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Example Business Essay
Analyse the business environment for Coles supermarket chain.
Coles is a national supermarket chain; liquor, fuel and convenience retailer in Australia. It was acquired in 2007 by Wesfarmers, “a diversified Australian company with strong, established market positions and recognised brands with the objective of delivering satisfactory returns to shareholders” (Wesfarmers, 2013, p.4)..
According to Wesfarmers (2013), Cole’s sole purpose has been to give the Australian people a shop they can trust, to deliver quality, value and service.
The main sources of business include the following:
- 756 full service supermarkets
- 810 liquor outlets fewer than three brand and 92 hotels
- 636 fuel and convenience stores
- More than 99,000 team members
As of 2013, according to Wesfarmers (2013), Coles operating results and drivers were:
- Revenue of $35.8 billion, up 4.9 per cent
- EBIT of $1,533 million, up 13.1 per cent
- Return on capital of 9.5 per cent, up from 8.7 per cent
- Total food and liquor sales growth of 5.5 per cent and comparative store sales growth of 4.3 per cent
- Over four years of industry outperformance
- Continued investment in customer value funded from cost reductions and business efficiencies
- Continued investment in product quality particularly fresh categories
- Ongoing transformation of the supply chain
- Launch of 90 more stores in renewal format and opening of 6 larger format stores and net space growth of 1.6 per cent
- Good progress on multi-channel initiatives including trials of new Coles Online website
- Growth in financial services including Coles Insurance and flybuys loyalty program
- Strong customer response to fuel offers and better range and value in the convenience store network
1.2 Scope and Approach
This essay takes a critical look at the company, its current position, the internal capabilities, and its external environment, and considers strategic changes necessary to ensure Coles maintains its traditional offering of long term value creation.
In developing this Business Analysis for Coles, the following tools have been used to assess present and future performance of the company:
- Situational Analysis,
- PEST Analysis,
- SWOT Analysis,
- 5 Forces Analysis
Furthermore, this essay gives consideration to the current growth strategies adopted by the company and questions if these practices are the best options going forward, for delivering sustainability of the group’s strategic framework.
2.0 Situational Analysis
2.1 Internal Market Audit
According to its 2013 sustainability report, Coles’ business focused on six key areas to improve its sustainability:
- Training and development of its team
- Customer trust in the produce range, value and quality
- Water savings and energy efficiency of the stores
- Workplace safety
- Supporting the local communities in which we operate
- Working with suppliers to further develop strong sustainable relationships.
2.1.1 Present Business Review
Wesfarmers’ “operating model is focused on ensuring each of its Group’s divisions has a very strong management capability and day-to-day operational autonomy, overseen by divisional boards and a well-established Group-wide framework where governance processes are coordinated over a 12-month operating cycle. This approach encourages strong accountability for operating results and assurance in areas such as:
- Strategic planning,
- Budgeting and monitoring of performance;
- Risk management, including internal audit and insurance protection;
- Group-wide human resource management systems such as executive remuneration and share schemes, talent development and key role succession planning;
- Centralised statutory accounting, tax, treasury and legal support.” (Wesfarmers 2013, p. 6)
Coles’ revenue in 2013 was $35.8billion, an increase of 4.9 per cent from the previous year. Its five year financial history report (See Appendix1) shows a steady growth in revenue generation. “Coles delivered earnings growth of 13.1 per cent to $1,533 million, building on the 16.3 per cent and 21.2 per cent earnings growth in the 2012 and 2011 financial years respectively” (Wesfarmers 2013, p. 3).
Figure 1: Five year Revenue Increase
Source: Adopted from Wesfarmers 2013, Annual reports.
Coles’ proposed strategies and prospects are to:
Embark on second wave of transformation with a focus on quality, service and value. And take advantage of further store renewal opportunities, supply chain transformation and operating efficiencies; as well as investment in category innovation, Coles brand and development, multi-channel integration and a tailored loyalty offer and a culture of continuous improvement.
“In 2013, the Coles turnaround strategy produced strong trading results by improving quality, service and value. The business continued to out-perform the industry and successfully completed the final year of a five-year turnaround plan” (Wesfamers, 2013, p.25)
2.1.2 Customer Analysis
From its various outlets nationally Coles handles more than 19 million customer transactions a week. Coles claims its customer-focused strategy continues to improve in efficiency and productivity, while investing in lower prices, delivering better quality through its ‘Australian First’ sourcing policy and developing a stronger store base through new store openings and renewing existing stores contributed to it steady revenue growth as the financial indicators have shown.
“The transformation of Coles since its acquisition has progressed with operational efficiencies and continued fund reinvestment in price. As well as a sustained turnaround of the business, providing benefits for consumers, suppliers and employees for the past five years thus, delivering a much stronger platform for future growth” (Wesfarmers 2013, p.25).
