Strategic Analysis for Coles Supermarket Australia

1. Introduction Since its establishment 90 years ago, Coles has developed itself to be one of the pioneering companies in the Australia’s retail industry. George Coles the founder of Coles Supermarket has a key influence in the early Australia’s retail industry (Deloitte, 2012). George the son of a retailer travelled to the United States in the early 1900’s to view and observe the retail practice. He returned to Australia and established the first retail practice along Smith Street; Collingwood, Melbourne. Over time the retail stores grew in number and soon they became famous for their slogan ‘nothing over 2/6’. The first Cole variety store was opened in 1927, and in 1935 the company listed on the Melbourne Stock exchange. The company became a leader in the Australian retail industry in offering value to customers. The first Coles supermarket was opened up in 1960 in North Baldwyn, Melbourne, and 13 years later, in 1973, the company achieved its goal of establishing a retail supermarket in every Australia’s capital city (Gunasekaran, 2008). In 1985, Coles Myers limited was established after Coles supermarkets merged with Myers Emporium limited through a cash offer of $918 million. In July 2007, Wesfarmer’s purchased Coles supermarkets for a cash offer of $22 Billion. Myer was de-merged from the Coles business in 2005 to private equity business, and floated as a listed company in 2009. Today the company still continues with its tradition of Australian traditional food retailing, employing over 10,000 people, who collectively carry out transactions amounting to 18 million per week. Cole’s supermarkets are one of the two supermarket chains operating in Australia (Gunasekaran, 2008). There are about 140,000 retail businesses in Australia, contributing about 4.1% to the GDP. The retail industry employs about 10.7% of the total employment in Australia. The grocery retailers in store based sales accounted for 51% of the sales in 2012, with the nonstores retailers accounting for 495 of the retail sales (Coles, 2011). The industry grew by 2%

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in 2012 in the wake of low customer confidence. Cole supermarkets have over 742 stores all over Australia, the total sales of the retail supermarkets increased by 4.2% in 2010 to $30 billion. This means that Cole Supermarkets controls about 31% of the market. This puts it in second place behind the market leader Woolworths at 40%. On the financial period of 20112012 the company generated revenues of $23.6 Billion (Deloitte, 2012). Over the past 5 years there have been significant developments in the grocery industry. There has been an entry of new players in the industry. Costco has entered the market while ALDI has expended since its entry in 2001. The recent changes in the grocery markets are occasioned by the increase in the number of online customers. Customers increasingly prefer to shop online than in the traditional methods (Deloitte, 2012). In response to the cost of living that were affecting consumer due to the increase in global fuel prices, in 2008, the links between the grocery industry and fuel industry has normalised. In 2008, the Australian government commissioned the Australian competition and consumer commission to regulate the industry. The trade practices act was recast as the competition ad consumers’ act in 2010, and this was followed by several amendments of policy and regulations in the years that followed. Supermarkets in the industry have developed a new marketing and pricing strategies (Nenycz-Thiel, 2012). This essay is a strategic management analysis on Coles supermarket including external, industry and internal analysis of Coles followed by the identification of Coles’ strategic features, strategy implementation and some predicted key challenges facing the company. The essay will then be concluded by some suggested recommendation for Coles in the future.

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2. External analysis 2.1. Macro-environmental factors 2.1.1. Political factors There have been significant changes in the political and legal atmosphere in the last five years that will affect the operations of retailers in the industry (Plunkett, 2008). The federal government developed the Australian Competition and Consumer Commission’s (ACCC), which is regulating the industry (Tootill, 2012.). The ACCC has introduced various policy changes that will open up the industry to competition. These among the various legislative changes that include tax and regulatory environment are factors that Cole should take into consideration when formulating strategies. 2.1.2 Demographic factors Australia’s population grew by about 1.8% in 2012; most of the population lives in urban areas. The high density population areas are the urban centres. Australia’s population comprises of the white people and the indigenous populations (Deloitte, 2012). The majority of the population consists of the youth. Cole has its presence in all capital cities. The company should then focus on maximising the full potential of the markets. The company should focus on the people between 15 to 67 years because they occupy majority people of the population. 2.1.3. Technological environment There has been rapid advancements in the technological environment in the last five years. Companies and people are employing the use of smart systems and technologies to boost the efficiency of their operations and monitor their progress (Hattersley, 2013). Australia’s population is increasingly using computers and other technologies to do their shopping. Cole uses the latest technology to track the process of its stock, and also examine the change in consumer demand and preferences.

