Company Spotlight MarketWatch: Food

Company Spotlight: Coles Group

Supermarket chain Coles has extended its online grocery shopping service to a sixth Australian city,
Adelaide. Although Australian consumers have not been receptive to online grocery retailing, if Coles
can promote the channel's time and money saving capabilities, while emphasizing that quality is not
compromised, the venture may prove successful.

While online grocery services have operated in Australia for over a decade, the service still only represents a
small proportion of total grocery retailing in the country, particularly when compared to countries such as the US
and UK. In fact, when Datamonitor asked Australians in August 2008 how often they bought groceries online, an
overwhelming majority (87%) reported 'never'. Exactly the same proportion said 'never' in April 2009, indicating
continued resistance to the service. Perhaps in response to low uptake, Woolworths has not matched Coles in
terms of coverage (Woolworths currently offers its online service in Sydney, Melbourne and Canberra only).

One of the most compelling reasons against the adoption of online grocery shopping is the inability to select
fresh produce in person, relying instead on the discretion of supermarket employees. Indeed, Datamonitor's
Consumer Survey conducted in April 2009 found that seven in 10 Australians considered the 'freshness and
quality of produce' to have a high amount of influence in deciding where they do most of their grocery shopping,
while one quarter perceived it to have a 'very high amount of influence'.

However, the current economic downturn may reignite opportunities for online grocery services. The ability for
consumers to purchase groceries from home affords them more 'quality time', an increasingly precious
commodity in times of financial adversity. Accordingly, the aforementioned survey revealed that, compared to
two years ago, 'using time saving products or services' has become more important for over half of Australians.
Furthermore, 'proximity to home' has a high amount of influence for nearly two thirds (64%) of Australians in
their choice of supermarket, illustrating the growing value they place on convenience.

If retailers are able to overcome the perception that online grocery services result in a quality compromise, they
will be in a prime position to capitalize on homebound consumers looking to save time and money (by making
fewer car trips). Retailers can achieve this by establishing a more integrated online and offline shopping
experience, and building a strong online community, so that consumers can trust the quality of products that
they are unable to select in person.

Business description

Coles Group is a full-line retailer which operates supermarkets, national liquor outlets, fuel and convenience
stores throughout Australia and New Zealand. The company primarily operates in Australia.

Coles operates 2,231 food, liquor and convenience outlets across Australia, through the Coles, BiLo, Vintage
Cellars, Liquorland, 1st Choice and Coles Express brands. The company also sells apparel and general
merchandise through its Target, Kmart, and Officeworks stores. In addition to these brands, the company also
operates other businesses including Coles Online and Pharmacy Direct.

Bi-Lo is a discount supermarket retailer, operating more than 190 stores and employing around 15,000 people.

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Company Spotlight MarketWatch: Food

Coles Liquor operates a range of liquor retailing formats encompassing three brands: its 1st Choice Liquor
superstore, the Liquorland convenience offer and the specialist chain, Vintage Cellars. Coles Liquor also
operates a network of 85 hotels, predominantly located in Queensland. This business substantially increased in
scale following the acquisition of the Hedley Group during 2006.

Under an exclusive alliance agreement with Shell, Coles operates 602 Coles Express fuel and convenience
stores across Australia.

Target is a department store retailer offering customers quality, on-trend, fashionable apparel and soft
homewares. Target operates in 270 locations across Australia, with 152 Target stores and 117 Target Country
stores, delivering a wide range of products to customers in both metropolitan and regional areas.

Kmart is a discount department store retailer in Australia and New Zealand offering low-cost merchandise
ranging from apparel to hardware and leisure goods.

Officeworks is a retailer of office products operating a national network of 107 stores. Officeworks also operates
Officeworks BusinessDirect selling office products direct to customers via phone, fax and online, and Harris
Technology, a specialist technology provider for small to medium size businesses.

Coles operates an internet shopping service called Coles Online, an online supermarket operating in Sydney
and Melbourne where customers can log in anytime to order grocery items.

Pharmacy Direct is a mail order internet pharmacy. The shop and warehouse are located in Silverwater, New
South Wales and staffed by qualified pharmacists who provide prompt expert service and helpful information on
prescriptions and general inquiries.

Key facts Major products & services

Address 800 Toorak Road Kmart
Tooronga Target
Victoria 3146 Coles
AUS 1st Choice Liquor
Telephone 61 3 9829 3111 Liquorland
Fax 61 3 9829 6787 Vintage Cellars
Website www.colesgroup.com.au BiLo
London Ticker CGJ Coles Express
Employees 100,000
Turnover A$16,876m

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Company Spotlight MarketWatch: Food

SWOT Analysis

Table: SWOT Analysis

Strengths Weaknesses

Integration with Wesfarmers Geographical concentration

Strong market position

Established brand name

Opportunities Threats

Store investment Slowdown of the Australian economy

Online retailing in Australia Intense competition

Source: Datamonitor

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Company Spotlight MarketWatch: Food

Strengths
Integration with Wesfarmers

The integration of Coles with Wesfarmers and the subsequent repositioning efforts have added significant
strength to Coles' business. A significant amount of work was undertaken since the acquisition to reposition
Coles for future growth. By June 2008, Wesfarmers had restructured the previously centralized Coles
functions to create autonomous retail divisions and completed a number of critical commercial reviews. There
has been a significant reduction in above-store employee numbers at Coles, the appointment of new
management teams and the development of five-year plans and budgets.

