tag:theconversation.com,2011:/africa/topics/wesfarmers-1723/articlesWesfarmers – The Conversation2020-05-22T06:57:37Ztag:theconversation.com,2011:article/1392052020-05-22T06:57:37Z2020-05-22T06:57:37ZDon’t blame COVID-19: Target’s decline is part of a deeper trend<p>Wesfarmers’ decision to close or rebrand up to 167 of its 284 Target and Target Country stores should not come as too much of a surprise. </p>
<p>The once popular store has been ailing for years, outmanoeuvred by its successful and popular <a href="https://www.wesfarmers.com.au/our-businesses/kmart-group">sister business</a>, Kmart. </p>
<p>Up to 75 Target and Target Country stores will be closed, with the balance being converted to Kmart stores.</p>
<p>Its decline is due to a combination of poor market positioning, confusing product strategies, a declining middle class consumer market and too much similarity with Kmart. The impacts of COVID-19 are just the icing on the cake.</p>
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Read more:
<a href="https://theconversation.com/how-kmart-ate-target-a-story-of-retail-cannibalism-60052">How Kmart ate Target: a story of retail cannibalism</a>
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<h2>Spiralling sales and profit</h2>
<p>Wesfarmers acquired both retail chains when it took over the Coles Group in 2007. At the time Target looked the stronger business, and Wesfarmers <a href="https://www.reuters.com/article/us-wesfarmers-coles/wesfarmers-plans-coles-investment-restructuring-idUSSYD11087920070816?sp=true">considered selling all or part of Kmart</a>, or converting stores to the Target brand. </p>
<p>Just as well it decided to invest in Kmart instead.</p>
<p>Since 2012, Target’s profits and sales have deteriorated with Target realising its first <a href="https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4">loss of A$195 million in 2016</a>. </p>
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<p>How Target has performed since then has been obscured by Wesfarmers combining the business into a <a href="https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-annual-report.pdf?sfvrsn=0">Department Stores Division</a> including Kmart and Kmart Tyre and Auto Service. Target’s results were thus no longer reported separately. </p>
<p>But Wesfarmers’ <a href="https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2019-annual-report.pdf?sfvrsn=0">2019 annual report</a> noted its trading performance highlighted “the need for ongoing repositioning to further elevate quality and style, expand its digital capabilities, and differentiate the business from Kmart and other competitors”.</p>
<h2>High couture and cheap kettles</h2>
<p>One way Target confused shoppers was to offer collaborations with high-end fashion designers like Missoni, Stella McCartney, Dion Lee and <a href="https://insideretail.com.au/news/targets-next-designer-partnership-revealed-201511">Dannii Minogue</a>, alongside $2 kids’ tops and <a href="http://www.target-catalogue.com/target-catalogue-february-2015-back-to-school/">cheap kitchenware</a>. </p>
<p>The move frustrated customers unable to secure designer pieces and disenfranchised “value-seeking” customers. Many voted with their wallets, moving to Kmart. </p>
<p>Wesfarmers’ <a href="https://insideretail.com.au/news/wesfarmers-to-reposition-target-cuts-head-office-roles-201908">plans to differentiate Target</a> from Kmart involved focusing on higher quality apparel, soft homewares and toys to compete against more specialty and middle market offerings. </p>
<p>But the middle market is a challenging sector. It is now dominated by “fast fashion” players offering on-trend clothing and home furnishing. The pressures have led to the collapse of other middle market chains. </p>
<p>Wesfarmers was very aware of the risks associated with this strategy.<br>
Its 2017 <a href="https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0">annual report</a> stated: </p>
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<p>“Target’s strategy has been reset and the business is now focused on progressing changes to the operating model to better position the business to grow earnings into the future. This journey will be undertaken in an increasingly competitive apparel and general merchandise environment”. </p>
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<h2>Death of department stores</h2>
<p>The attempted shift in focus to a middle market department store only created more problems. </p>
<p>Department stores worldwide have faced challenging times in recent years. The past year alone has seen department store icons including Barney’s, Debenhams and JCPenney <a href="https://www.forbes.com/sites/laurendebter/2020/05/14/jcpenney-bankruptcy-protection-coronavirus/#5c84870521c8">file for bankruptcy or close for good</a>. Closer to home, Harris Scarfe <a href="https://www.afr.com/companies/retail/fallen-icon-the-undoing-of-harris-scarfe-20200109-p53q7j">went into receivership</a> in December 2019, while Myer and David Jones <a href="https://10daily.com.au/news/australia/a190829aclgz/david-jones-to-shrink-stores-as-profits-fall-20190830">have looked to consolidate stores</a>. </p>
<p>Department stores face many challenges from competition and changing consumer behaviour. However, a broader challenge is a <a href="https://www.oecd.org/social/under-pressure-the-squeezed-middle-class-689afed1-en.htm">declining middle class</a> that has been the cornerstone of the sector’s customer base. </p>
<p>Target’s strategy to move further into the middle market was always doomed for limited success. </p>
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Read more:
<a href="https://theconversation.com/death-of-the-department-store-dont-just-blame-the-internet-its-to-do-with-a-dwindling-middle-class-121499">Death of the department store: don't just blame the internet, it's to do with a dwindling middle class</a>
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<h2>Pandemic impacts</h2>
<p>Adding to department store woes is the COVID-19 pandemic. </p>
<p>Already reeling from a <a href="https://www.abc.net.au/news/2020-02-06/retail-sales-december/11937224">weak Christmas period</a> and the effects of the bushfires, retailers were hoping for a return to spending. Instead, they have been faced with store closures and possibly permanent shifts in consumer behaviour. </p>
<p>While some retailers have simply tried to survive the lockdowns, others are <a href="https://insideretail.com.au/news/ive-spoken-to-dozens-of-retail-execs-in-the-last-two-weeks-heres-what-i-learned-202004">re-evaluating their future</a>. For Wesfarmers, this means shifting focus from the struggling Target to the more popular and profitable Kmart. </p>
<p>But though the pandemic has undoubtedly had an unprecedented and substantial impact on the retail industry, in some cases it only accelerating outcomes already on the cards.</p>
<p>So Target is unlikely to be the last retailer to undergo radical surgery. Retailers like the <a href="https://www.smh.com.au/business/companies/hype-dc-platypus-owner-to-shut-stores-after-big-leap-in-online-sales-20200427-p54ni0.html">Accent Group</a> and <a href="https://insideretail.com.au/news/pas-group-may-shutter-underperforming-stores-in-restructure-202004">PAS Group</a> have flagged similar plans. </p>
