Coles Group is in the final six months of its four-year cost-out transformation known as 'smart selling' and is now planning for a fresh iteration of the program.
The transformation, announced in mid-2019, was intended to reduce costs groupwide by $1 billion by the end of FY23, and retiring CEO Steve Cain said this remains on track.
Automation, data analytics and artificial intelligence are among the technology enablers of this transformation, and the retailer's first half results point to ongoing investments in that area.
Accenture also has a role in the transformation, working with technology stacks from Microsoft and SAP.
The retailer has fairly consistently hit targets of around $100 million to $125 million in costs saved per half, or $230 million to $250 million per year, so far.
Cain said approximately $100 million of cost-out benefit was delivered in the most recent half year.
He flagged another iteration of the program is likely to begin sometime after the current one expires; which could make it similarly structured to Telstra's consecutive T22 and T25 transformations.
"With the smart selling program due to conclude this financial year, planning for smarter selling two is well advanced," Cain said.
The retailer's slide deck provided little additional detail on the planned second version of smart selling, though it suggested more investment in "digital, data and technology".
In the six months to December 31, Coles reported a range of improvements from its use of AI and digital technology.
“We saw the efficiencies in the business through the rollouts of fresh produce easy ordering to almost 300 stores enabling improved availability and freshness for customers through AI technology," Cain said.
The retailer expanded its use of advanced analytics and store specific data to optimise markdowns on perishable items.
The algorithm now works with bakery items, in addition to fresh produce, meat and dairy.
Coles also rolled out its ‘fresh easy ordering’ program to almost 300 stores across the half, “enabling improved availability and freshness for customers through AI technology” via the cloud-based platform, Relex.
Witron and Ocado progress
Providing an update on its Witron-powered distribution centres (DCs), Cain said Coles has “achieved a key milestone” by taking hold of the first facility in Redbank, Queensland.
In January, the Redbank centre began receiving in-bound inventory deliveries.
“I'm expecting to open this particular Witron facility on April 27, subject to everything going well," Cain said.
Outbound store deliveries are scheduled to start in the fourth quarter of FY23.
Calling it a “sight to behold”, Cain said the facility is the largest automated distribution centre in the southern hemisphere.
“As we look at our automation projects, I'm more confident than ever that they were the right investment for Coles at the right time and that's particularly so in the face of increasing wage costs across the nation and globally," Cain said.
External building works are not complete at the Witron site in Kemps Creek, NSW with Witron “installing its automation with a view that that will be completed in the third quarter of FY24”.
Construction progress on its Ocado online customer fulfilment centres (CFCs) has made progress in both NSW and Victoria.
The Truganina automated CFC in Victoria is now in recruitment mode with key leadership roles now in place, while the Wetherill Park automated CFC in NSW saw some work delays.
“Based on information from Ocado we're working towards the Victorian CFC being commissioned ahead of the NSW one with an incremental ramp-up period commencing mid-24 as previously advised, and the NSW CFC now in the second half of FY24," Cain said.
“The revised timeline is not currently expected to have a material impact on Coles estimated total capital expenditure of the project”.
Digital action
Over the first half, Cain said Coles launched its exclusive Flybuys member pricing and digitised Coles Express fuel dockets, which “offered greater personalised value through individually tailored offers".
Flybuys membership was up nine percent and redemptions were up by 14 percent.
It also expanded its supermarket ecommerce ‘Rapid Click & Collect’ offer to almost 400 stores, which lets customers order and pick up in under 60 minutes.
In addition, Coles said website and app improvements made it simpler to transact digitally.
“Finally, we accelerated investment in our retail media platform which we rebranded as ‘Coles 360’ focusing on technology and talent," Cain said.
Expected spend
Coles chief financial officer Charlie Elias said gross operating capital expenditure (capex) on an accrued basis was $623 million, an increase of $205 million compared to the prior corresponding period.
“Within supermarkets capex increase due to investments of Witron and Ocado transformation projects … but we have incurred approximately $900 million of the planned $1.37 billion capex [for these facilities] to date," Elias said.
“Other efficiency-related capex includes investments in service transformation, including trolley assisted checkouts and the fresh produce easy ordering program."
Liquor capex increased during the half, driven by new store openings and renewals - with 16 new liquor stores and 128 renewals - as well as investments in IT systems.
Capital expenditure is still expected to be in the range of $1.2 billion to $1.4 billion for the full year, inclusive of the major automation projects.
Total sales revenue rose 3.9 percent to $20.8 billion while net profit after tax reached $616 million.
As Cain steps down, long-time Coles employee Leah Weckert will take over as Coles Group CEO this May.
Weckert said Coles has “a transformational strategy that, through the hard work of our 130,000 team members, will deliver better experiences for customers and create value for shareholders.”