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2.1.4. Socio-Cultural factors. One of the significant trends is the increasing awareness and consciousness of the consumers towards their well being and health. There has been a continual shift of tastes and preferences of consumers towards more organic and healthy product (McCarthy, 2013). Currently there are few players in the industry who is offering the sales of organic foods and products. This presents an opportunity for Cole Supermarkets to venture into healthy and organic foods and products. This will enable the company to tap on the already available market and also respond to the changes in the tastes and preferences of customers (McCarthy, 2013). This also highlights the threat to Cole supermarkets that farmers markets and niche supermarkets, which specialise in organic and healthy products, will thrive. There have been an increasing number of time sensitive consumers in the Australian market. There has been an increasing demand for ‘time convenience’ among consumers in the market. The ability to meet and satisfy time sensitive customers is the possibility of extending the trading hours. Cole supermarkets can also provide more convenience to customers by extending the range of products to customers as much as possible. Cole Supermarkets have responded to these customer needs by creating Cole’s express. 2.1.5. Economic Factors The current trend in the economic climate has resulted in the reduction of consumers purchasing powers. The most adversely affected goods are the flexible goods; consumers are shifting into private labels in order to save costs (Hattersley, 2013). This has allowed private labels to compete on the basis of lower prices while making a huge profit margin. The provisions of private labels by Cole supermarkets will enable supermarkets to compete on the basis of choice convenience, which is, offering customers a low cost choice alternative.

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2.1.6. Global environment. Changes in the global operating environment occur rapidly meaning that companies must continually adapt to suit these changes. Globalisation has brought about the free movement of people and goods in the world (Kumar, 2008). Products from all over the world compete in the local economy. Changes in the global operating environment affect the local economy. Companies are not spared from the harsh environment of the global operating environment. Cole and other companies must continually change to suit their needs and strategies to fit the global environment. 2.2. Industry Analysis This section will first utilise the Porters’ Five Forces analysis to examine the competitive forces in the retail industry in Australia. It will then examine the attractiveness of the Australian grocery industry in the advent of the current operating environment. This will be preceded with the examination of Cole Supermarkets relative position in the industry. 2.2.1. Threat of substitutes The threat of substitutes in the grocery and retail industry is high. Cole supermarkets lace numerous convenience stores, grocery stores and the farmers markets. The indirect competitors form the significant threat of substitutes to Cole supermarkets. Convenience stores have experienced significant growth recently, and are offering more choices to customers (Hattersley, 2013). This is offering direct competition to supermarkets on offering the choice convenience and the wide range of products to consumers. The shift of consumer taste and preferences towards healthy and organic products means that farmer’s markets offer a potential threat to supermarkets. The rise of time sensitive consumers makes the perceived threat of specialty stores minimal.