<p>Expect further announcements as retailers evaluate how to survive.</p><img src="https://counter.theconversation.com/content/139205/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Target’s fall from grace involves poor market positioning, confusing strategies, and a declining middle class consumer market.Jason Pallant, Lecturer of Marketing, Swinburne University of TechnologyGary Mortimer, Professor of Marketing and Consumer Behaviour, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/934822018-03-16T06:59:39Z2018-03-16T06:59:39ZExplainer: why Wesfarmers is ditching Coles<figure><img src="https://images.theconversation.com/files/210759/original/file-20180316-104645-1l89e0v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Whoever buys Coles will have a huge store network. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Coles will <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/intention-to-demerge-coles---briefing-presentationdc83516999c863f7bfccff00000e9025.pdf?sfvrsn=0">soon be an independent company again</a>, with more than 800 supermarkets, nearly 900 liquor stores, 700 service stations, and 88 hotels. </p>
<p>Spinning off Coles is a great example of how good Wesfarmers is at entering and exiting markets. Buying <a href="http://www.wesfarmers.com.au/investor-centre/your-shareholding/corporate-transactions/coles-transaction">the ailing Coles in 2007</a> was a smart move.</p>
<p>But the supermarket sector has changed dramatically in the past decade in relation to intense competition, with the <a href="http://www.roymorgan.com/findings/7234-woolworths-coles-aldi-iga-supermarket-market-shares-australia-march-2017-201705171406">growth of discounters like Aldi</a> and the <a href="http://www.roymorgan.com/findings/6442-supermarket-loyalty-whats-that-201509072312">emergence of price-conscious shoppers</a> who simply shop across multiple brands of supermarket each week. </p>
<p>Customers have benefited from price deflation, but it is a different story for suppliers.</p>
<p>The nature of these relationships has regularly been <a href="https://www.smh.com.au/business/companies/battle-rages-between-supermarkets-and-suppliers-20151211-glkzoa.html">criticised</a> and <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed_inquiries/2010-13/dairyindustrysupermarket2011/index">investigated</a>. </p>
<p>A new owner will bring these matters back to the forefront. Ultimately, private equity firms and global businesses only purchase companies and enter markets where considerable return on investments can be made. </p>
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Read more:
<a href="https://theconversation.com/why-australian-supermarkets-continue-to-look-to-the-uk-for-leadership-71562">Why Australian supermarkets continue to look to the UK for leadership</a>
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<h2>Cash cows and dogs</h2>
<p>Most first-year business students deal with these conundrums and often rely on simple models like the classic <a href="https://www.bcg.com/publications/2014/growth-share-matrix-bcg-classics-revisited.aspx">Boston Consulting Group’s Matrix</a>. </p>
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<a href="https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=508&fit=crop&dpr=1 600w, https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=508&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=508&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=639&fit=crop&dpr=1 754w, https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=639&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/210762/original/file-20180316-104650-1v7g4tp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=639&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Boston Consulting Group’s growth share matrix.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>Businesses move around in these quadrants, depending upon external, macro-level impacts. A <a href="https://theconversation.com/how-kmart-ate-target-a-story-of-retail-cannibalism-60052">stronger Kmart</a> will push Target from a “Star” into the “Dog” category very quickly. </p>
<p>Wesfarmers has successfully moved Coles from “Dog” status 10 years ago to “Cash Cow”, but profits have <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-half-year-results-briefing-presentation.pdf?sfvrsn=0">slid in recent years</a>. </p>
<p>Coles also accounts for a staggering <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/intention-to-demerge-coles---briefing-presentationdc83516999c863f7bfccff00000e9025.pdf?sfvrsn=0">61% of the capital deployed</a> in Wesfarmers’ entire portfolio (which includes other retail brands, industrial, mining and energy businesses), but contributes just 34% of earnings before interest and tax. </p>
<p>The supermarket sector has seen a huge increase in competition in recent years, with the <a href="http://www.roymorgan.com/findings/7234-woolworths-coles-aldi-iga-supermarket-market-shares-australia-march-2017-201705171406">growth</a> of discounters like Aldi. There is also a <a href="https://theconversation.com/a-lidl-bit-of-grocery-competition-could-cause-a-coles-rethink-29891">possibility</a> of more international competition from the German discounters Kaufland and Lidl.</p>
<p>This month, Fred Harrison, chief executive of Ritchies, Australia’s largest chain of independent supermarkets, called for an end to the “price wars”. Metcash, a wholesaler for independent supermarkets, <a href="https://mars-metcdn-com.global.ssl.fastly.net/content/uploads/sites/101/2017/12/04085314/4-december-2017-metcash-limited-fy2017-results-announcement.pdf">recently delivered</a> a loss in its food and grocery business. </p>
<p>Coles itself has <a href="https://theconversation.com/down-down-and-cheap-cheap-are-gone-gone-why-supermarkets-are-moving-away-from-price-92996">signalled a move away from its strategy of slashing prices</a>. </p>
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Read more:
<a href="https://theconversation.com/down-down-but-not-different-australias-supermarkets-in-a-race-to-the-bottom-48151">Down, down but not different: Australia's supermarkets in a race to the bottom</a>
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<p>Other than putting cash back on Wesfarmers’ balance sheet, spinning off Coles creates two long-term revenue streams for Wesfarmers. </p>
<p>To begin with, Wesfarmers <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/intention-to-demerge-coles---briefing-presentationdc83516999c863f7bfccff00000e9025.pdf?sfvrsn=0">will aim to a hold 20% stake</a> in Coles. So some profits will continue to flow back to Wesfarmers. </p>
<p>More importantly, Wesfarmers <a href="http://www.wesfarmers.com.au/docs/default-source/asx-announcements/intention-to-demerge-coles---briefing-presentationdc83516999c863f7bfccff00000e9025.pdf?sfvrsn=0">intends</a> to retain “substantial” ownership in Flybuys, Coles’ loyalty program. </p>
<p>The value of loyalty programs is best highlighted by Woolworths’ <a href="http://www.afr.com/business/retail/woolworths-sitting-on-big-data-goldmine-20161013-gs1cgw">purchase</a> of Quantium in 2013 for almost A$20 million. </p>
<p>These programs hold a vast amount of data, giving Wesfarmers huge customer analytics capabilities with which to tailor promotions, product ranges and store layouts across all of its other retail businesses. </p>
<p>The new owners of Coles will also be eager to access this data. </p>
<h2>Who will buy Coles?</h2>
