What does Coles gain from dropping the Express chain?

Earlier this week, supermarket player Coles announced it is selling its convenience arm Coles Express to long-time fuel partner Viva Energy for $300 million.Coles had been working with Viva Energy through its Express arm for some time, though its agreement was due to expire in 2029 – meaning Coles would have either had to negotiate a new agreement in seven years’ time, or sell the business. According to Coles’ chief executive Steven Cain the expiring deal, as well as the fluctuating cost of petrol, were factors in the decision to sell the business early.“If you look at what’s happened more recently, for all fuel operators the last few years, during the Covid-19 pandemic, have been challenging times,” Cain told the media on Wednesday. “And more recently, the conflict in Ukraine has led to a surge in energy and oil prices… So we’ve looked at the deal, and we’ve looked at what is important to us at Coles Group, [and] we’ve managed to come up with a win-win.”Though the Express chain will inevitably be rebranded away from the Coles name, the supermarket has made a deal to keep its receipt-based 4-cent-per-litre discount rewards program ongoing, as well as the chain’s use of FlyBuys. Additionally, $816 million in lease liabilities will be transferred to Viva Energy.“We’ve enjoyed a strong partnership with Coles over the last 20 years, and this is an exciting next step for our business and our relationship,” Viva Energy chief executive Scott Wyatt said. “This acquisition means we will be able to accelerate our plans to grow the integrated fuel and convenience business, while our customers continue to enjoy the excellent customer service provided by the dedicated Express team.”Wyatt said the business will take on the Express business’ team members once the transaction is complete, which is expected to take place in the second half of next financial year. Additionally, Cain said the environmental impact of fossil fuels was difficult to justify for a business aiming to be the country’s most sustainable supermarket.“As we move forward [with our sustainability initiatives] and start getting into things like our Scope 3 emissions, as opposed to Scope 1 and 2, this business would have been a factor,” Cain said.“Part of what Viva is doing now will be investing in renewables and electric charging, and no doubt hydrogen down the track.”Coles still behind, Jarden arguesThough the move will open up opportunities for Coles to invest more heavily in its supermarket and liquor businesses, particularly as its Ocado partnership costs spike, analysts at Jarden said they expect the business to suffer in the short term due to the exit. Jarden analyst Ben Gilbert said he could see the reasoning for the sale, but even taking into account the savings from lease and investment exits, he said Jarden still believes Woolworths and Metcash are in a superior position in the Australian market.According to Gilbert, the grocery sector in Australia is expected to outperform the market in the next few years, due to people returning to eating at home as the pandemic continues to normalise, an expected 10 per cent increase in food prices due to inflation and a sector-wide expansion of margins. “We do, however, expect Woolworths to outperform the listed names, with less upside risk to Coles, particularly with suppliers less positive of the outlook relative to Aldi and Woolworths,” Gilbert said. Between FY23 and FY25, Jarden expects Coles’ earnings per share to fall between 2 and 3 per cent due to the sale, as well as the overall macro trend of grocery sales currently cycling against previous panic buying periods.