Coles investing

Bad news has gone hand-in-hand with supply chains these days, with shortages of everything from computer chips to toilet paper. But in better news, more companies are innovating fixes that could help prevent these kinds of disruptions from becoming the new normal.

One company taking the lead via new technology is Coles Group (ASX: COL), which is set to transform how it restocks fresh produce across its 850 stores nationwide.

You have already been able to shop for your groceries either online or through one of Coles’ supermarkets, but in light of the recent pandemic, consumers have been increasingly reliant on online grocery shopping as a means to stock up on food. Coles realised this shift in demand a few years ago and partnered with Ocado and Witron back in March 2019. Both of whom are world-leading providers in automated fulfilment technology and home delivery solutions.

After the partnership, the Company began to roll out automated customer fulfilment centres (CFCs) in Melbourne, Sydney, and Queensland. Each of which is on track to be built and completed by 2023 and 2024, along with an army of over 1000 AI bots developed by Ocado, which will staff each CFC. The development of these CFCs is expected to cost the Company a total capital expenditure of $130m to $150m.

Once set up, you will be able to place an online order, then bots at the fulfilment centre gather your groceries and  load them onto a truck for same day dispatch – streamlining the process to make it efficient and straightforward for customers.

Steven Cain, Coles Group CEO, said, “We are very excited that the biggest automation project in Coles’ history, Witron and Ocado, will open next year (2023) to further enhance efficiencies and the range and service we can offer.”

If this technology looks familiar, then you’re not wrong. In 2012, US tech giant Amazon spent USD $775m to purchase robots from Kiva Systems that could automate their entire operations. Today, Amazon has over 200,000 mobile robots working inside their warehouses. The new technology helped the Company store up to 40% more inventories in their warehouses and ease employees’ jobs. Now it is clear why other companies are starting to adopt this strategy.

Not only does this new automation make the shopping experience simpler and more efficient for customers, but it has also caused many employees to be out of a job. Many people lost their jobs back in 2015 when Coles introduced automated self-checkouts across its supermarkets. The change was in part because Coles was able to process many more transactions a lot quicker than a standard checkout-chick, and they were able to have one staff member managing dozens of checkouts at once.

For the supermarket, this was wonderful – significantly less wages expense and less management required to oversee a large workforce. But for people needing a low-skilled job, supermarkets were no longer an option. Once the new CFCs are open and deployed, employment from an institution such as Coles will likely become even more scarce.

In the Company’s first-half report, which was released today, the Group saw sales revenue of $20.6b, increasing 1% year-on-year and 9% on a two-year basis. Earnings before tax and interest (EBIT) was $975m, decreasing 2.2%, including $20m spent on project implementation and development costs of the Witron and Ocado CFCs. The company states that revenue was driven by elevated sales as a result of lockdowns in NSW, VIC and the ACT, and also recognized costs from COVID-19 disruptions, which weighted on EBIT.

With shoppers returning to stores after the pandemic, Coles’ Express shopping service saw a 62.5% decline in EBIT from $32m to $12m year-on-year. This has accelerated the Group to get these fulfilment centres operating with the hopes that the cost benefits received will be in excess of $750m by the end of FY22.

Coles shares have been tracking sideways for most of 2021, reaching a low of $15.27 in March and hitting its peak of $18.94 in August. The report was received well by investors, seeing the shares jump nearly 4% at market open, and currently sitting at $17.30 at the time of writing.