<p>While Wesfarmers will remain a minor shareholder, there will be plenty of interest in the majority share among private equity investors and international players (such as Walmart and Carrefour). </p>
<p>Walmart entered <a href="http://articles.latimes.com/1994-01-15/business/fi-12150_1_woolco-stores">Canada</a> through an acquisition, Mexico through a <a href="http://www.nytimes.com/1997/06/04/business/wal-mart-investing-in-mexican-partner.html">50-50 joint venture with Cifra</a> (Mexico’s largest retailer), and Brazil through a joint 60-40 (in favour of Walmart) with Lojas Americana. </p>
<p>Likewise, French retail giant Carrefour has adopted a range of approaches to international expansion, <a href="https://books.google.com.au/books?id=I9N-AgAAQBAJ&pg=PT91&lpg=PT91&dq=Carrefour+international+entry+by+acquisitions&source=bl&ots=BXiloQG4S4&sig=8r49Qg8FC3hknOK54WkSh-jxI5Y&hl=en&sa=X&ved=0ahUKEwjWuqH1_e_ZAhULhrwKHQLgBgEQ6AEIXjAI#v=onepage&q=Carrefour%20international%20entry%20by%20acquisitions&f=false">including joint ventures and acquisitions</a>. </p>
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Read more:
<a href="https://theconversation.com/can-coles-fly-buy-shopper-loyalty-6640">Can Coles (Fly) buy shopper loyalty?</a>
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<p>Ultimately, private equity investors and global businesses will only buy companies and enter markets where they can make a considerable return on investment. </p>
<p>Considering the declining margins in supermarkets, driven by low-cost operators like Aldi, it is likely that this will be done by squeezing suppliers. </p>
<p>On the other hand, a new Coles will no longer be constrained by Wesfarmers’ conglomerate ownership model. One of the challenges faced by large conglomerates is “<a href="http://web.a.ebscohost.com/abstract?direct=true&profile=ehost&scope=site&authtype=crawler&jrnl=19396104&AN=92630217&h=VyumJsgTcjJGU%2bguISQtNog1PODsD79BLX8JLKxN1%2beO8UkY3mjwKSFQjC%2bapn28ATRl%2bJo1tY0xYaiCMq%2fXsw%3d%3d&crl=c&resultNs=AdminWebAuth&resultLocal=ErrCrlNotAuth&crlhashurl=login.aspx%3fdirect%3dtrue%26profile%3dehost%26scope%3dsite%26authtype%3dcrawler%26jrnl%3d19396104%26AN%3d92630217">strategic inertia</a>”. </p>
<p>A separate business will lead to faster innovation, greater investment and potentially another battle for market share between Australia’s two big supermarkets.</p><img src="https://counter.theconversation.com/content/93482/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Spinning off Coles is a great example of how good Wesfarmers is at entering and exiting markets.Gary Mortimer, Associate Professor in Marketing and International Business, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/600522016-05-30T20:22:26Z2016-05-30T20:22:26ZHow Kmart ate Target: a story of retail cannibalism<p>Facing more than $1 billion in impairments and a further $145 million in restructuring costs, Wesfarmers’s Target is expected to post an end-of-year loss of $50 million. </p>
<p>It is no wonder that Wesfarmers chief executive Richard Goyder last week said “I would not rate this as one of my better days in the group”. However, this will become a great case study in illustrating the risk of a <a href="https://strategicthinker.wordpress.com/cannibalisation/">cannibalisation strategy</a>.</p>
<h2>Does cannibalisation work?</h2>
<p>Cannibalisation happens when a company offers a brand, product or service that competes with another within that same company. When this level of internal competition is directly head-to-head, only the strongest will survive. Shoppers and retail commentators have been seeing this play out across the Australian retail landscape with Kmart and Target. Yet, a limited degree of overlap can be a successful strategy if <a href="http://www.mcngmarketing.com/when-to-cannibalize-your-existing-products/#.V0uf9pN95Bx">well implemented and where markets are clearly defined</a>. </p>
<p>For example, Proctor & Gamble (P&G) adopted the famous “fighting brands” cannibalisation model in the 1930s, with laundry detergent brands like Tide and Cheer. While P&G accepts a small degree of cannibalisation, they ultimately and successfully inhibit competitors’ growth in the market. However, unlike Kmart and Target, each P&G brand of laundry detergent, tooth paste, cleaning product, has a separate position, targeting a different consumer.</p>
<h2>How Kmart ate Target</h2>
<p>Following the <a href="http://www.brandingstrategyinsider.com/2009/10/fighter-brand-strategy-considerations.html#.V0u0upN95Bx">classic “fighting brands” strategy</a>, Wesfarmers brought in Guy Russo to lead the reinvigoration of Kmart in order to take the fight to Woolworths’ Big W; and clearly came away as the victor. Fighter brands are launched by a firm to battle low price rivals. However, Kmart’s renewed success has come at the expense of Target. </p>
<p>Cannibalisation backfires when brands begin to look too similar. With increasing disposable incomes and an apparent insatiable desire for superior quality and “luxury for the masses”, mid-tier shoppers originally turned to Target for a range of popular brands at reasonable prices. But times have changed. Economic strains are now causing consumers to trade down, and many mid-tier and premium brands are losing share to low-price rivals. </p>
<p>Today, Kmart is where Target was seven years ago, with Kmart’s first-half earnings in 2016 at $319 million, while <a href="http://www.abc.net.au/news/2016-03-17/can-kmart-russo-turn-target-around/7255180">Target has slumped to $74 million</a>. Quite simply, Target lost its way and confused its core customer. </p>
<h2>How to confuse your shoppers 101</h2>
<p>When Target is selling $7 kettles and $10 children’s clothing, it is starting to look a lot like Kmart. Mixed with global fashion designers like <a href="https://www.target.com.au/jeanpaulgaultier">Jean-Paul Gaultier </a>and Stella McCartney, shoppers became confused with what Target stood for. One of the frustrations is that often a successful “fighter brand” like Kmart, once deployed, may have an annoying tendency to also acquire customers from a <a href="https://hbr.org/2009/10/should-you-launch-a-fighter-brand">company’s own premium offering</a>, like Target. </p>
<p>The mistake often then made is to implement some of the fighter brand’s successful components (such as $7 kettles) into your upmarket business; in this case, low priced Target basics. In doing so, Stuart Machin started to replicate Guy Russo’s EDLP (Everyday low prices) Kmart strategy and inevitably blurred the lines between the two retailers. </p>
<p>One of the ways to successfully ensure a good cannibalisation strategy is to ensure a strong brand loyalty to the original business. However, as Target moved further into increasing their range of private label products, brand equity reduced and shoppers migrated to the lower priced alternative, Kmart. Simply shoppers didn’t see the difference between a Kmart t-shirt versus a Target t-shirt. </p>
<h2>A fork in the road</h2>
<p>Wesfarmers and specifically, Guy Russo, face two options; either merge the two businesses under one name or keep both, but clearly differentiate them. The merging of retailers is nothing new. US retailers Sears and Kmart <a href="http://www.washingtonpost.com/wp-dyn/articles/A56358-2004Nov17.html">did just that in 2004</a>, and Coles and Myer in 1986. While merging two distinct retailers is difficult, rebranding your own business is much easier. </p>