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2.2.2. Competition With over 140, 000 retail stores in the Australian retail industry, there is high competition in the industry. The high degree of rivalry that exists in the industry is as a result of the small number of retail stores in the industry, and low perceived difference in the generic nature of the goods and services offered in the industry (Deloitte, 2012). The biggest determinant of the level of competition is the price, although store location and product choice also play a major role. Woolworths are Cole supermarkets biggest competitors in the industry, which is the market leader followed closely by Cole supermarkets. The rivalry in the industry is bound to increase in the future due to the entry of new players in the industry, and the growth and expansion of private retailers like IGA and Action (Gunasekaran, 2008). 2.2.3. The Bargaining power of customers The bargaining power of suppliers in the industry is low, because Woolworth’s and Cole control 75% of the market share, therefore, the supplier has a limited selection of intermediaries to select from in the industry. In the producers’ production, in most cases Cole and Woolworths are the major purchasers’ in the industry, and sometimes the only purchasers in the industry (Deloitte, 2012). Woolworths and Cole have a significant market share presence in Australia, such that major companies like Nestle and Kellogg’s do not dare upset these two companies. This is set to change in the future, the emergence of action Supermarkets, and the expansion of IGA is set to erode the significant power that Woolworths and Cole have in the industry. The recent policy changes by Federal Government and The Australian Competition and Consumer Commission’s (ACCC) to reduce the barriers of entry in the industry (Deloitte, 2012). The bargaining power of suppliers in the industry is expected to be moderate in the years to come, because of the wide range of intermediaries that producers can select from in the industry.

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2.2.4. The bargaining power of buyers. Although the bargaining power of consumers is low in the industry, it is set to increase in the future. The aggressive push by the national government and ACCC to reduce the barriers of entry in the industry is set to increase the bargain power of customers in the future due to the entry of numerous players in the industry. The emergence of price comparison websites will lead to the increase in the consumer bargaining power I the industry (Tootill, 2012.). The price comparison websites such as ‘grocery.bestpricedirectory.com.au’, enable consumers to compare the prices of products among various supermarkets and convenience stores in the industry. The bargaining power of buyers is set to crease to a ‘moderate’ level in the future. 2.2.5. Threat of new entrants The threat of new entrants in the industry is low. This is expected to remain like that in the near future because of the indigenous agreements of the zoning laws and other agreements like leasing, rent, and ownership. These laws have resulted in the scarcity in the grocery and retail stores location sites, especially for the foreign players who are seeking to venture into the grocery and retail industry in Australia (Tan, 2012). This is despite the amendments of federal governments and ACCC law and regulation to encourage entry of new companies and competition in the industry. The threat of entrants is expected to remain low in the foreseeable future. The preferential treatment of Cole and Woolworth’s by landlords due to the amount of traffic that both companies attract discourages new entrants in the industry. New entrants in the industry must compete with Cole and Woolworth’s economies of scale, thus the new entrants must invest heavily in infrastructure and facilities, and seek for expertise to manage the business, which is hard and rare to find (Gunasekaran, 2008). New entrants in the industry require significant investments and undertaking, and only a few players like IGA and Action are low.

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2.2.6. Comparison of the industry attractiveness for Cole supermarkets The Porters’ five forces have highlighted the industry attractiveness for Cole supermarket. In the recent past, the industry attractiveness for Cole has been moderately high, or extremely high in the industry (McCarthy, 2013). The main cause for this was the high barriers of entry in the industry, and the low bargaining power of buyers and sellers in the industry. This is highlighted by the high profitability that Cole enjoyed in the industry. However, this is set to change because of the various changes that is occurring in the industry. The increase in the bargaining power of buyers and sellers, and intensity of competitors in the industry is set to reduce the attractiveness in the industry from high to moderate. As a result of this the profitability of Cole supermarkets is set to reduce from high to moderate. The ability of Cole supermarkets to out performs its rivals in the industry lays on its ability to properly utilize its resources and capabilities (Nenycz-Thiel, 2012). 3. Internal analysis – Cole’s Core Competencies The capabilities of Coles supermarkets are vital when they are combined in a unique and sustainable manner that create core competencies for the organisations, which develops and creates strategic value and ensures that the company maintains a strategic advantage over its competitors (Hattersley, 2013). The capabilities of Coles highlights the ability of the supermarket to effectively deploy its resources, which have been integrated purposely to achieve the goals of the organisation. The core competencies are the vital capabilities that function as the basis of Coles competitive advantage over its rivals (McCarthy, 2013). Core competencies distinguish Cole supermarkets competitively and make it distinguishable in the market. These core competencies are identified below. Highly Effective Supply Chain: Coles efficient supply chain is both a resource and a capability in the company’s inbound and outbound logistics. The substantial cost saving provided by the supply chain

