Monday, 02 April 2012

Coles: How Far Down Will They Go?

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It’s interesting that the guy called in to turn Coles’ fortunes around in the short term demanded cash, not shares, as part of his package, no?

There’s an old trick they use in movies, of making someone appear harmless right up until the point where they pick your pockets or have a knife at your back. Good guys, bad guys, the technique is the same... think Captain Jack Sparrow, for example, or Ian Holm’s android in Alien. By the time the threat is revealed it’s too late.

Lately, that’s how I feel about Coles. Australia’s second biggest supermarket chain has rebuilt itself as our daggiest retailer on the back of an advertising campaign that shouts “we’re dumb and folksy, shop with us” but that image hides a much darker reality. While we’re laughing and cringing at their antics, we’re missing what’s happening behind the scenes.

Coles has always been in the shadow of its main rival, Woolworths. Other supermarkets have come and gone but the reality is that groceries in this country is a two horse race, and Coles has always been second past the post. So they re-wrote the rules of the game, poaching Ian McLeod from British car-parts retailer Halfords and promising him a massive wad of cash if he could turn things around.

Superficially the results have been stunning. McLeod has delivered on his promise; business is booming, profits are way up and things are looking rosy. For him, anyway. Long-term, I believe Coles is in serious trouble and this strategy is only making things worse.

Take their ads. The writing was on the wall when they ripped off Status Quo for the first “Down, down” commercial, with the big red hands. I still have nightmares about that ad. It was terrible, ear-bleedingly embarrassing and looked like the kind of budget ad you’d see on late-night TV, but that was the point. It was so awful it worked.

Inspired by this, they’ve released a succession of commercials that have consistently pushed the limits of how low they’re prepared to go. Downtown was bad, Normie Rowe’s BBQ was worse and I’m pretty sure the recent “No freshness like Coles freshness” ad was responsible for an outbreak of smashed flat screens across the country. Worse, they’re playing these ads in their stores... now that’s just cruel.

Then there’s the Masterchef association. Yes, I know Masterchef has been a massive success story, one that’s spawned a whole new generation of celebrity chefs (because you can never have enough celebrity chefs), but it’s also given us Curtis Stone. And Stone has become the face of Coles, with his $10 meals (ta daah!) and lifesize cardboard cutouts in every store. Even Stone has caught the goofy bug, hamming it up with Rowe (I can’t really call it singing) and mugging for the camera every chance he gets.

That’s the image Coles has decided it wants, and on the whole we’re buying it. But while we’re shaking our heads at the inanity, Coles is quietly, even ruthlessly going about its business.

Take the price wars. $1 milk and $1 bread may sound great for us consumers, and it sure gets customers through the door. But this savage discounting war which was started by Coles has been wreaking havoc on our growers, our farmers and our suppliers. Maybe Coles is paying good money for these lines and absorbing the loss themselves, but there’s no way branded products can compete. The ripple effect is hurting the infrastructure in ways we can only begin to imagine.

Then there’s the house brands. This was a strategy that apparently turned Tesco into the dominant player in the UK’s supermarket game; find suppliers who will package their product with house brand labels and load up the shelves, again at the expense of smaller brands. If the suppliers won’t play along, threaten to cut their branded products altogether. Coles isn’t the only one doing it but they’re certainly leading the charge. Maybe they should take another look at the UK; Tesco may have shone for a couple of years, but they’ve slipped back to the pack now. Another short-term strategy, which can only hurt the Coles brand in the long run.

One thing a lot of people have missed is that our farmers, after years of drought, have had a pretty good year or two. Crops have done well and there’s a lot of quality produce on the market. Coles have taken full advantage of the glut, offering the farmers basement prices for their stock, knowing full well that if they refuse, there are plenty of other growers who won’t. And surprise surprise, suddenly Coles is leading the price war again, only this time it’s on fruit and veg.

None of this can last... not that McLeod would be too concerned about that. With just over a year left on his contract, all he needs to do is keep the business humming along for a little while longer and he’ll pick up his full bonus entitlement. And that will bring his pay cheque for the past five years to somewhere around $38 million. Cash of course, not shares... he stipulated that quite clearly, which may be an indication of his confidence in Coles’ performance after he’s gone.

What will happen when the public gets sick of the goofy antics? When Masterchef fades away (as all reality TV shows inevitably do) and Curtis finds himself out of a job? When the crops aren’t so good, but we consumers continue to demand quality produce at bargain basement prices?

Prices will rise, sales will fall, and the man behind it all will be negotiating his next multi-million dollar contract somewhere new. Or maybe retired... $38 million is a tidy sum after all. And as the penny drops, share prices will start spiralling down...

Down, down.

Read 2341 times Last modified on Saturday, 04 August 2012
Tom Cummings

Tom Cummings is a former problem gambler and advocate for gambling reform. He blogs about gambling and is running a gambling reform campaign (with a petition you should sign at www.clubpubfail.com)

Follow Tom on twitter @cyenne40

www.cyenne.com