<p>Despite this, such a merger between Kmart and Target <a href="http://www.smh.com.au/business/retail/target-and-kmart-merger-will-lose-sales-to-big-w-wesfarmers-warned-20160419-go9stk.html">has been criticised as risky</a>, suggesting that loyal Target shoppers will not be satisfied with the Kmart offer and drift to Woolworths owned Big W. </p>
<p>The alternative would be to differentiate; keep Kmart as the EDLP model and <a href="http://www.abc.net.au/news/2016-03-17/can-kmart-russo-turn-target-around/7255180">push Target back into the middle market</a>. Yet, this too would be risky, as a new Target would then compete with the likes of Myer, Harris Scarfe and potentially a glut of global fast fashion retailers. </p>
<h2>History repeats</h2>
<p>We only need to look back 10 years to understand how cannibalisation impacted two Coles’ businesses; Coles Supermarkets and the now defunct Bi-Lo Supermarkets. For a period of time, Coles found itself running two supermarket businesses, one a full-line business, and the other a low priced grocer. </p>
<p>Initially, both businesses had a clearly defined position and target market. However, over time, these two business started to resemble one another. Bi-Lo’s range grew, to include fresh produce, meat, bakery, delicatessen and the same national branded products sold in Coles Supermarkets. </p>
<p>As Aldi grew, and shoppers sought lower priced groceries, Coles adopted a “Down, Down” low price mantra, leaving Bi-Lo exposed. In order to reduce duplication and operational costs, Coles <a href="http://www.smh.com.au/articles/2004/08/26/1093518005940.html">merged their management and buying teams</a> in 2004. Some Bi-Lo stores were rebranded as Coles and others were closed.</p>
<p>In 2007, <a href="https://www.wesfarmers.com.au/our-businesses/coles.html">Wesfarmers acquired the Coles Group</a>.</p>
<h2>The future</h2>
<p>Ultimately, what Guy Russo will identify is that there is already far too much crossover between Kmart and Target and shoppers don’t see the difference. Targets’ core shopper have moved to Kmart, now satisfied with their basics and burgeoning home furnishings ranges. </p>
<p>Centralisation is soon to take place, with the closing of Target’s head offices, and plans to move the retailers’ support office closer to Melbourne. </p>
<p>Where you have two very similar businesses, serving the same market, with essentially the same offer; close one. The Kmart model works. Rather than merge, I’d expect Russo to rebrand Target to Kmart. </p>
<p>Economies of scale would deliver lower prices, even further than the <a href="http://www.dailymail.co.uk/news/article-2822979/So-make-jeans-7-Kmart-Target-Big-W-locked-head-head-battle-make-cheapest-denim.html">famous $7 jeans.</a> Operational and overhead costs would reduce as you remove duplication. </p>
<p>To push Target back into the middle market would be far too risky considering already the growth of global fast fashion retailers, <a href="http://www.afr.com/business/retail/clothing-and-accessories/harris-scarfe-lures-group-gm--from-myer-20140629-jgr02">South African-owned Harris Scarfe</a> and a refocused Myer. </p>
<hr>
<p><em>The piece has been altered since publication. It corrects that it was Coles, not Wesfarmers, which merged Coles and Bi-Lo management and buying teams.</em></p>
<p><em>The piece originally said Wesfarmers would consolidate Target and Kmart teams under one roof. Wesfarmers has said there are no plans to consolidate the teams.</em></p><img src="https://counter.theconversation.com/content/60052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If you can’t really tell the difference between Target and Kmart, you’re not alone.Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/547452016-03-16T19:18:53Z2016-03-16T19:18:53ZRetail outlook: big retailers feel the pressure of new challengers<p><em>It’s reporting season, and over the past few weeks some of Australia’s biggest companies have been releasing information on how they’re travelling. These reports reflect key themes of how things are going in key sectors of the economy. Over coming days we’re going to report on the results a handful of major companies in key sectors, transport, construction, retail, mining, insurance and banking. Today we look at the retail sector.</em></p>
<hr>
<p>Dominant retail giants Wesfarmers - owner of Coles supermarkets - and Woolworths hold a 70% of market share of Australia’s fresh food grocery market, but have had contrasting fortunes over the past few years. Half-year results for Wesfarmers and Woolworths for 2016 show very different outlooks.</p>
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<p>Meanwhile, the major retail players are continuing to feel the disruptive impact of smaller players such as Aldi and highly competitive market conditions; both will have employ new strategies away from the tried and true defensiveness that has worked in the past.</p>
<p>Wesfarmers <a href="https://www.wesfarmers.com.au/document/investors/asx-announcements/2016-3/1500-2016-half-year-results-presentation.html">reported a net profit</a> after tax of $1.4 billion, up 1.2% since the same time last year, while Woolworths <a href="http://www.woolworthslimited.com.au/icms_docs/182526_16_02_26_HY16_Earnings_Announcement.pdf">reported a net loss</a> of $973 million after a profit of $1.3 billion. Over the last few years Coles has seen stronger sales growth and <a href="http://www.smh.com.au/business/coles-outperforms-woolies--again-20130418-2i1ju.html">comparatively better market share</a>.</p>
<p>By contrast, Woolworth’s strategy problems with its home improvement business, Masters, has been widely ventilated. The company attributed $1.8 billion loss to the costs related to <a href="https://theconversation.com/woolworths-counts-the-cost-of-masters-blunder-with-food-business-under-fire-55385">its exit from Masters</a>.</p>
<p>Woolworths’ underlying profit was $925 million, still down 33% on prior year. Woolworths would hope that its exit from the ultimately costly Masters endeavour will serve as a boost to investor confidence. </p>
<p>Woolworths has also struggled with branding and has seen advertising agency changes over the last few years the most recent being the dropping of <a href="http://mumbrella.com.au/woolworths-appoints-mc-saatchi-343314">Leo Burnett and a return to M&C Saatachi</a>. </p>
<p>Perhaps more revealing to the outlook of the industry are some of the underlying similarities in strategy. Both Woolworths and Wesfarmers emphasised price deflation, cost reduction and further price cutting, as key strategies.</p>
<p>The companies <a href="https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/cheapest-groceries-australia">expect highly competitive market conditions</a> and consumers to remain price sensitive, and will largely focus on improving supply chain productivity, through cost reduction. Woolworths is reducing its spending on activities such as marketing, property acquisition and rent as part of $500 million in cost savings during the 2016 financial year (July 2015 to July 2016).</p>
<p>Likewise, Wesfarmers has <a href="http://www.woolworthslimited.com.au/icms_docs/182527_Woolworths_Limited_Half_Year_FY16_Earnings_Announcement.pdf">highlighted similar measures</a>, with <a href="https://www.wesfarmers.com.au/document/investors/asx-announcements/2016-3/1500-2016-half-year-results-presentation.html">cost cutting objectives</a>, the company hopes will allow them to lower their prices in the supermarket even further. </p>