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enables Coles to compete effectively with Woolworths (Gunasekaran, 2008). The level of technological capability and supply chain efficiency is non-substitutable for any other resource. The level of competency is vital for the proper management and implementation of the promise of the organisation. Should Cole have efficient supply network and technological advancement and sell products of high quality? It would be irrelevant (Hattersley, 2013). Thus, by the aforementioned an effective supply chain is deficient as a separate competency, and must be sustained by other competitive advantages. Brand Reputation: Coles brand image has been developed over several decades and this was achieved through positive consumer experiences. This can be attributed to the stringent quality assessment that exists in the company. Coles brand is valuables, because it offers substantial differentiation from the rivals, and contributes of the high level of customer satisfaction (Coles, 2011). However, competitors offer high quality and fresh food products. Thus, this reputation is not a distinctive competitive advantage; rather it is a point of parity, which Coles must enjoy in order to compete. Effective Top Management: The competencies of Cole has enabled it the company to be able to navigate the operating environment effectively in the advent of recessionary pressures. This can be attributed to the company top management. The top management will be relied on by the company to be able to navigate the increasingly competitive environment, in particular CEO John Fletcher (Mills, 2002). Consequently, the competence of top management in directing Coles through the current turbulent economic climate and constantly achieving high growth rates makes it a valuable resource. As such, it is non-substitutable by any other resource. However, it cannot be considered exceptional and rare, the maturity of the industry highlights at most companies in the industry capable senior management (Gunasekaran, 2008).

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The following are the means through which Coles supermarkets frames its strategic focus by employing the sustainable advantage and the value chain analysis of core competencies. Sustainable advantage When framing the strategic advantage Coles supermarkets employs the following four criteria’s; valuable, rare, non-substitutable and costly to imitate. Valuables are the core competencies that are not possessed by many others (McCarthy, 2013). This are the values that enable the company to be able to neutralise the threats and exploit the opportunities available to the company. Through this, the Cole supermarkets is then able to create value to its customers. The value chain of Coles supermarkets is efficient that it enables the company to be able to create value to its customers (Dwivedi, 2012). Through its value chain and economies of scale the company is able to offer customers products of high quality standards at low possible costs, therefore, creating value to customers. This strategy adopted by Coles is costly to imitate. The company has developed its value chain system and economies of scale through decades of experience giving the company a competitive advantage over its competitors. The strategy is extremely costly for companies to copy, especially the new entrants, because of the capital resources required (Coles, 2011). The economies of scale is easily substitutable, and this is demonstrated by Woolworths. The strategic advantage possessed in the value chain analysis is extremely difficult for other companies to substitute because it possess invisible capabilities. The level of technological capability and supply chain efficiency is non-substitutable for any other resource. The level of competency is vital for the proper management and implementation of the promise of the organisation (Plunkett, 2008). The firms possess a specific knowledge over the other companies in the industry in the value chain analysis. In Australia’s retail industry not many companies possess the

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strategic combinations of core competencies, which Coles possess that is giving it the strategic advantage. Value chain analysis Coles supermarkets main business objectives are all geared towards delivering the achieving its mission which are “Down Down, Prices Are Down” and “Quality food costs less at Coles”. The value chain analysis is the system through which Coles supermarkets has separated it value creation activities (Dwivedi, 2012). The goal of these activities for Coles supermarkets is offer customer values that exceed the cost of the activities, thereby, creating a profit margin. All the activities of the organization are geared towards attaining and delivering the objectives (Coles, 2011). The main value chain activities that are geared towards delivering the promise of Coles supermarkets includes the following: In-Bound Logistics Coles being a retailer does not produce the product it sells in its stores. Coles just controls the distribution network of the products (Nenycz-Thiel, 2012). Procurement and logistics are the two main activities within the organization that contribute to the firm’s success in delivering on its promise. The products that come directly from producers go directly to the regional or national distribution centre, where the product quality is certified before it is distributed to the various stores nationally. Cole supermarkets own and operate its own distribution trucks, which are involved in the company’s own distribution system (Kumar, 2008). This puts the company in a better position in ensuring on time delivery of goods and services. Additionally, operating the distribution centres (DCs) and trucks in its delivery chain puts Cole supermarkets in a superior position to warrant optimum distribution efficiency and product quality.

