being more value conscious so they do tend to trade down to the entry price point products and that’s partly why we are continuing to invest in ensuring we have got great value in that area and we are also seeing quite stark differences across the country. If you take away WA, we seeing WA sales a lot slower as the economy’s doing it a bit tougher over here and less than half the population growth in WA than we’re seeing across the country. There some of the factors that we are working through.

Ross Greenwood:  You are a really good sort of example because of the breadth of retailing, you have got to, obviously it’s tough in supermarkets and just before I allude super markets, one issue. Do you believe it’s as much what’s happening inside households the fact that sales growth and even now you say there are usual circumstances but sales growth is still under some pressure? Or do you believe it’s actually the household factors or the structural issues in other words the competition inside that industry?

Rob Scott: Well look, I think it’s a bit of both, we called out earlier in the year that it’s been a challenging year within Coles because their major competitor went through a major reset investing heavily in value that resulted in them dropping their profit a fair bit, we had to respond and we responded strongly early this calendar year we’re now farkling through that. We are actually starting to see a more a more stable competitive environment, we certainly haven’t seen the competition intensify over the last quarter and we are looking forward to a positive Christmas trading period.

Ross Greenwood:  Okay, because my observation on looking at your results today, is that once a person walks into a Bunnings, an Office Works or a Kmart there is help I have altogether different as compared with when they walk into a supermarket, it’s almost as though they have become less price conscious that they are prepared to buy and spend and also spend at a reasonable clip as well.

Rob Scott: Yes, value is very important in certain markets but I wouldn’t underestimate the importance of service, the importance of having the right range, the importance of having really good quality fresh produce in particular. We feel that there are many facets to the Coles offer and we actually see that there is many opportunities for us to continue to improve our offer over time.

Ross Greenwood:  Okay but the interesting thing is that you have got store on store growth, 10.8 percent out of Bunnings Australia and New Zealand. That’s phenomenal growth as you well aware as I’m now aware as compared with comparable food and liquor sales up by point four percent, so there’s something in the nature of people. You probably have a better handle on this than me as to what happens when they walk to a Bunnings store as compared with what happens when I walk into a Coles or a Woolworth store or an Aldi store.

Rob Scott: Well in there Ross, in the true under sated nature of Bunnings say, they did refer to it as a satisfactory result, I guess it’s off the back of a lower sales performance last year when we were working around the significant clearance activity that was saying for masters, it is also a lower base but what Bunnings has been able do, which I think is an important part of their offer is to continue to broaden their range and move into new areas, be quite innovative around their range extensions and that increases their addressable market each year.

Ross Greenwood:  I know that Target has been an ongoing thorn in the side of the business and there’s been some fundamental structural change at Target, there’s also let’s be honest significant competition out there for Target in that particular space. Do you believe you are getting closer to coming to a conclusion as to what ultimately happens to Target?

Rob Scott: Well I think the important change we’ve made over the last year is we’ve now got better strategic coordination between Time out and Target and the important part about that is where are able to invest a lot more in Time out and really drive the growth of Timeout so nine percent sales growth for the quarter it within Time out shows that business is resonating well with customers. What Guy Rosa has done with Target, which he doesn’t necessarily say in the sales numbers, is he’s taken a lot of cost out of the business, he’s got inventory under control and he’s really risked the business. Clearly it’s not before where we wanted to but it’s breaking even and really now the focus is to try and get some better product into stores that will start to resonate with customers.

Ross Greenwood:  Well Rob I’m really pleased you are on the program tonight, the deputy CEO of west farmers, also its future managing director from later this year and it’s going to be terrific having the chair talking about it because one of the most important employers in this country, just one of those companies that every person in some way shape or form ultimately has to interact with and Rob we appreciate your time on the program this evening.

Rob Scott: Thanks for the opportunity Ross.

 

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