<p>In an industry where profit margins are already low, such intense competition would carry significant risk. If sales don’t meet expectations, the retailers have little room to lower prices when margins are low. As a consequence, covering fixed costs like maintenance and rent of stores becomes increasingly difficult and the likelihood of making a loss is higher.</p>
<p>To some extent these price wars reflect the two retail giants directly competing against each other, but another factor is the disruption caused by new entrant Aldi. The supermarket chain has gained 11% of the market since it came onto the scene in 2002, using its <a href="http://www.theaustralian.com.au/life/weekend-australian-magazine/how-aldi-supermarkets-created-converts-in-australia/news-story/c9a22fdae3419fba96471adc61ae374e">streamlined, low cost supply chain</a> to undercut Woolworths and Wesfarmers on price.</p>
<p>Aldi is a unique player in this space. In the past Coles and Woolworths could exercise their market share and size to squeeze out small producers; but Aldi is a different beast, a global company with a presence in both Europe and the USA.</p>
<p>Aldi may not even be the biggest problem facing the locals, if <a href="http://www.smh.com.au/business/retail/move-over-aldi-more-discount-supermarkets-could-be-on-the-way-20140716-ztoiz.html">reports that European retailers such as German retailer LIDL are sizing up the Australian market</a> prove true. LIDL is the fourth biggest retailer in the world, with $128 billion in annual sales. Whatever hold true for Aldi is doubly true for LIDL. Other hypotheticals floated around Danish discounter Netto and UK grovery giant, Tesco. </p>
<p>The traditional defensive strategy against competitors employed by the Aussie giants relies on economies of scale, being larger than your rival and being able leverage this efficiency to deliver a cheaper end product or more controversially to loss lead and force your opponent out of business maintain your market share and eventually maximise your profit. </p>
<p>Woolworths and Coles are falling back on their old ways to try and beat Aldi, the companies’ corporate strategy for the most part is focused on a doubling down on the traditional squeeze out all newcomers approach. However Aldi brings global resources to the table that Woolworths and Coles don’t have access to.</p>
<p>In the retail sector Aldi will continue to steal market share from Wesfarmers and Woolworths more so if the companies continue with old strategies and don’t think of a way to innovate the retail space.</p><img src="https://counter.theconversation.com/content/54745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shumi Akhtar receives funding from the ARC, CIFR and a number of other organisations.</span></em></p><p class="fine-print"><em><span>Farida Akhtar receives funding from AFAANZ grant. </span></em></p>The big supermarkets, Woolworths and Coles, will need to think of new strategies to compete with new chains such as Aldi which continue to steal market share.Shumi Akhtar, Senior Lecturer, University of SydneyFarida Akhtar, Lecturer, Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/532822016-01-18T04:45:42Z2016-01-18T04:45:42ZMasters was spoiled from the start, now Woolworths must go back to basics<figure><img src="https://images.theconversation.com/files/108392/original/image-20160118-13796-67g9ew.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Or not.</span> <span class="attribution"><span class="source">AS 1979/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Masters, of Woolworths, has died at the age of five after a long illness. Its passing was a surprise to few. It will live on in the memory and superannuation accounts of Woolworths investors and, it is hoped, in the boardrooms of Australia forever.</p>
<p>Masters was a surprise offspring of the well-matured Woolworths family. Many rightly speculated it was conceived in response to the wonderfully successful Bunnings, from Woolworths’ corporate nemesis, Wesfarmers. It was an odd motivation for the venerable Woolworths family to bring into this world another sibling for such an established brood. With the benefit of hindsight, Woolworths would have been better to focus its time and energy on what was working well, rather than bringing into the world a business that could never thrive.</p>
<p>The adjective “prodigal” seems apt for Masters. Perhaps most associated with the Prodigal Son, the offspring who partied away his father’s wealth and then returned in sorrow. Masters consumed so much time, energy and money from Woolworths that it left Woolworths exhausted, demoralised and financially frustrated.</p>
<h2>An anatomy of a disaster</h2>
<p>Masters was never intended to succeed on its own merits. It <a href="http://www.smh.com.au/business/retail/woolworths-executive-grilled-over-dumped-masters-property-deal-20150527-ghawvt.html">was both spoiled</a> and a spoiler from the start. Woolworths hoped to sap the financial strength of Wesfarmers by reducing Bunnings’ operating margins – little did it know a <a href="https://theconversation.com/the-aldification-of-woolworths-is-destroying-its-value-48885">much smarter operator</a> (Aldi) was about the play the same trick on Woolworths’ main grocery and alcohol business – albeit much more successfully.</p>
<p>Rather than Masters weakening Woolworths’ corporate enemies, the reverse is true. Bunnings has grown from strength to strength and will now make even greater profits for its parent, Wesfarmers. Wesfarmers shares rose as much as 4% on the news. The Masters debacle has <a href="http://www.news.com.au/finance/business/retail/were-all-in-trouble-if-bunnings-keeps-dominating-masters/news-story/deb0f1abf8df5b632059a8316b19eb25">clearly reduced overall competition in hardware retail,</a> and its exit will not reverse this.</p>
<p>Woolworths’ retail competitors will also be carefully looking at the Masters stores that Woolworths will now abandon at great cost. Could these emerge as new locations for the next Bunnings, <a href="http://thenewdaily.com.au/news/2016/01/10/costco-gaining-ground-australia/">Costco</a> and the like? If so, this would be the second free kick by Woolworths with long-term consequences. Many Masters stores, however, are doomed to lay dormant and empty for many years as many Masters locations were simply duds.</p>
<p>In hindsight, it is worth pondering what might have been had Woolworths tried to replicate the success of Costco, building something new for Australian retail customers, rather than trying to wreck Bunnings’ success. There were always better options to pursue.</p>
<p>The damage by Masters has been both direct and indirect. The direct financial losses are huge, and yet to be finally quantified. Woolworths and its one-third partner Lowe’s have poured perhaps A$3.5 billion into Masters over the last six years. Lowe’s, with great prescience, negotiated an exit option that shifted much of the risk to Woolworths. This has cauterised Lowes’ losses to perhaps US$500 million – at the expense of Woolworths shareholders.</p>
<p>In the final analysis, the direct losses to Woolworths shareholders may be around A$2 billion when all is said and done. This is far from small change - but it is around the <a href="http://www.reuters.com/article/woolworths-masters-sale-idUSL3N1510SH">market capitalisation growth</a> that happened when Woolworths shares spiked by more than 6% after today’s announcement. Over the long term, however, much greater costs will emerge.</p>
