December 4, 2014

Talk with Coles legend Ian McLeod

Ian McLeod, Coles/Wesfarmers (photo: Frank Nürnberger)
We are amused: Success at Coles makes for a happy manager
Strewth, blimey cobber! An offer to interview a top exec at an Ozzie retailer in the middle of Germany is about as unlikely as meeting a kangaroo or a dingo on the way to work.

But like many surprises from the Lucky Country, this one had a logical reason and a seam of gold. Ian McLeod, Group Commercial Director of Australian conglomerate Wesfarmers Group, was speaking at this year's German Retail Congress in Berlin.

Evidently McLeod thought that after a meeting with Angela Merkel etc., he would do well to curry favour with the local gentry and talk with our newspaper.

We didn't need to be asked twice. During McLeod's six-year tenure as MD of Wesfarmers supermarket subsidiary Coles until this July, earnings more than doubled. With some help from Boston Consulting Group, he masterminded a major turnaround at the country's second-largest retailer, despite fierce competition from the likes of Woolworths, Aldi and Costco. 

McLeod spent most of his earlier career with Asda where he was a member of the Management Board and the Executive Board of Wal-Mart Germany. This, then, is a man with a tale to tell.

Ian McLeod, Coles/Wesfarmers (photo: Frank Nürnberger)
Stairway to heaven: Ian McLeod is now Group Commercial Director at Wesfarmers
Originally founded as a Western Australian farmers' co-operative, Wesfarmers has grown into one of the country's largest listed companies. Its diverse business operations also cover coal production and export, chemicals, energy and fertilisers as well as industrial and safety products.

In 2007 the conglomerate made a successful bid for troubled Coles Group which is currently celebrating its centenary.

After selling its department stores to private equity, Coles now operates around 2,200 outlets. These include liquor stores and 639 convenience stores as well as discount apparel stores Target and Kmart, which are separately run with independent managing directors.

However its "Coles" supermarkets chalk up nearly half of annual group revenues (€40bn). Coles runs 741 of these throughout Australia with an average store size of 2,300m²; a further 70 branches are planned over the next three years.

Coles and its larger rival Woolworths dominate the local supermarket segment. This has inevitably led to complaints from smaller suppliers and consumer groups and to investigations by the Australian Competition and Consumer Commission (ACCC).

Growing competition, however, has come from abroad since Aldi South and Costco went Down Under in 2001 viz. 2009. Aldi Stores currently runs 350-odd outlets and posts revenues of around €3.7bn. Its market share in the eastern part of this pricey market for consumers is estimated at around 10 per cent. 

Australia is the world's 12th-largest economy. The land that has given us Foster's lager, cuddly koala bears and Crocodile Dundee also enjoys one of the highest levels of GDP per capita. The economy has grown for 22 consecutive years and inflation is low.

Ian McLeod, Coles/Wesfarmers (photo: Frank Nürnberger)
Gives as good as he gets: A down-to-earth Scotsman in no-fuss Oz
Australia is the only country to occupy a whole continent and roughly equals in size the continental United States. A good 85 per cent of its hearty, laid-back and family-oriented population (23.5m) live in the urban areas of Sydney, Melbourne, Adelaide, Brisbane and Perth or within a narrow 100-mile coastal strip.

Ian McLeod (56) originally hails from Scotland and as an ex-pat wasn't allowed to vote in the September referendum on Scottish independence. He admits, however, to "lively debates" about the issue with his son. 

"I've always believed suppliers!"


Mr. McLeod, what is it like competing every day with Aldi in Australia?

Our view isn't just about one retail competitor. We have thousands of them in the fresh food arena, for instance, because the independent trade is still very strong in Australia. If you go to a local supermarket, you will see an independent butcher, baker, greengrocer or delicatessen almost outside the front door.

Point taken, but doesn't Aldi represent a particular price challenge on your local market?

Wesfarmers appointed me to lead the turnaround of Coles in 2008. By that time, Aldi already had a fairly strong foothold in the main conurbations of Australia, such as Sydney and Melbourne, and set a floor level on competitive pricing. Therefore, addressing our price competitiveness was integral to our turnaround plan.

Do you match Aldi on prices?

We now have good value positioning in terms of our entry price point, but our product offer is broader. The Australian consumer is still very brand-loyal, particularly as regards local brands, and own label penetration is relatively low. We gain on these local brands.

