19/11/2009 - 00:00

From coal to Coles – let the carping begin

19/11/2009 - 00:00

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Some of Wesfarmers’ business divisions may present public relations challenges in the near future.

WHEN Alan Carpenter starts his new job as head of communications at Wesfarmers in a few weeks he may well be joining at a time that might, in hindsight, be considered the calm before the storm.

For any shareholder or observer who attended the Wesfarmers AGM last week, this might seem an odd view.

It was a sedate affair by any standards, having weathered the drama of 2008 when its executive remuneration package was voted down in a tokenistic backlash by shareholders. The news on Coles was also very positive, even if a few shareholders still believe it was value destroying.

Coles is certainly at the heart of my thinking when it comes to a brewing storm, but not directly related to the turnaround efforts of its management.

What struck me at the AGM, during what seemed interminable video presentations and speeches covering the same material, was the disconnect between Wesfarmers' now-biggest business segment, numerous retail operations, and its legacy division in coal.

Combined, Coles, Bunnings, Office Works, Target, Kmart, Bi-Lo, Liquorland, 1st Choice, Vintage Cellars and Harris Technology represented 61 per cent of Wesfarmers' earnings before interest and tax. Coal operations Curragh, Bengalla and Premier represent 28 per cent. Obviously this mix could change depending on dozens of variables such as coal prices, currency fluctuations, the success of expansion plans and consumer spending.

Nevertheless, Wesfarmers' transition from a resources-linked business to a retail business is in its final phase. Just a decade ago, its business was predominantly involved in resources production, including directly such as forestry and coal or indirectly through servicing producers such as farmers.

But the growth in Bunnings was shifting the internal balance of the group, and the purchase of Coles has transformed the company.

However, I am very surprised to find that the legacy operations of coal and the retail assets burgeoning with the purchase of Coles have remained unconnected in the eyes of the public.

When they are linked by consumers - most likely by conservationist action groups or leftist politicians, but potentially also by so-called ethical investors - it will create a public relations nightmare for Wesfarmers, one that will keep Carps very busy.

It is a surprise to me that this did not occur this year, with all the climate change debate in the lead up to the Copenhagen conference.

But with the Danish convention already in tatters, climate change alarmists will be lurching about for someone to blame and big business will be a likely target.

What better place to start than a 'dirty' coal miner, which also happens to be Australia's biggest private employer in the midst of trying to turn around the nation's biggest retail empire. Talk about vulnerability.

The thing to remember about all this is that Wesfarmers has been there before.

In the late 1990s, it had a local version of exactly this issue when the forestry debate became a political issue. Wesfarmers, of course, had huge forestry interests through the purchase of Bunnings in the early 1990s. Towards the end of that decade, though, the real benefit of the purchase of Bunnings was starting to emerge with its success in big format hardware stores.

It was clear to all where the future lay. After previous forays into retail had performed poorly, Joe Boros had found the magic formula for Wesfarmers by adapting the tactics of US giant Home Depot to the Australian market.

Even today, Bunnings continues to grow at a rapid pace and is a big earner for its parent. It is clearly this success that convinced the Wesfamers board and management it had the skills to make the acquisition of Coles work.

One of the experiences on that road to Bunnings' success was dealing with political furore.

For those of us who were following Wesfarmers at the time, the company and the issue of logging native forests became enmeshed. Wesfarmers' AGMs became frustrating affairs as conservationists masqueraded as shareholders to hijack the meetings. Outside the meetings, investors were greeted with large furry animals campaigning against forestry.

This tactic also spread to stores, broadening the issue from a corporate one to a consumer one.

While the matter dogged Wesfarmers for a couple of years, it is clear that 1999-2000 was when the heat was really on.

At that stage, the Liberal state government was struggling with the issue in the polls and had to deal with a breakaway conservative party, Liberals for Forests, which opposed logging of native forests.

The late Harry Perkins, then chairman of Wesfarmers, alluded to this issue in his summary of the businesses operations at the 1999 AGM.

During the 1998-99 financial year, Bunnings had opened 13 new stores and was on track to open a further 11 or 12 before June 30 2000.

While the forest products division was still making money, Mr Perkins' comments highlighted an unclear future, acknowledging management had to work through some very complex and challenging issues, which required special efforts and their patience in difficult times.

“This business continues to operate in an uncertain environment following state government changes to its forest policies," Mr Perkins stated in his address to shareholders.

“As a result, the board is reviewing all aspects of the business, possibly leading to some rationalisation and restructure of our forestry and timber operations in the future."

Within a few months, Bunnings Forest Products Pty Ltd changed its name to SOTICO Pty Ltd and, by August of 2000 Japanese trading house Marubeni had bought Wesfarmers' woodchip and plantation interests, including WA Chip & Pulp, Sotico Treefarms, South West Forest Holdings and Wesfarmers' interest in Bunnings Tree Plantations.

Wesfarmers finally exited the timber business in 2004 when it was sold to Gunns, three years after Labor took office and radically changed the timber industry.

Certainly, branding and the link between the Bunnings retail business and its forestry legacy were more direct than that of Coles the supermarket and coal the fuel.

Despite all the climate change alarm, there is no clear signal that coal is a sunset industry like native timber was. And Wesfarmers CEO Richard Goyder suggested nothing but continued investment and expansion in its coal operations.

Nevertheless, as the Bunnings experience showed, things can change quickly. Both consumer activism and the conservationist movement are stronger than ever before and, with the advent of the internet, which aids direct communication with the public, more potent than the late 1990s.

I would hazard a guess that, by this time next year, Mr Carpenter will have his hands full in dealing with this issue.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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