<h2>Costs yet to come</h2>
<p>Extricating itself from long-term, yet newly established, leases will keep property lawyers busy for a while. How well these leases were negotiated by Woolworths will tell us much about how self-deluded Woolworths was about the viability of Masters.</p>
<p>The massive financial and managerial distraction created by Masters has left little time and money to focus on the core grocery business. This has been especially problematic as Aldi has been triumphantly focused on rolling out new stores across Australia. Reinvigorating Woolworths’ core business is an immediate and pressing challenge.</p>
<p>Combating the resurgent Wesfarmers, and the emergent Aldi, means life in general is about to get a whole lot more challenging for Woolworths’ management. Wesfarmers decision to <a href="http://www.smh.com.au/business/retail/wesfarmers-buys-homebase-for-705-million-20160117-gm7xgv">purchase the UK Homebase business</a> for around A$700 million will assist it in building global supply scale economies – adding impetus to higher margins for its Bunnings business.</p>
<p>Most prosaically, Masters has destroyed reputations and careers. Ironically, those most to blame have already <a href="http://www.smh.com.au/business/retail/woolworths-ceo-grant-obrien-to-depart-with-about-10-million-payout-20150911-gjkis1.html">exited with huge payouts</a>. It is the lives of Masters workers and their families that we should consider most. They, and Woolworths shareholders, will carry the burden for Masters far after the last store shuts its doors.</p><img src="https://counter.theconversation.com/content/53282/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is a member of the NTEU and ALP.</span></em></p><p class="fine-print"><em><span>Nigel Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The massive financial and managerial distraction created by Masters has left Woolworths little time and money to focus on its core grocery business.John Rice, Professor of Management, University of New EnglandNigel Martin, Lecturer, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/298912014-07-31T20:47:01Z2014-07-31T20:47:01ZA Lidl bit of grocery competition could cause a Coles rethink<figure><img src="https://images.theconversation.com/files/55377/original/42ckw5g8-1406780036.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Lidl: will Australian shoppers line up for another discount grocery chain?</span> <span class="attribution"><span class="source">Robert Wallace/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>Australian shoppers have inadvertently invited global discount grocers to our shores by demonstrating their readiness to adopt private labels. In 2001, German discounter Aldi <a href="http://www.abc.net.au/7.30/stories/s238058.htm">opened its first store</a> in Sydney. The impact this business format would have on the Australian grocery sector was underestimated. </p>
<p>Initially, Aldi was dismissed as a small “no-frills” food store that provided a small range of non-branded products. Thirteen years later Aldi has over 340 stores, is the third-largest food retailer in Australia and <a href="http://www.smh.com.au/business/retail/watch-out-woolies-aldis-rapid-growth-could-open-the-door-for-others-20140212-32i11.html">continues to grow</a> at a staggering rate, with plans to expand operations into SA and WA. </p>
<p>Aldi’s success has not gone unnoticed by other foreign-owned discount grocers, with reports German-owned Lidl is scouting for sites and Danish discounter Netto also <a href="http://www.smh.com.au/business/retail/move-over-aldi-more-discount-supermarkets-could-be-on-the-way-20140716-ztoiz.html">considered a candidate</a>. </p>
<p>Lidl has already established an office in Australia and its brand name is <a href="http://www.channelnews.com.au/sales_and_marketing/OBEVNPBA-exclusiveeuropean-retail-giant-lidl-set-to-take-on-aldi-in-oz.aspx">registered</a> with the Australian Securities and Investment Commission.</p>
<h2>What is Lidl?</h2>
<p>Owned by German-based Schwartz Group, <a href="http://www.lidl.co.uk/en/index.htm">Lidl’s</a> history dates back to the 1930s, when it opened as a food wholesaler. The first retail stores were opened in 1973 throughout Germany.</p>
<p>During the 1990s Lidl began its global expansion. By 2011, it had expanded its sites to 26 countries across Europe and Britain, generating a staggering <a href="http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/Industries/Consumer%20business/Deloitte_Global_Powers_of_Retail_2013.pdf">US$88 billion in annual sales</a>. Nearly 60% of this revenue came from international operations. </p>
<p>Currently the 8th largest food retailer in the world (Woolworths rates 17th, followed by Wesfarmers (Coles) in 18th position), the sales of Lidl continue to surpass the total sales of both Coles and Woolworths together. Operating from small footprints of between 750sqm to 1,750sqm, Lidl sells a small range of private label products, consumer electronics, apparel and general merchandise. </p>
<p>Similar to Aldi, Lidl has adopted the “no-frills” supermarket approach. Shoppers select products direct from open cartons, off pallets and deep freezers. Coin-released trolleys force shoppers to return them and remove the need for trolley collection contractors.</p>
<p>Staffing is minimal, there are no loyalty schemes and you pay for carry bags. Unlike Aldi, Lidl offers a small range of “branded products”, at very low prices. Although it imports many low-priced gourmet foods from Europe, it also sources many local products from the country where the store is located. </p>
<p>Keeping operational costs low, global buying power, a smattering of brands mixed with quality imported European private label products, and small stores that fit into localities large supermarkets cannot get into: that seems to be Lidl’s model for success.</p>
<p>But the simple duplication of the Aldi model is a risky strategy as Aldi already has already established itself as a household name in Australia. Lidl will need to clearly differentiate though range, service, price or location.</p>
<p>Although Lidl and Aldi co-exist in many countries, our dispersion and size of population will present a challenge. Finding suitable store locations also remains a challenge, despite Woolworths’ decision to <a href="http://www.afr.com/p/business/companies/land_banking_out_store_makeovers_NFGI0wJnUqa4nPlOT6f5GM">wind back</a> the practice of buying land for future developments.</p>
<h2>What does this mean for Australian players?</h2>
<p>Price pressure from Lidl is likely to lead to further discounting and a continued growth of private label groceries. We can also expect to see Aldi agressively push ahead more quickly with its plans for expansion into SA and WA, before Lidl gets a foothold. </p>
<p>Smart shoppers are questioning the price they are paying for groceries and are abandoning full-line, traditional supermarkets for low-cost food operators. Internationally, we have seen shoppers desert traditional full-line supermarkets and move to low-cost grocers like Lidl, Aldi and Netto. </p>