2.1.3 Financial Analysis
As of the last 2012/2013 financial year, Coles was able to generate earnings before interest and Tax (EBIT) of $1,533m as can be seen in figure 2 below.
Figure 2: EBIT
Source: Adopted from Wesfarmers 2013 Financial Reports.
Tables 1 & 2 below show the key financial indicators and Coles’ performance over the past few years.
Table 1: Key Financial data
|Earnings before interest and tax $m||1,533||1,356|
|Segment assets $m||20,367||19,940|
|Segment liabilities $m||4,145||3,676|
|Capital employed $m||16,114||15,572|
|Return on capital employed %||9.5||8.7|
Source: Adopted from Wesfarmers 2013 Financial Reports
Table 2: Key Financial Indicators
|For the year ended 30 June||2009||2010||2011||2012||2013|
|Earnings before interest and tax ($m)||831||962||1,166||1,356||1,533|
|Capital employed (R12) ($m)||15,140||14,886||15,018||15,572||16,114|
|Return on capital employed (%)||5.5||6.5||7.8||8.7||9.5|
|Capital expenditure ($m)||606||683||840||1,218||1,181|
Source: Adopted from Wesfarmers 2013 Financial Reports.
As reported in the Wesfarmers 2013 Financial Reports and shown in table1 above it can be observed that, for year 2012/2013, Coles has generated a healthy return on capital employed (ROE) of 9.5%, and improvement from 8.7% for the previous year. An increase in capital expenditure and liabilities has been due to the company’s support for net capital investments across the Group. This is up to an increase of $1.5 billion to $1.9 billion in 2014.
“The group also managed strong credit ratings with Moody’s Investor Service upgrading Wesfarmers’ issuer and senior unsecured long-term debt rating from Baa1 (positive) to A3 (stable) consistent with the Group’s credit rating from Standard and Poor’s of A- (stable)… It settled all outstanding debt in the name of the Coles group and continued to neutralise the dilution that would otherwise have occurred from the Dividend Investment Plan and Employee Share plans”(Wesfarmers 2013, p. 13).
Interests, income and expenditure are however not allocated to operating segments at Wesfarmers. This type of activity is managed on a group basis. Revenue and earnings of various divisions are also affected by the effect of high seasonality such as, for the retail divisions like Coles, earnings are typically greater in the December half of the financial year due to the impact of the Christmas holiday shopping period on the retail business.
2.2 External Market Audit
Given the nature and scale of Coles’ business, the impact of macro and micro forces on its operations is considered to be relatively large compared to the standard in the industry. The external market has been assessed based on PEST analysis and Competitor analysis.
2.2.1 PEST Analysis
To explore how the macro environment has impacted the supermarket chain industry and Coles specifically, a PEST analysis has been used, which consists of Political, Economic, Social and Technology factors as shown below.
Figure 3: PEST ANALYSIS – Coles Group Ltd
i. Political Factors
The supermarket chain industry attracts a great deal of attention from the government, non-governmental organizations and even advocacy groups. Due to the size of the industry and how significant a component of the economy and social welfare of countries it is, it has trigged debates on the future and current state of the industry on a global basis. The industry is mature in many countries and in Australia, it is considered a ‘duopoly’, which is a market situation where “two companies own all or nearly all of the market for a similar product or service” (Kumar & Sharma 1998, p.229).
With regards to Coles and the supermarket chain industry in Australia, the political situation as described in the preceding paragraph holds true. According to the Australian Competition and Consumer Commission, Australia is one of the largest importers of grocery products and it’s a key contributor to the economy of neighbouring countries. Coles is also an equal opportunities employer which provides equal employment opportunities nationwide. Coles also sources products responsibly and contribute positively to the communities in which it operates.
Other political factors that have an impact can include:
- Government initiatives and subsidies for local produce and foreign export policies
- Legislation for local farmers’ protection
- Market deregulation for foreign groceries to compete
ii. Economic Factors
The Supermarket chain industry is a high-risk industry, which requires a substantial strategic planning process, customer satisfaction and significant investment. To compete many companies have pursued alliances and joint ventures with shared facilities and outright buy outs to maintain the cost. The global recession of the past years has also had a significant impact on smaller retailers and the supermarket industry as a whole.
Other economic factors that have had an impact include:
- Rise in currency rates
- Competition from developing countries
- Competitor rivalry
- Mergers and Acquisitions of big players
- Market seasonality and trade cyclesSupplier and customer drivers
iii. Social Factors
Aging populations and longer life expectancies, changing taste, healthy living styles and specific dietary requirements have increased demand for more organic food, and have been an important factor in the growth of new brands. In the US and UK, greater life expectancy will depend on diet, exercise and a positive attitude to life and increasing knowledge, according to Newell et al (2006). The Australian government’s plays an important role in promoting exercise, healthy living and a positive culture, which in effect can reduce consumption of certain brands and product demographics for Coles.
iv. Technological Factors
Increased use of the Internet has helped to reduce media costs and also made room for increase innovation in the supermarket chain industry. Coles has capitalised on the internet to continue to develop its online sales platform which has thus managed to attract interest from younger audiences and increased sales significantly.