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Operations Operations activities cover two primary activities that guarantee the consumers convenience and value, improved quality assessment and proper management of inventory. The two primary activities include the following; Checks and balances are put in place to ensure that from the time stock arrives in the store, to when they are displayed on the shelves they detect and remove defective products. The minimum presentation level for each product is tracked to ensure the products do not fall beyond the require levels (Dwivedi, 2012). The sophisticated point of sale (SOS) keeps track of the sale of the products, and it authorizes re-stocking when the product falls below the minimum presentation level. Cole supermarkets use modern and advance forecasting models that evaluate the change in consumer demand so as to optimize the sale of products (Dwivedi, 2012). Marketing and Sales In-store Promotions and Organizational Dynamism are the two main activities that ensure the success of marketing and sales endeavours of Cole supermarkets. In order to boost sales in its branches all over the country the company holds weekly special offers where the prices of certain goods are reduced significantly (Cleanthous, 2011). In order to supplement this offer, the company issues catalogues that show consumers the products that are available on offers. This strategy is highly effective in boosting the sale of products and the turnover of products in the store. For example, normally Cole sales $2000-$3000 worth of toilet papers weekly, during weekly specials the sales of the products increases to $8000. The success of Cole will be judged on the ability of the company to keep up with the change in consumer trends and preferences. Under the Coles quality food brand, the company has introduced easy to prepare meals in order to cope with the changing preferences of consumers (Meyers, 2010).

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There are also other activies within the value chain that contribute to achieving Cole’s mission; which are: - Outbound Logistics; distributing the products to the various branches using the company’s distribution network. - Services; supporting customers to understand the value offered in the products, and assist them in locating the products (Gunasekaran, 2008). - The supply chain value addition services are supported by the superior technology that cannot be substituted by any other firm in the industry, and the level of resources and infrastructure available to the firm. 4. Cole’s main strategies The business-level strategy that Coles adopts involves the integration of cost leadership and differentiation strategy. The company uses its brand image to differentiate and superior supply chain to minimise the costs of its products (Mules, 2011). The cost leadership strategy is used to ensure that the company offers value to customers at the lowest cost possible (Coles, 2011). This is achieved through its economies of scale activities, profound influence over producers, use of advanced technology and efficient supply chain. The low perception of products in the market means that there exists a low perceived difference between the products. Cole supermarket employs its differentiation strategy through brand image. The company has developed its image over decades, and through offer value and satisfaction to customers. The integration of cost leadership and differentiation strategies means the Cole supermarkets are able to target a broad segment of the market, by offering products that are different from rivalries at the lowest costs possible (McCarthy, 2013). The low cost strategy ensures that Cole focuses on producing products that have few frills, which demonstrate the superior quality with a limited selection. The product differentiation features ensure that customers can identify the different offering on Cole’s products. The integration 13

of these strategies ensures the products possess good to excellent product feature, with many upscale product features. The generic use of the integration strategy ensure that Cole supermarkets strive to come up with new ways that will offer value to consumers while offering product at the lowest costs possible (Tootill, 2012.). This would ensure that the company does not sacrifice on offering consumer products with superior quality. The main corporate-level strategy for Coles business is to become the market leader in the Australia’s retail industry (Meyers, 2010). Wesfarmers portfolio management is focussed on identifying and investing in value added services. Wesfarmers strategy focuses on diversifying its portfolio across various industries. Their strategy focuses on strengthening the existing industries, identifying of growth opportunities and sustaining responsible business operations. BCG is a framework that is used to analyse the strategic position of Coles supermarkets business brand portfolio. In Coles Supermarket’s case, the company has a substantial market share. This means that the company utilises more cash, and also receives substantial returns. The company benefits from economies of scale and has decades of experience in the industry. The market share growth rate is relatively small, in 2011 the grocery and retail industry grew by less than 2%.