<p>In Britain, the market share of the traditional full-line supermarkets, Tesco, Asda, Sainsbury’s and Morrisons, fell. In contrast, Lidl’s sales <a href="http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10484622/Sunday-interview-Lidls-UK-boss-Ronny-Gottschlich.html">grew</a> by 13.8% year-on-year. Aldi’s market share in the UK also increased to 4.8% (up from 3.7%), while the UK’s largest supermarket, Tesco, dropped from 30.3% to 28.9%.</p>
<p>Although Lidl will compete directly with Aldi, Coles and Woolworths should not be quick to dismiss this potential new entrant. Concerned by customers shifting to low-cost, discount retailers, UK supermarket Sainsbury’s this year announced <a href="http://www.morningstar.co.uk/uk/news/AN_1403264257659517700/update-sainsburys-teams-with-netto-to-target-discount-grocery-market.aspx">plans</a> for a joint venture with Danish discount grocer Netto, enabling it once again to enter the UK market. </p>
<p>Quite possibly Coles’ dumping of its “no-frills” Bi-Lo brand may have been a little premature. Logically, it is not unreasonable to think Coles may do the same here in Australia to combat these international discounters.</p>
<h2>A win for private labels</h2>
<p>Private label products have come a long way. Both Coles and Woolworths have implemented a good, better and best private label strategy. As such, shoppers now feel confident in purchasing these products. The proportion of private label in Australian supermarkets is <a href="http://www.foodmag.com.au/features/private-labels">estimated</a> to be about 20% dollar share, which is a long way behind the UK at 46% and 32% in Germany, suggesting we still have a way to go. </p>
<p>With the majority of Aldi’s range being private label, it suggests shoppers are shifting to these generic brands. Australian shoppers also appear keen to trial novel and unknown brands.</p><img src="https://counter.theconversation.com/content/29891/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Mortimer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australian shoppers have inadvertently invited global discount grocers to our shores by demonstrating their readiness to adopt private labels. In 2001, German discounter Aldi opened its first store in…Gary Mortimer, Senior Lecturer, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/182372013-09-19T05:17:10Z2013-09-19T05:17:10ZMortgage price check in aisle four as Coles banks on future<figure><img src="https://images.theconversation.com/files/31501/original/fyvyq4bm-1379459592.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1000%2C667&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coles is believed to have applied for an Authorised Deposit-taking Institution licence, which would allow it to take deposits.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The news that Coles may be seeking a banking licence would, if confirmed, put the supermarket group and its parent company Wesfarmers in direct competition with Australia’s major banks. It would allow Coles to offer its 18 million customers, savings accounts and mortgages. </p>
<p>Coles is believed to already have an application with the Australian Prudential Regulation Authority for an Authorised Deposit-taking Institution (ADI) licence, which would allow it to take deposits under its own name. </p>
<p>The licence may be held by Wesfarmers, which already issues Coles insurance products and in September 2012, Coles trademarked the brand ‘Coles Money’ to facilitate a widening of its consumer proposition to include financial services. </p>
<p>The company’s major Australian competitor is Woolworths, which also has a range of financial service products, such as insurance and credit cards, issued under the brand of Woolworth’s Everyday Money.</p>
<p>The Australian supermarket groups are following a global trend of moving into the provision of services such as Telecoms and financial products, as well as retailing goods such as groceries. </p>
<h2>Supermarket and banking trends</h2>
<p>This trend is well advanced in the United Kingdom. Supermarkets such as Tesco and Sainsbury’s have been playing in the financial services space for over 15 years. Their experience will act as a guide for Coles’ prospects of success, as well as an indication of what threat the existing Australian players may face.</p>
<p>Tesco, in particular, has led the way in gaining a banking licence, and its financial services portfolio has grown from savings accounts, into credit cards and personal loans, then onto insurance products (car, home, pets, travel) and now into offering mortgages. </p>
<p>The supermarket’s Tesco Personal Finance began in 1997 as a joint venture with the Royal Bank of Scotland (RBS). Tesco then acquired the RBS stake in 2008 and launched the re-branded Tesco Bank in 2009. By 2013, Tesco’s customers held 6.5 million accounts and policies with Tesco Bank and the bank employed 3,000 staff. </p>
<p>In August 2012, Tesco added mortgages to its basket of financial services products and they encouraged their customers to take out a mortgage with them, by rewarding them with loyalty points as they repay their mortgages. This launch was described by Tesco as “a major milestone towards offering Tesco customers a full retail banking service”. </p>
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<img alt="" src="https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&rect=5%2C1%2C994%2C998&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/31459/original/p6qprqc4-1379399981.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Coles plans to add financial services to its basket of goodies.</span>
<span class="attribution"><span class="source">Imaged sourced from www.shutterstock.com</span></span>
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</figure>
<p>Tesco Bank has material market positions in two financial services products: credit cards (7% of the total market) and car insurance (5%). Less meaningful market positions are held in home insurance (2%) and savings accounts (1%). </p>
<p>Tesco customers who have savings accounts with the Bank can pay money into their account in any Tesco store in the United Kingdom, seven days a week. The savings can then be withdrawn via the 3,300-strong Tesco ATM network or at the checkout.</p>
<p>In the financial year 2012-13, Tesco Bank’s total revenue was GBP 1.02 billion and the trading profit was GBP 191 million, a margin of 18.7%. </p>
<p>This is one of the attractions for retailers to enter the financial services market as the margins are considerably higher than those earned through the retailing of groceries. </p>
<h2>Making the leap</h2>
<p>Coles is believed to have sold over 200,000 insurance policies, but making the leap to selling mortgages and checking/savings accounts to customers is a big ask. </p>
<p>New entrants to the financial services market should be welcomed as they will offer attractive products and excellent customer service. However, getting customers to ‘switch’ from their current provider of checking accounts or mortgages will be a challenge.</p>
<p>The possible entry of Coles as an ADI into Australia’s financial services arena will concern existing ‘players’. However, it won’t be causing them major anxiety because, as the Tesco Bank story reveals, the timeframe for breaking into this market is long-term.</p>
<p>Customers of supermarket groups are quite willing to change their providers for credit cards or their car or home insurance, but it is much more difficult to get them to ‘switch’ to a new mortgage or checking account provider. </p>
