Critical To Coles Myer Shareholder Value example essay topic

Coles Myer is Australia's largest retailer with more than 1,800 stores throughout Australia and New Zealand. The company's aim is to create benefits for every stakeholder by being the best retailer in every market in which the company operates. Coles Myer is the Australia's largest non-government employer with over 160,000 staff and spends approximately $19 billion a year buying merchandise and services from over 61,000 suppliers. There are various factors undermining the decline of Coles Myer performance and shareholder value, both externally and internally. In this report we will analyse Coles Myer, in terms of major financial, marketing and organisational drivers presently influencing the company's shareholder value by using the value driver framework. Coles Myer is a large organisation; we will only be concentrating on the important aspects that we have ascertained.

The concluding section of the report will address the major challenges in altering the drivers to increase Coles Myer shareholder value in the future. 2. Financial Value Drivers A marketing strategy only makes sense if it is likely to increase the value of a business and Doyle (2000) suggested that to determine whether strategy make sense, long-term cash flow have to be estimated in a true valuation, rather than boosting the cash flow in short-term based by scarifying the long-term objectives. While shareholder values and financial value drivers are the objectives of business, marketing strategy lies at the heart of value creation. Marketing value drivers will determine the process and marketing strategy to achieve and maximise the shareholder and financial values. 2.1 Level of operating cash flow 2.1.

1 Sales Growth In 2001, J. Fletcher aimed to reach the target of $800 million annual net profit by July 2006. Since then, Coles Myer has struggled to meet the analyst's forecast periodical profit and sales growth. Solomon Lew commented that the company will need a compound growth rate of 25% per annum while the star business which is the food business was struggling to grow more than 2-3% by 2005. This means that the only way Coles Myer could reach its growth target is to rely heavily on cost cutting measures (Operation Right Now). 2.1. 2 Operating Margins (Higher Prices and Decreases in Cost) The key to a sustainable competitive advantage is by commanding a price premium or by doing things cheaper or doing both. As Porter (2001) illustrates that cost and price advantages can be achieved in two ways, operational effectiveness or strategic positioning.

What is clear in the retail industry is that the consumers are very elastic to price. Thus it is fairly impossible to command a price premium in the market unless added value is presented on a platter. The retail branches (Myers-Grace Bros and Target) had relied on heavy discounting to clear their inventory during the post-Christmas periods, a price-war between industries retailers will most likely occur. This in turn generates a negative value to sellers as the bargaining power is shifted to the buyer. As Porter (2001) suggests with more competitors selling largely undifferentiated products, the basis for competition shifts ever more towards price. Clearly, the net effect on the industry's structure is negative.

It is probably due to the realisation of the above-mentioned eventualities that Coles Myers tailored their focus on "Operation Right Now" as a cost-cutting exercise first and foremost to boost their operating margin. 2.1. 3 Investments One of the investments that Coles Myer has embarked on is a fully integrated supply chain system which is a key to improving 'asset turn'. It was predicted that if Coles Myer can lift its asset turn by one-third, it could improve net profit by between 265 and 38%. However, the investment community is convinced that this larger then expected investment plan will take a long time to bring a return on investment. 3. Market Value Drivers 3.1 Market Selection The fundamental objective of the business is to target the 'right' customers who create shareholders value.

Clear market positioning is essential for retailing industry. Coles Myer suffers from the lack of focus and clear strategy due to the fact that the company is simply too big to efficiently mange its division. More importantly, Coles Myer is trying to operate a combined strategy, the two are, high-volume, low-margin retailers (e.g. Kmart and Target) and retail specialists focusing on a single retail category (e.g. Office works, Mega mart and Myer-Grace Bros). Mead (2003: cited in Reading Pack) commented that, these two types of retailing require different retailing skills and different corporate and marketing strategies and separate and therefore, independent organisational structures. Furthermore, there diversified interest in Coles-Grace Bros, Target and Kmart do create a cannibalistic effect.

By offering product discounts with no convergence to the business strategies of the other two, detrimental effects on the sales performances across all three brands do occur. 3.2 Customer Loyalty Hannen (2001: cited in Reading Pack) said that keeping existing customers is cheaper than finding the new ones. However, the retailing industry is a 'generic market' and a lot of effort is needed to build meaningful relationships with the consumers. Coles Myer has done very poorly in retaining existing customer in two ways. Firstly, "Fly Buys" as a loyalty program is not appealing to consumers as they have to spend a significant amount to attain rewards. The saturation of the membership numbers has quantified this ailment in the loyalty program.