But hasn't Aldi also begun to expand its brand offer recently in Australia as in Germany and elsewhere?

Just one example: There is a particular product called Vegemite, which Australians absolutely love. If you didn't have that on your shelves, you'd be inundated with complaints. So Aldi was obliged to introduce it, but they generally remain very strongly private label focused.

Why did Aldi complain to the Australian Competition and Consumer Commission (ACCC) that you have been colluding with site operators to hinder their expansion plans?

When Aldi arrived in Australia, they found a situation where Woolworths and we had rented a number of sites with main landlords on 20- to 25-year leases. We have since come to a voluntary agreement with the ACCC, whereby we have changed this situation to make more sites available.

Tell us how you managed to turn your supermarkets around in only five years?

When I started at Coles in 2008, customers and even the government told us that supermarket prices were too high generally, and we were probably more expensive than the competition at that time. So our first move was to increase operational efficiency in order to invest in lower prices.

We also improved the quality of our fresh food. When I arrived at Coles much of our fresh produce was pre-packaged, which customers hated. Australians want to be able to select their own fruit & veg. So we took all the packaging away and merchandised the produce loosely, exactly in fact as the independent greengrocers were doing.

Finally, we implemented best practices from around the world in order to modernise store layouts. So today, for instance, our core grocery space is similar to what you might see in the UK, but the fresh food offer has greater levels of inspiration from retailers in the US.

You also increased the number of service counters in your stores. Doesn't that just raise your costs and reduce your margins?

We've improved our sales densities by 25 per cent over the last five years. So if you have someone behind, for instance, a deli counter and the store is taking 25 per cent more on that counter, then you get greater efficiency out of that individual and wage costs will be fractionalised. 

We also looked hard at how we roster our stores and have aligned staff better to where customers really want them to be. Among other things, this has allowed us to spend less on our checkouts while providing a better service with fewer queues.

You once had a few hypermarkets. Why couldn't you raise their sales densities?

We sold around half of their floor space and converted them into supermarkets. The challenge that hypermarkets are facing worldwide is essentially in non-food. In the past, Big Box stores used general merchandise as a value offer or for special offers. This was to increase foot traffic and to get customers to food-shop with them, thus enhancing the overall margin mix.

But now that online has begun to penetrate the non-food arena, it's becoming very difficult for hypermarkets to get a return on this additional space.

Your online share of revenues is still relatively small in the low-single digits region. Is this a field that Coles has neglected?

Not at all, we have aggressively pursued the development of online so that around 95 per cent of Australians can now use our e-commerce offer. But when you are in a turnaround situation, you have to prioritise very carefully. While online is important, the critical thing is to get your store right.

How suitable a market is Australia for online retailing?

Customers shop in different ways on different markets. In the UK they tend to shop less frequently, but have a correspondingly higher weekly or fortnightly shopping basket. But Australians buy their fresh products almost on a daily basis because of the climate. So customer frequency is far higher.

Numerous other national markets have larger stores where customers need cars to reach them. But in Australia supermarkets tend to be smaller and more in the High Street and city shopping malls than in out-of-town shopping centres. So individual supermarkets are much closer to the average Australian than in many other countries. Also opening hours are quite generous from 6 a.m. to midnight.

All these factors mean that internet shopping requirements are relatively low.

Presumably, therefore, you are expanding your convenience store division?

In Australia supermarkets are smaller than in many other countries and only average around 2,800m². There are also more of them per capita, so there is less potential for convenience stores than elsewhere. Therefore, as we are already very well represented in the sector, our strategic focus remains on extending and redeveloping our existing supermarket estate.

You have accused global brands of making excess profits in Australia, arguing that pack sizes of Coke, toothpaste and other consumer products are up to 60 per cent cheaper in Asia than in Australia. Don’t you trust your own suppliers?

In the 30 years I have worked in retailing, and a fair amount of that in buying, suppliers have always told me I am getting the best price. Of course I've always believed them!

But, fun apart, I think it is my right as a retailer to challenge such claims in the interests of our customers. After all, why should Australians be charged significantly more for the brands they love than consumers on other markets?

Our margins are not too dissimilar from those made by retailers in other countries. So when a beverage brand, for instance is three or four times dearer in Australia than in, say, Indonesia or Thailand, then obviously that means we are being charged more by manufacturers for the privilege of having their products on our shelves.

