The Coles Group Ltd (ASX: COL) share price has taken a tumble this morning following the release of an update on its supply chain modernisation.
In morning trade the supermarket giant's shares are down almost 2% to $12.37.
What was in the update?
This morning Coles announced that it has executed definitive contracts with WITRON Australia to develop two new automated ambient distribution centres in Queensland and New South Wales.
WITRON Australia is a subsidiary of WITRON Logistik + Informatik, which is the Germany-based global leader in building automated distribution centres that deliver improved product availability for customers and cost efficiencies.
As a result, the company has entered into an agreement for the development of one of the distribution centres at Redbank in south-west Brisbane with Goodman Group (ASX: GMG).
Another agreement has been signed for the other distribution centre in Kemps Creek, western Sydney, with a joint venture between Goodman and Brickworks Limited (ASX: BKW).
Coles has signed 20-year leases for both distribution centres and expects the total capital expenditure for the two automated distribution centres to be approximately $950 million over six years.
Coles CEO Steven Cain believes these contracts are a big step forward for the company.
He said: "With the signing of these important contracts, Coles is one step closer to implementing a key element of its supply chain modernisation strategy. This will provide a safer working environment for our team members, lower supply chain costs, enhance our overall business competitiveness and make life easier for our customers by having the right offer in the right location."
Automation does of course come at the cost of jobs. The supermarket giant advised that it will recognise a pre-tax provision of $146 million in its 2019 interim result as a significant item. This relates to redundancies and lease exit costs for existing distribution centres that will be closed over a five-year period.
This may have been more than the market expected, leading to a spot of selling pressure today.
Should you invest?
I like Coles' plans and believe this short term pain will make it a much stronger business in the long-term.
In light of this, I still see it as a great investment option along with its former parent Wesfarmers Ltd (ASX: WES).
