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MELBOURNE - After a tumultuous year in the Australian retail sector, in which food giant Coles rejected an A$18 ($20) billion takeover bid and cut ties with Myer, and rival Woolworths underwent a changing of the guard and jumped the Tasman, analysts predict a less eventful 12 months
ahead.
"I don't think it will be as eventful as this year," CommSec senior analyst Grant Saligari said.
But Mr Saligari said competition would escalate between the majors as recent cost-cutting exercises lowered prices for shoppers, and a major focus would be the success of the Coles Group in executing its new strategy.
Australia's second-biggest retailer, behind Woolworths, is under pressure to show it did the right thing by rebuffing an A$18.2 billion takeover offer from a private equity consortium.
The Coles board rejected a revised takeover bid from the group led by the US Kohlberg Kravis Roberts (KKR) in October, without putting the offer to shareholders.
The KKR consortium had bumped up its tilt to A$15.25 a share from A$14.50 a share, but Coles told shareholders they would be better served by the company pursuing a growth plan that was outlined by chief executive John Fletcher in September.
"We'll all be following those metrics and seeing how well they're able to deliver on that strategy," Mr Saligari said.
Melbourne Business School strategy professor Paul Kerin said Coles would be on watch to deliver on its promised A$1 billion-plus profit in 2007/08.
"A number of people in the market have been conned into thinking that that is a hard exercise to achieve, but frankly it's not," Professor Kerin said.
He said if shareholders had been able to take KKR offer, they would have been able to reinvest back into the market.
"The real comparative in the future is not the A$15.25, but what that would be if shareholders had got that money and invested it in the market," he said.
Coles is expecting flat profit growth in 2006/07 as it carries out a major restructure - bringing variety stores Kmart and Target, along with discount supermarket Bi-Lo, under the Coles brand.
In 2005/06 it delivered a net profit of A$1.16 billion, up from A$637.9 million in the previous year, but the result was boosted by a a one-off A$584 million profit on the sale of the Myer department store.
The underlying net profit was A$787.3 million, up 13.9 per cent from the previous year. It is also the forecast profit for this financial year.
While Coles focuses on internal change, rival Woolworths is expected to make improvements on its recent Foodland supermarkets acquisition in New Zealand.
FW Holst analyst David Spry said Woolworths would continue to cut costs while bedding down Foodland and taking on more market share growth in the market.
Woolworths snapped up the New Zealand assets of the Perth-based grocery chain a year ago in a A$3.3 billion carve-up of the company with grocery wholesaler, Metcash Ltd.
The purchase helped retired Woolworths boss Roger Corbett go out with a record billion-dollar profit for the company after seven years in the top job before passing the baton to long-serving lieutenant Michael Luscombe.
Mr Corbett, who has recently been appointed to the board of the world's biggest retailer, Wal-Mart, and is serving on the board of the Reserve Bank of Australia (RBA).
Woolworths reported a 24.3 per cent rise in net profit to A$1.01 billion for the 2005/06 year, and said it expected net profit to growth by between 16 and 21 per cent this year.
A possible cloud for the food and liquor giant could be in discretionary spending where higher interest rates may cut back consumer trips to Big W.
The RBA raised interest rates in November for the third time in 12 months to 6.25 per cent, its highest level in a decade.
CommSec's Mr Saligari said that while trading over the peak Christmas period was still unclear, the outlook for discretionary spending was "pretty good".
He said employment growth continued to be strong and inflation, a trigger for wage growth, looked to be under control.
"I think we'll actually see a strengthening of consumer spending through 2007," he said.
He said that although petrol prices were a volatile element, the outlook for prices at the pump was fairly stable, barring no major disruption.
Mr Saligari said grocery lower prices could be expected into 2007 as the big three, which includes the self-labelled third-force Metcash, the company behind the IGA chain, took advantage of their supply-chain reforms.
"To me that says they're going to be pushing aggressively into the market using some of the cost reduction to deliver lower prices to consumers," he said.
"It's going to be a pretty competitive environment next year for all of them."
David Jones has been a keen advocate of cutting costs to improve efficiency and drive profit margins.
The top-end retailer has largely sidestepped the interest rate and petrol price-fuelled malaise that hit its more downmarket counterparts, such as Big W and Kmart, during the year.
In November, it exceeded its first-quarter guidance, delivering a 6.3 per cent increase in sales to A$430.3 million.
Into the new year, FW Holst's Mr Spry said he didn't see David Jones being too much affected by interest rate rises.
"That part of the market doesn't travel the same way," Mr Spry said.
He said the now privately owned Myer may feel the squeeze of any economic downturn though.
"With employment rate we have, which is a key indicator, we are not going to have a disastrous discretionary sector, but it will come off a bit but not enough to affect Myer's repositioning," Mr Spry said.
Private equity group Newbridge Capital bought the 60 Myer stores for A$1.4 billion in June.
Private equity interest has been hot elsewhere in the sector, with clothing and shoe retailer Colorado Group, sporting goods seller Rebel Sport, outdoor-equipment chain Kathmandu Group and car parts wholesaler and retailer Repco Corp, among those also attracting bids.
Mr Saligari said interest in the sector would continue.
"You've still got a number of opportunities out there and I don't think liquidity for private equity players is going to dry up anytime soon," he said.
- AAP