But don't suppliers always argue that their cost base varies from country to country?

True, some claim that the same economies of scale don't exist in Australia as in Europe. But there is another argument that a number of these large multi-national manufacturers have higher market shares in Australia than in other markets. So the competitive pressure on them is a lot less, and they can virtually charge what they like.

Your market share is also viewed critically by some. Woolworths and Coles are estimated to account for 80 per cent of the local supermarket industry. Doesn't one call that a cosy duopoly?

This accusation is thrown at us quite a lot, but I can only talk about Coles. We have a strong market share in core grocery, probably in the mid-20 per cent region. But half the market in fresh food is actually with the independents. So Australia is a more competitive market that a number of people would assert.

Then why did the government request an independent enquiry into competition within the supermarket industry in 2008?

Even then the investigation concluded that the sector was workably competitive. Three or four years later when we started to change our price position, it was described as "intensely competitive". That is because part of our underlying strategy to turn Coles around was to lower prices.

Australia had endured annual food inflation of between 4 and 6 per cent for the best part of 30 years prior to the change of ownership in Coles in 2007. And because we sharpened our prices and pushed harder for the benefit of the consumer, we turned food inflation into food deflation, saving the consumer about 1bn Australian dollars a year.

Doubtless the government will also appreciate this as the cost of living for the average Australian in most other fields, whether in rents, utilities, or school fees, is heading north.

But haven't your lower prices also been achieved by playing hardball with smaller suppliers and (dairy) farmers?

No, we have very strong relationships with our suppliers. We had an independent survey done as to how Coles was perceived by suppliers when we first arrived in 2008. We were among the bottom three of the 15-odd retailers reviewed. The same survey was conducted recently and found that we are now among the top three. So the way suppliers see us has improved significantly. 

Why then are some still so bitter about you?

We have had to rationalise our supplier base by around 20 per cent over the last five years because we carried several thousand too many products on our shelves. Obviously some will have benefited from this decision, and others will have lost out.

Also, I guess that, if you are a big player in a market place, then you are inevitably going to be subject to a degree of criticism.

Looking back over your long career in retailing, you were 17 years at Asda in the UK. After the company was acquired by Walmart in 1999, why did they make you Chief Merchandise Officer for their operations in Germany?

Walmart were a terrific company to work for! They were looking to use the Asda management team as a springboard for a broader level of European expansion. 

What impression did German retailing make on you at the time?

There didn't appear to be a lot of innovation in store development or the offer. But I did find the market highly competitive, where discounters have a much stronger foothold than in the UK and really set a benchmark on prices.

Also German consumers are far shrewder in seeking out the best prices. They read weekly advertising flyers almost cover-to-cover, which isn't usual in the UK where flyers are rarely produced. German retailers are therefore quite promotionally geared and change store promotions virtually every week.

Why do you think Walmart failed in Germany?

Too many assumptions were made that what works in the US would automatically work in Germany, so the big differences between cultures, personalities, and shopping habits were totally underestimated. 

Walmart also took on too much too quickly. They acquired two hypermarket operators, Interspar and Wertkauf, in different regions. They merged them and moved head office; they transformed the distribution system from direct-store to central delivery; they introduced auto-replenishment in every store; and they modelled every single store.

All this was attempted in the first year, and the organisation simply couldn’t digest that amount of change in one go. 

Walmart also didn't understand local staff. The Germans are a very rational people who need to be given reasons for change, whereas the American psychology tends to be "let's just give it a go".

So Walmart got off to a pretty bad start on a discount-oriented market where it was hard to make money. Walmart always tries to offer the lowest price in the market, which is possible in America where it is a large-scale retailer, but in Germany it was only a relatively small player and didn't have the economies of scale it was used to.

You were appointed Group Commercial Director at Wesfarmers in July. Why not stay at Coles and continue your success story there?

The transformation has now been essentially completed, and in any organisation it is very important to have effective succession planning. Moving into a group role provides me with a broader opportunity to look across all the divisions of Wesfarmers in order to find new opportunities both domestically and internationally.


Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 49, 05.12.2014



1 Comment (Write a comment)

  1. Paddy19
    Created 5 December, 2014 13:12 | Permanent link

    Great interview, the insights into why Asda failed in Germany are particularly interesting.

    Assuming all markets are the same, trying to get too much changed too soon, and workers who need a rational explanation.

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