2.2.2 Competitor Analysis 5 Forces
The Five Forces model developed by Michael Porter provides a frame work to identify the competitive nature of an industry. Even though extremely subjective, a broad Five Forces analysis indicates that competitive rivalry within the supermarket chain industry is medium in Australia.
Figure 4: Porter’s Five Forces Model
Based on the research and competitive analysis carried out and relative to Porter’s five analyses as shown in figure4, it can be observed that:
As a known fact that, “Australia’s grocery markets is one of the most concentrated in the world, Woolworths and Wesfarmers (owner of Coles) account for almost 80% of supermarket sales, 60% of alcohol retail, 50% of petrol retail and 40% of all retail in Australia” (Ethical Consumer Group 2014). With their large market share they have and continue to exert considerable influence over suppliers and make the playing field extremely tough for much smaller independent retailers such as IGA, Foodland, 7-Eleven, Lucky 7, BP and several other liquor retailers. See figure 5 below.
Figure 5: Australian Grocery Market Share
Source: Ferrier Hodgson – Ferrier’s Focus May 2011
from Wesfarmers and Woolworths annual reports 2010, NARGA November 2010 Report, Master Grocers Australia December 2010
Thus, Coles has only one major competitor – Woolworths; and a few direct competitors such as Aldi and Metcash. These four, Coles inclusive make up the big players in the industry. With each of them having a different and unique operating model, competitor rivalry is therefore high to medium. The market concentration of private label brands from these giants have been blamed for Australia having the fastest rising grocery prices in the developed world. Threat of substitution is therefore also high to medium because there are only four main competitors with similar prices. This is the same reason why customer bargaining power is medium to low, and threat of market entry to compete with the big four is very low. Other competition therefore can only come from local harvests, independent grocers and small supermarkets and recently Costco.
3.0 SWOT Analysis
As a result of the internal and external market audits undertaken, a complementing SWOT analysis for Coles’ group will help to evaluate areas of strength, weaknesses, growth opportunities and threats for the company. Results are shown in figure 5 below:
Figure 6: SWOT Analysis for Coles Group
In conclusion, there are no real threats or key issues for Coles presently except for the recurrent price wars with its major competitor and concerns about the sustainability of these battles. With continuous market dominance however, leading to Australia’s powerful supermarket duopoly, this could be termed as inhospitable and leaving consumers to revel in cheaper staples.
A key to survival of any business is the need to increase revenue and reduce dependence upon financing via debt bearing instruments. Coles, in respect to these strategic options is already in the process of developing new initiatives by reducing its debts and focusing on quality, service and value. Coles is in the forefront of innovation by taking advantage of further store renewal opportunities, supply chain transformation and a strategic approach to improved operational efficiencies and continued fund reinvestment in price.
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Appendix : 5 year financial History
|All figures in $m unless shown otherwise||2013||2012||2011||2010||2009|
|Summarised Income Statement|
|Other operating revenue||410||395||362||342||341|
|Operating profit before depreciation and amortisation, finance costs and income tax||4,729||4,544||4,155||3,786||3,803|
|Depreciation and amortisation||(1,071)||(995)||(923)||(917)||(856)|
|Income tax expense||(965)||(918)||(784)||(650)||(474)|
|Operating profit after income tax attributable to members of Wesfarmers Limited||2,261||2,126||1,922||1,565||1,522|
|Capital And Dividends|
|Ordinary shares on issue (number) ‘000s as at 30 June||1,157,194||1,157,072||1,157,072||1,157,072||1,157,072|
|Paid up ordinary capital as at 30 June||23,290||23,286||23,286||23,286||23,286|
|Fully-franked dividend per ordinary share (declared) (cents)||180||165||150||125||110|
|Earnings per share (weighted average) (cents)||195.9||184.2||166.7||135.7||158.5|
|Earnings per share growth||6.4%||10.5%||22.8%||(14.4%)||(9.0%)|
|Return on average ordinary shareholders’ equity (R12)||8.9%||8.4%||7.7%||6.4%||7.3%|
|Fixed charges cover (R12) (times)||3.0||2.9||2.8||2.5||2.2|
|Net interest cover – cash basis (R12) (times)||12.2||10.8||9.5||6.8||5.0|
|Financial Position As At 30 June|
|Net tangible asset backing per ordinary share||$4.69||$4.45||$4.12||$3.61||$3.13|
|Net debt to equity||20.2%||19.1%||17.1%||16.3%||18.3%|
|Total liabilities/total assets||39.7%||39.4%||37.9%||37.1%||37.9%|
|STOCK MARKET CAPITALISATION AS AT 30 JUNE||45,936||34,846||36,913||33,171||26,337|
Source: Adopted from West farmers 2013 Annual Report