Coles Myer changes its supply chain plans

Filed in archive News on May 29, 2006

According to a report by Sydney Morning Herald, fridge and cooler maker Frigrite has shone some light on the maneuvering inside australian supermarket chain, Coles Myer, as Coles chief executive John Fletcher rearranges his resources to try to lift sales.

Frigrite supplies the retail group with supermarket cooling and refrigeration cases for fresh and frozen produce, and it announced on Wednesday that earnings before interest and tax would be between $8 million and $8.2 million in the year to June 30 instead of the $9.4 million originally expected.

Profits had been cut by "a recent reduction in orders from Coles Supermarkets", it said, and also because of "changes in payment terms" that had boosted the working capital Frigrite needed from $1 million to $3 million - an amount funded with bank debt.

John Carew, Frigrite's managing director, added that "changes to Coles Myer's capital works program" had resulted in "lower than anticipated demand over the concluding months of the 2006 financial year".



Frigrite's agreement with Coles for the supply of cases had been extended beyond its original March 31 expiry date and Frigrite's relationship with the retail group remained strong, Carew said. But he also said that Frigrite was still waiting for "a formal decision from Coles supermarkets in respect of its contracted position over the balance of the 2006 year".

Frigrite is a small company, with a market capitalization of only $38 million, and the downgrade hit its shares hard. They fell 15.5c to 75c on Thursday and lost another 1c to close at 74c on Friday.

Coles Myer shares have eased from $11.35 to $11.16 in the past four trading days but that is clearly a reaction to the third quarter sales numbers it released on Tuesday, not Frigrite's news.

The contract changes are not in themselves financially significant for Coles Myer, which has a market value of $14 billion and an annual capital expenditure spend alone of $1.1 billion - enough to buy Frigrite 28 times over. Store refit outlays in the first half of the current year at Coles Myer were substantial, at $129 million compared with $98 million in the first half of 2004-05.

Frigrite's announcement does, however, confirm that Fletcher has been shuffling spending priorities and spending associated with the group's factory to shop floor supply-chain redesign project has been deferred as a result.