Coles: Wesfarmers paid $22bn, doubled the earnings, and spun it out again

By 2007 Coles Group — the Australian grocery chain plus Kmart, Target and Officeworks — had slipped as a retailer. Wesfarmers, the Perth-based conglomerate, agreed in July 2007 to take it over for $22 billion, and completed the purchase in early 2008. The stated ambition was rescue and restoration: Wesfarmers described bringing in British executives specifically to resuscitate the ailing retailer.

The man given the job was Ian McLeod, a British retail executive, who ran Coles from 2008 to 2014. The turnaround ran through the basics of the shop floor: enhancing the customer experience, improving the fresh food offering and on-shelf availability, and rebuilding supplier terms — Coles chief operating officer John Durkan was one of the prime players, as the Sydney Morning Herald put it, in squeezing suppliers while turning Coles back into a thriving supermarket chain able to compete with market leader Woolworths.

Wesfarmers' verdict was explicit. Group managing director Richard Goyder credited McLeod's 'leadership during the successful first six years of the Coles turnaround,' noting that the division had 'more than doubled earnings before interest and tax' while generating significant shareholder value for the group. McLeod moved to a senior group role, with Durkan taking the top job in 2014.

The endgame came in 2018. A portfolio review concluded that Coles — by then accounting for 60 per cent of Wesfarmers' capital base and a third of its divisional earnings — was a mature, cash-generative business that should be owned separately. Wesfarmers spun it off, creating a new standalone top-30 listed company, with managing director Rob Scott stating the group had 'successfully turned around the business and restored its position as a leading Australian retailer.'

Coles divisional EBIT more than doubled under McLeod; by 2018 it was a third of Wesfarmers' divisional earnings and was listed again as a top-30 company.

Patient conglomerate ownership let the fix run at retail speed: Wesfarmers could absorb early years of investment that a listed Coles could not have sold to its own shareholders.

The turnaround started with the customer proposition — fresh food, availability, experience — before the supplier-squeezing that funded the margin recovery.

McLeod and his British team imported supermarket craft from a more competitive market, replacing incrementalism with execution discipline.

Separating Coles once the recovery was proven let the market reprice the fixed asset instead of letting it hide inside a conglomerate discount.

A conglomerate with patient capital can fix a retail slump that public shareholders won't wait out — and the dividend for finishing the job is the option to sell the fixed asset.

Coles listed again in November 2018 as an independent top-30 Australian company, roughly a decade after the $22 billion takeover. The arc completed the conglomerate's playbook: buy a beaten retailer inside a diversified group, rebuild it around price and fresh food, double its earnings, then hand it back to the market once the growth story was proven. The McLeod years remained the reference point for Australian retail turnarounds — and the reminder that the same public-market impatience which made Coles vulnerable in 2007 was, once fixed, exactly what made the demerger valuable.