There are also no plans to integrate "Fly Buys" to the Coles Myer credit card as well. Secondly, Coles Myer loses out to Woolworth in customer retention by not having a petrol discount scheme. This is a major stimulus that Woolworth uses to gain market share in the food businesses. 3.3 Strategic Relationships It is known that Coles is trying to introduce a petrol discount scheme that can compete with Woolworth's. In order to realise this competitive tool, Coles Myers will need to develop and sustain strategic relationships with Shell and MasterCard. The offering must translated into value for the two partners or else it will definitely fall short.

3.4 Branding Coles Myer is in the process of re-branding its retail businesses. As Hannen (2001) describes moving Myer-Grace Bros more upmarket. With Target offering affordable, trendy and high quality merchandises. And K-Mart will position as a low-cost discount department store catering to the entire household. Evans (2003) have noted that Myer Grace Bros has embarked on a new advertising campaign under the "My Store" banner and is trying to reposition itself to target the top 40 per cent of households by income, with a key focus on women aged between 25 and 49. The closure of two Grace Bros stores and the expected closure or conversion of ten more stores into Target or K-Mart stores is well in line with their refocused branding strategy.

4. Organisational Value Drivers 4.1 Strategy Coles Myer is a suffering from the effect of its size. They have tried to combine two strategies which are 'low cost, high volume basic need' and 'speciality retailing'. This resulted in a lack of focus as the company is operating in many market segments under the same strategy.

The lack of clear positioning of each their business inevitably caused overlaps in market positions. 4.2 Leadership The lack of retailing experience on the board is a drawback. The departure of Solomon Lew left Patty Akopiantz as the only director with retail experience on the board. Constant bickering and politicking among the board members have caused much instability among investors.

4.3 Staff Hannen (2001) suggested that one of the most important tasks for Coles Myer is too lift staff moral and dismantle the culture of competition between various Coles Myer businesses. Every Coles Myer store operates as a stand alone unit and they often compete for the same market share. This developed a culture of internal rivalry which to a great extent demoralized the staff. 5. The Major Challenges in Altering the Drivers for Shareholder value. Organisation with the resources, capabilities and culture to operate a strategy is probably more important than the strategy itself.

Doyle (2000) suggested that delivering strategy depends upon the core competencies of the business. As well as culture and attitude of people in the organisation which ensure that competencies are utilised appropriately. As the issues of staff and leadership have been addressed in the previous section, the following discussions will entail our other perspectives of the major challenges that are critical to Coles Myer shareholder value. 5.1 Re-Positioning The first obvious issue is should Coles Myer continually pursue a 'growth strategy' in trying to reach the illusory target of $800 million net profit by 2006. Is it achievable?

The answer is very unlikely, since there are limited opportunities for growth in a retail industry where intense competition is the mainstay. Other then the food business, it seems like there non-food businesses are heading south. Myer Grace Bros has already been identified as a cash cow with no growth opportunities. Taking the Gulf War into account, consumers will be hard press to source for cheaper buys in their retail experience. Most may feel that this in turn may generate sales growth for Target and K-mart. We believe that the sales growth of the two brands will definitely be positive if all things been constant.

What we are unsure of is how much cannibalization will happen. At present, there is no distinct differentiation between Target, K-mart and Myer-Grace Bros. Without any added value, the overall sales curve of Coles-Myer's non-food business will not increase. Their commitments to the non-food business do create a worrisome issue for their food and liquor businesses. In the process of radical changing the ailing businesses, how much focus will Coles Myer forgo to their food business competitors? We feel that this is a area which needs readdressing.

5.2 Technology The implementation of the fully integrated supply chain system must complement their existing way of competing. Other then the lack of comprehension by investors and shareholders, a rollout in technology does require a re-alignment of business strategies. What we do perceive as a major challenge is the size and the diversified interest of the organisation. To achieve full integration across the company is risky.

Though untethered information flow does allow a competitive advantage in supply-chain management, we feel that Coles Myer should consider running different systems for the three brands. This will allow Coles Myer to have greater flexibility when they do decide to sell off any one of the brands. Furthermore, using different systems or vendors will allow Coles Myer to evaluate, contrast and compare on what serves them best in the future. 5.3 The "Me-Too" Strategy One of the challenges that Coles Myer will face will be in their attempt to play catch-up to Woolworth in the petrol discount war. As Woolworth's petrol discount scheme has been in place for a long time, Coles Myer will have to present a strong offering to win back the market share lost to their competitor. This may not be easy as consumers will be reluctant to change if the service, location, value and customer loyalty offered by Woolworth is superior.

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