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Coles belongs in the cash Cow category it should invest maintain and growth in the relative position in the market. Coles earning are high and stable, and the flow of cash is also high and stable. 5. Strategy Implementation Implementation of strategies by Cole follows the leadership, performance measurement and turning strategy into action mechanisms. The strategy implementation in Cole supermarkets is strategically driven, which involve all people in the organisation. The management of Cole knows that staff members look into leaders to provide meaning, a sense of direction and to establish purpose and value (Cleanthous, 2011). The process of transforming strategy into results is achieved through engagement of all staff members and personnel. The engagement of all people in the organisation will turn the strategy into the action, and bring about the sense of ownership in strategy implementation. The resources for strategy implementation are done through the various departments and individual levels of the organisation (Tan, 2012). This ensures that the strategy implementation is successful.

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Leadership in implementation of strategies makes a difference. It is the difference between success and failure of the organization. The turning the strategy into action involves linking the strategy through the departmental and personal activities. In this way, the strategy implementation will be translated in a manner that is clear and concise. The strategy will be divided into manageable outcomes for the departments and individuals (Plunkett, 2008). The communication, concise, and cascading effects of strategy implementation are achieved through putting the plan into action. The capacities for the strategy implementation redeveloped internally within the organization. The performance management is carried out to ensure that the strategy implementation is done within the plan and time scale requirements. In order to ensure that there exists proper strategy execution within both the individual and institutional level the policies and procedure that facilitate strategy implementation should be examined and analyzed. This will enable all people involved in the implementation process to understand the policies guiding the implementation and execution of strategies. Adoption of information technology tools would enable foster the implementation process. The implementation team would identify information technology tools that foster the implementation of strategies. Coles supermarkets organisational culture will foster strategy implementations. The cultural practices within the organizations is tailored towards ensuring the goal and objectives are achieved. 6. Key challenges Resistance to change, culturally Australians are resistant to change, for instance, the Australian consumers have been reluctant to move online and slow to clear out stock. In Australia the costs of doing business are extremely high, costs of rent and workers are among the highest in the globe (Hattersley, 2013). The global economic environment is experiencing sluggish growth. This is due to the recent economic recessions experienced in Europe. The

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effect of this is tightening of capital and banking facilities. It is not easy for companies to access credit. The retail industry is experiencing too much, or incorrect inventory levels. Rotating of stock is vital for any retail business. The retail companies have been reluctant to rotate any stock (Deloitte, 2012). Australia is a land of opportunities; young people are getting jobs and running the business. The young and inexperienced do not have the capacity to run businesses especially in the tough and rough economic climates. The retail industry has been slow to embrace the internet and social media. 7. Recommendation The Australian retail industry should embrace technological advancements in order to be able to achieve its strategic objectives. The use of online retail stores is increasing in the Australian economy. Retail stores should embrace online retail stores and social media in order to grow their business (Kumar, 2008). The Australian business is characterized by resistance to change. The retail companies have been slow in embracing the change of attitudes and consumer preferences towards organic and healthy food products. In this uncertain economic turmoil, retail companies should streamline their operations in order to make substantial cost savings, which would enable the company to have additional funds for spending.

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Mules, R. 2011. Supermarket Wars. 19(4), p. 2. Nenycz-Thiel, M. 2012. Value-for-money perceptions of supermarket and private labels.. Australasian Marketing Journal (AMJ), 20(2), pp. 171-177. Plunkett, J. W., 2008. Plunketts Food Industry Almanac 2008: The Only Comprehensive Guide to Food Companies and Trends. Houston, TX : Plunkett Research, Ltd. Tan, L. P. 2012. Intra-category competition, entry probability, and private label share: Evidence from organic food retailing in Australia.. Asia Pacific Journal of Marketing and Logistics, 24(3), pp. 414-432. Tootill, A. 2012. Cole In The Country. Sydney, Australia: Alan Tootill.

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