What you need to know

• Kmart was the standout performer in this year's Wesfarmer's financial performance, while Catch is struggling in a world of intensifying ecommerce competition due to the expansion of international competitors (in other words, Amazon).
• The group's OneDigital division provided some details about its previous five-year trajectory, with digital interactions growing from 94m to 220m, and digital transactions from half a million to 2.2m. This year's $3.1bn in online sales is a hefty leap on the $900m achieved in FY19.
• Wesfarmers' homegrown group loyalty program, OnePass, is proving increasingly beneficial, with CEO Rob Scott saying members are significantly more valuable than non-members, shop across more brands, more often, and spend more after joining the program.
• And there are some hints the company's retail media strategy is starting to bubble to the surface, with a reference in the annual report to the success of early trials.

Investments in technology, including a digital transformation at Target, and the growing success of the OnePass loyalty program, helped deliver a solid increase in net profit for the Wesfarmers Group in an economy where consumers are watching their cash very closely. The results on ecommerce were mixed, with Officeworks delivering a solid outcome, but Catch is struggling, and its performance will be watched closely according to CEO Rob Scott, who nonetheless emphasised the other benefits it delivers.

Kmart is the standout this year for Wesfarmers, delivering earnings growth of close to 25 per cent. Scott highlighted the success of Anko products - the value range it introduced in Kmart first to reflect the cash-conscious consumer, along with its "unique sourcing capabilities and ability to operate more efficiently due to the continued growth in profit and cash flows."

According to Scott, "The result reflects Kmart's consistent focus over many years on developing world-class end-to-end sourcing capabilities to deliver market-leading owned brand products through Anko. This focus has enabled Kmart to deliver a step change in performance driven by its everyday low price positioning, and provided new growth opportunities for the future. The performance has also been supported through leveraging digitisation to improve operating performance."

Scott noted that with the Kmart and Target integration now largely complete, Target is benefiting from Kmart systems, processes, and capabilities. That augurs well for next year.

The numbers

Wesfarmers reported a 3.7% increase in net profit after tax to $2.6 billion and a 9.9% increase in operating cash flows to $4.6 billion.

Wesfarmers' health division and industrial safety also performed well and executives said they will invest $1.1bn - $1.3 million in capital expenditure for the year, with a focus on digital transformation and productivity improvements they bring. 

On Bunnings, Scott said, "Bunnings demonstrated the resilience of its offer and strong execution of its strategic agenda, continuing to grow sales and earnings in challenging market conditions. This year, Bunnings continued to expand its range with innovation across categories such as smart home supporting an increase in customer demand. Bunnings also continued to invest in supply chain, data, and technology projects to strengthen the customer experience across channels, such as the new Bunnings local delivery service. 

Per Scott, "Key to our success this year has been the ongoing focus on investing in technology and digitisation across the portfolio. This helps unlock operational benefits, productivity improvements, as well as improving the product and service offering through a strong, stronger omnichannel experience for our retail customers."

Loyalty

An important part of that omnichannel experience is the growing strength of Wesfarmers' OnePass loyalty program run out of the firm's OneDigital division.

During the year, significant enhancements were made to the OnePass membership program with the addition of new retail partnerships, delivering even better value for its members. Scott said it was pleasing to see these enhancements resonate with members, and OnePass driving incremental sales for the divisions and improving customer retention.

"We know that OnePass members are significantly more valuable than non-members, shopping across more brands, more often and spending more after joining the program with members shopping three times more frequently compared to non-members per annum," he said.

Ecommerce

While ecommerce may have bounced back sharply in Australia's grocery category, as we reported last week, online sales remained under pressure in the broader merchandise category where Wesfarmers plays. Its ecommerce results were mixed. Officeworks reported a notable online penetration of 34.5%, up from 33.7% the previous year but online sales growth actually slowed to 2.3% down from 6%.

However, the performance of Catch, Wesfarmers’ online marketplace, was less favourable, with a 28.5% decline in gross transaction value due to the exit from unprofitable lines and increased competitive intensity in the ecommerce market. Catch's loss of $96m includes $23m of restructuring costs and a non-cash impairment.

Scott told investors, "It's clear that the competitive environment in Australian ecommerce retail is intensifying with the growth of international ecommerce and marketplace retailers."

On that point, he noted: "Catch reduced its losses on the prior year following actions to reset the operating model and reduce the cost base... In this environment, the group's investment in Catch which provides a marketplace platform and fulfillment capability that provides valuable insights and capabilities for the group's broader operations, and also improves the offer for OnePass members.

"So Catch is now scaling up its marketplace, which is a capital-light strategy that will better utilise its supply chain assets and digital capabilities, whilst also strengthening the group's ecommerce offering."

These actions are expected to reduce ongoing investment and improve returns. And in words that typically chill the heart of any business line manager in charge of a division when the boss speaks them on an earnings call, Scott said, "Progress will continue to be monitored very closely."

Across the wider OneDigital group, stats in the investor briefing provided some colour for what Wesfarmers has achieved, with over $2bn in capex and opex spent since 2019.

Over that five-year period, digital interactions have grown from 94m to 220m, and digital transactions from half a million to 2.2m. That translates this year into $3.1bn in online sales, up from less than a billion (0.9b) five years ago.

Retail media

Finally, with the growing cache of OnePass, coupled with PowerPass and Flybuys data, Wesfarmers now has the data story it needs to underpin a strong retail media strategy. On this final point, the investor pack noted Bunnings was seeing, "Strong engagement and results from initial retail media trials."

In the annual report there's a further reference reinforcing the potential of retail media. "OnePass is focused on improving member benefits to help attract and retain a larger membership base and increasing the Group’s share of customer wallet. Development of the Group shared data asset will continue and as OneDigital scales, it will increasingly focus on developing new revenue streams, such as a retail media network."

It also reveals - in the remuneration report - that Michael Schneider, Managing Director, Bunnings Group has been working closely with OneDigital on the development of Wesfarmers retail media play.