<p>It is these products that are at the heart of the relationship between a consumer and their ‘main bank’. </p>
<p>Switching providers in these key relationship products continues to be fraught with suspicion by consumers, and new entrants into financials services will need both patience and luck if they are to survive and prosper.</p><img src="https://counter.theconversation.com/content/18237/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Worthington does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The news that Coles may be seeking a banking licence would, if confirmed, put the supermarket group and its parent company Wesfarmers in direct competition with Australia’s major banks. It would allow…Steve Worthington, Professor, Department of Marketing, Faculty of Business and Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/39122011-10-24T02:19:32Z2011-10-24T02:19:32Z‘Two strikes’ law for shareholders, but will it curb executive pay?<figure><img src="https://images.theconversation.com/files/4752/original/Strike_one.jpg?ixlib=rb-1.1.0&rect=60%2C37%2C1959%2C1266&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Two strikes - a term borrowed from baseball, now being applied to Australian executive pay.</span> <span class="attribution"><span class="source">EPA/Arleen Ng</span></span></figcaption></figure><p>Australia’s new “two strikes” law giving shareholders more power to curb excessive executive pay packets, promises to shake up some businesses.</p>
<p>Homewares company <a href="http://www.smh.com.au/business/twostrikes-policy-hits-home-20111020-1ma8u.html">GUD Holdings has already been hit with a protest vote</a> from 42% of shareholders over the company’s remuneration report, under the new legislation introduced in July.</p>
<p>Under the new amendment to the Australian Corporations Act, if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report, then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days.</p>
<p>In addition, key management personnel whose remuneration is disclosed in the remuneration report are excluded from voting, ensuring those with an obvious interest in the outcome cannot vote.</p>
<p>So businesses have been put on notice.</p>
<h2>Executive pay </h2>
<p>There are few more controversial issues than executive pay.
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=595&fit=crop&dpr=1 600w, https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=595&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=595&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=748&fit=crop&dpr=1 754w, https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=748&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/4753/original/occupy_wall_st.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=748&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Occupy Wall Street protesters.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
In the US, the Occupy Wall Street movement, with its banner of “we are the 99%” has been vocally critical of Wall street executive pay packages.</p>
<p>Here in Australia, Qantas chief executive Alan Joyce found himself in the firing line for his large pay increase despite a damaging industrial dispute.</p>
<p>Last week, the Australian Shareholders Association indicated <a href="http://www.theaustralian.com.au/business/companies/asa-to-oppose-pay-changes-as-wesfarmers-moves-to-lower-bonus-hurdle/story-fn91v9q3-1226159646827">it would oppose the remuneration package of Wesfarmers chief Richard Goyder</a> and financial officer Terry Bowen at the company’s AGM in November.</p>
<h2>Non-binding vote</h2>
<p>Since 2005, Australian shareholders have had the right to vote on the remuneration report of their companies at an AGM. </p>
<p><figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/4743/original/goyder.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Wesfarmers’ chief, Richard Goyder faces shareholder displeasure.</span>
<span class="attribution"><span class="source">AAP</span></span>
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</figure>
But as this has been an advisory, non-binding vote, it has widely been viewed as lacking teeth.</p>
<p>The tougher Australian laws parallel similar moves in the Netherlands, Norway, Sweden and the United Kingdom which have responded to public outrage about executive pay levels.</p>
<p>The US has also introduced similar legislation effective from the 2011 proxy season in the wake of public concern about the role of excessive remuneration in the global financial crisis. </p>
<h2>New research </h2>
<p><a href="http://www.sciencedirect.com/science/article/pii/S1815566911000130">Our new research</a> backs the idea that shareholder voting is an effective way to discipline boards over unsatisfactory executive pay arrangements. </p>
<p>Using a sample of 240 ASX listed firms between 2001 and 2009, fellow UQ researchers Peter Clarkson, Shannon Nicholls and I investigated the pay-for-performance relationship and its effect on governance.</p>
<p>Pay-for-performance is an important metric because it measures how much executive pay changes or varies with firm’s performance. That is, it captures the incentive effect of the remuneration structure. </p>
<p>Not surprisingly, a weak pay-for-performance relationship is a focus for shareholder dissent. </p>
<p>Research around the effects of the UK advisory vote, for instance, showed shareholders were more likely to vote “no” on remuneration packages that are excessively high, had a weak pay-for-performance link or were greatly dilutive.</p>
<p>We found the average “no” vote on the remuneration report for our sample has increased steadily from 5.4% in 2005 (the first year of the vote) to 11.4% in 2009. </p>
<h2>Pay-for-performance </h2>
<p>The pay-for-performance relation strengthened across the nine year period, with enhanced remuneration disclosure and the non-binding shareholder vote the most important avenues to achieve greater monitoring and greater shareholder control of the executive remuneration process.</p>
<p>Our research findings have important implications for Australian regulators and company directors. Shareholders are increasingly voicing their concerns about excessive executive pay and have used the advisory vote effectively to flag inappropriate remuneration packages to the board.</p>
<p>Our research suggests that boards of directors have listened to their shareholders and have adapted pay packages to be more in line with shareholder expectations. </p>
<p>This season, the two-strikes rule gives shareholders an even stronger say on pay and there is every reason to believe that shareholders will use it. </p>
<p>For their part, company boards need to listen closely to what shareholders have to say about the remuneration report and respond accordingly. </p>
<p>Transparent and careful disclosure about remuneration is more critical than ever this reporting season if company boards are to avoid “striking out” with their shareholders.</p><img src="https://counter.theconversation.com/content/3912/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Walker does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s new “two strikes” law giving shareholders more power to curb excessive executive pay packets, promises to shake up some businesses. Homewares company GUD Holdings has already been hit with…Julie Walker, Associate Professor in Accounting , The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.