As a result of these efforts, financial results for the divisions have been sound. Operating revenue for the
Coles division (comprising the supermarkets, liquor and fuel and convenience businesses) during the period
from November 23 2007 to June 30 2008 increased by 7.2% over the same period last year to A$16.9 billion
($18.2 billion). Food and liquor sales also grew by 4.2% to A$12.8 billion ($11.7 billion) with trading earnings
before interest and tax (EBIT) of A$422 million ($386.3 million) in the same period. The results were driven
primarily by improved performance in on-shelf availability, a focus on providing better value to its customers
and increasing customer take-up of the Coles housebrand product offering. Repositioning efforts following the
takeover have allowed Coles's new retail divisions to create a much more customer-focused, value-driven
operation, thus improving the business performance of Coles.

Strong market position

Coles is one of Australia's largest full-line retailers. The company operates more than 2,400 supermarkets,
liquor, and convenience stores throughout Australia and New Zealand. Coles also sells apparel and general
merchandise through 540 Target, Kmart, and Officeworks stores. With more than 100,000 employees and
over 11 million customer transactions a week, Coles currently operates 750 stores across Australia; 862
liquor retail outlets including 95 hotels; and fuel and convenience stores with 619 sites. Coles has established
itself as a leading retailer in Australia which enables it to attract more customers and gives it a competitive
edge over its peers.

Established brand name

Coles is recognized as a strong brand in the Australian retailing business. The company operates
supermarkets, liquor, and convenience stores under the brands Coles and Bi-Lo; Coles Liquor with 1st
Choice Liquor, the Liquorland and Vintage Cellars brands; and Coles Express. It also operates a chain of
supermarkets and stores under popular brand names such as Kmart, Target and Officeworks. Additionally,
Coles has been a leader in private brands for several years and has increased its range to 2000 items
including the expanded organic label. Since the company's take-over by Wesfarmers, customers have
responded well to Coles' housebrand product offering, with the brands recording a 14% growth in sales year
on year. Coles has harnessed its brand potential to attract more customers, thereby strengthening its
bargaining power.

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Company Spotlight MarketWatch: Food

Weaknesses

Geographical concentration

Coles's operations are concentrated in Australia. Though, the company has operations in Australia and New
Zealand, a major portion of its revenue comes from Australia alone. The company's confined presence limits
its customer base and does not allow the company to derive the benefits of geographical diversification.
Further, geographic concentration exposes the company to business risks associated with that particular
region.

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Company Spotlight MarketWatch: Food

Opportunities

Store investment

Wesfarmers, Coles's parent, aims to reinvent the Coles shopping experience through significant capital
investment in both new stores and store refurbishments, while working on new concepts and designs for a
new store model.

The company's business grew its store network throughout the year, opening 17 new supermarkets, 42 new
liquor outlets, eight new Coles Express sites and four new hotels. In addition, the business refurbished or
extended 12 supermarkets, 99 liquor outlets and 27 hotels, and introduced 31 new convenience store offers
in the Coles Express network. Significant capital investment in both new stores and store refurbishments
would be value accretive to Coles' business in the medium to long term.

Online retailing in Australia

According to recent industry estimates, the retail industry in Australia will reach A$1.96 billion ($1.73 billion)
by 2010, growing at a cumulative growth rate of 9% from 2006 to 2010. Online retail is, however, still relatively
untapped in Australia with a little over 4% of all retail being conducted online. While online retailing in
Australia is at a nascent stage, it is expected to grow in the coming years, as consumers want to take
advantage of the convenience and transparency afforded by the internet, but are unable to buy from some of
their most trusted brands. Between 62% and 78% of Australian internet users are also online shoppers.

Coles operates an internet shopping service called Coles Online, which is an on-line grocery supermarket
operating in Sydney and Melbourne. Cashing in on its strong brand image, Coles would be able to garner
incremental revenues through its online business.

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Company Spotlight MarketWatch: Food

Threats

Slowdown of the Australian economy

The Australian economy is expected to slowdown in 2008, in comparison to its performance in the previous
years. Gross domestic product (GDP) in the third quarter of FY2008 was expected to be up 1.5% on the same
quarter last year, a 0.5% lower than the expected 2% growth. Further, the inflation rate in the country is more
than expected. Previously, the Australian central bank anticipated the inflation rate to touch 2 to 3% target
band by 2010. However, the recent estimates suggest that the core inflation will slow down from the current
4.7% to touch 3.5% by the end of 2009 and 3% by the end of 2010. Inflation would only return to within its 2 to
3% target band in 2011. An economic slow down in Australia would impact the consumer's retail spending
capacity, and in turn affect the demand for the company's products and services.

Intense competition

Coles faces intense competition in the Australian market from domestic and international players. The
company faces competition from large Australia-based retailers like Woolworths, across its business
segments such as liquor stores, consumer electronics, and forecourt and department stores. Additionally,
Coles competes with retailers like Franklins, which has been increasingly developing discount and
convenience store formats.

Coles also faces competition from international players, who have entered the Australian market as a result of
limited barriers to entry in the region. The company competes with ALDI, a German-based international
supermarket chain, which commenced operations in Australia in 2001. ALDI currently operates 150 stores
across Australia. Intense competition would put pressure on the company's margins and may lead to a loss of
market share.

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