Wesfarmers Ltd to invest $360 million in Victoria

Coles, owned by Wesfarmers Ltd (ASX: WES) has announced plans to invest $320 million to develop 8 new stores in Melbourne and 6 new stores across regional Victoria. On top of the $320 million investment, another $40 million has been earmarked to refurbish existing stores across the Victorian portfolio.

It’s a significant sum of money and highlights to investors that growth opportunities are still available to the $47 billion giant conglomerate. While not stated explicitly, it’s possibly that the source of funds for this proposed expansion of Coles will come from utilising some of the cash from the recent sale of the Insurance business to Insurance Australia Group Limited (ASX: IAG). Many analysts viewed the Insurance business as sub-scale and were happy to see Wesfarmers jettison it, and redeploy the funds into the supermarket business – if higher returns on capital can be achieved – it will be looked upon favourably.

With population forecasters at the Australian Bureau of Statistics (ABS) estimating that by 2053 Melbourne’s population will exceed Sydney’s, it’s pleasing to see one of Australia’s largest retailers is (to paraphrase Warren Buffett) “skating to where the puck is going to be, not to where it has been.” As Woolworths Limited (ASX: WOW) discovered with its entry into the hardware sector via the Masters chain, it is getting harder to secure key properties and locations for stores. While supermarkets may be easier to locate than large warehouse-style hardware stores, securing quality locations is still vitally important.

Foolish takeaway

Since Wesfarmers acquired Coles in 2008, the company has spent around $3 billion overhauling the Coles’ business which was regarded as having been neglected and under-invested in by its previous owners. This investment has included opening 100 new stores and refurbishing a further 350 stores across Australia. The dire state of Coles when Wesfarmers acquired it is a reminder to investors to make sure that their companies are re-investing in their assets and staving-off the competition.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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