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WESFARMERS LIMITED: AUTOMATING FOR DEFENSIVE EXCELLENCE

The 2030 Report | CEO Memo | June 2030

FROM: Macro Intelligence Unit TO: CEO, Board of Directors RE: Strategic Focus: Operational Excellence Through Automation During Economic Uncertainty DATE: June 2030 CLASSIFICATION: Confidential - C-Suite

EXECUTIVE SUMMARY FOR LEADERSHIP

Wesfarmers is positioned as a defensive haven during economic uncertainty. The strategic imperative is not growth (which will be modest in recession), but operational excellence through automation and cost discipline.

The next 18-24 months should focus on: 1. Margin expansion through automation (50-100bps EBITDA improvement) 2. Market share protection in discount retail and hardware (counter-cyclical positioning) 3. Supply chain resilience (in case of economic disruption) 4. Shareholder returns (capital discipline, dividend maintenance)

STRATEGIC PRIORITY 1: BUNNINGS AUTOMATION ACCELERATION

Bunnings is the crown jewel. EBITDA of $3.15B on $90B revenue (3.5% margin) is excellent, but there's opportunity.

Automation Opportunities:

  1. Warehouse Robotics: Deploy robotic picking systems in 80% of distribution centers (currently 20%). Target: 40% reduction in picking labor costs.

  2. In-Store AI Pricing: Dynamic pricing based on local demand, competition, inventory levels. Target: +1.5-2.0% gross margin improvement.

  3. Inventory Optimization: AI-driven demand planning by SKU/location. Target: 5% reduction in inventory carrying costs, fewer markdowns.

  4. Supply Chain Automation: Automated replenishment, route optimization. Target: 3-5% logistics cost reduction.

Financial Impact by FY2032: - Labor cost reduction: -$100-120M annually - Gross margin improvement: +$40-60M annually - Logistics cost reduction: -$30-40M annually - Total EBITDA uplift: +150-220bps (to 3.75-4.0% margin) - EBITDA additional: +$135-180M annually by FY2032

Capex Required: $800M-1.0B over 3 years (0.9-1.1% of sales annually)

ROI: 15-18% IRR on capex (excellent)

STRATEGIC PRIORITY 2: KMART TRANSFORMATION

Kmart has stabilized but remains at risk of secular decline if market conditions worsen.

Strategic Actions:

  1. Format Optimization: Close <40 unprofitable stores; invest in profitable stores
  2. Merchandise Mix: Shift toward essentials (bedding, basics, household goods); reduce apparel exposure
  3. Automation: Apply warehouse robotics and supply chain optimization (same as Bunnings)
  4. Digital Integration: Omnichannel platform (online + pickup/delivery)

Financial Impact by FY2032: - EBITDA from automation/efficiency: +100-150bps margin improvement - Revenue stabilization: +0-2% growth (vs. historical -3-5%) - Total EBITDA by FY2032: $720-750M

Capex Required: $300-400M over 3 years (depreciation of estate, system upgrades)

Strategic Decision: Consider divestment if EBITDA margins don't improve to 12%+ by FY2031. Kmart asset base could be valuable to other retailers (Costco, Costco-style player).

STRATEGIC PRIORITY 3: ECONOMIC RESILIENCE POSITIONING

The worst-case scenario is a significant recession (unemployment 5.5%+, house prices down 20%+). Wesfarmers needs to be positioned as the "last man standing" in retail.

Actions:

  1. Pricing Discipline: Avoid price wars; maintain margins (accept volume risk if necessary)
  2. Supplier Relationships: Lock in supply chains; be prepared for disruption
  3. Working Capital Management: Build cash reserves; be prepared for extended credit to customers if necessary
  4. Labor Flexibility: Maintain mix of permanent + temporary staff; be able to adjust quickly

Message to Market: "Wesfarmers is prepared for economic uncertainty. Bunnings will win market share in downturns. Kmart will capture trade-down customers. Coles stake provides downside protection."

CAPITAL ALLOCATION FRAMEWORK

Dividend Policy: - Maintain 3.0-3.5% dividend yield (approximately 60-65% payout ratio) - This signals confidence while maintaining financial flexibility

Capex: - Bunnings automation: $400-500M annually (priority) - Kmart transformation: $80-100M annually - Coles expansion (via stake): Co-invest if opportunities arise - Total: $550-650M annually (~0.6-0.7% of sales)

M&A: - Opportunistic acquisitions in retail (if valuations attractive) - Small bolt-on acquisitions to fill geographic gaps - Target: Return 12%+ on invested capital

Debt/Capital Structure: - Maintain investment-grade credit rating (A- or above) - Use debt strategically if acquisition opportunities arise - Target: Debt/EBITDA of 2.0x-2.5x

RISK MANAGEMENT

Risk 1: Deep Recession If unemployment rises to 6%+ and house prices fall 25%, Bunnings could see -10-15% EBITDA vs. base case. Mitigation: Market share gains in downturns; cost discipline.

Risk 2: Kmart Continued Decline If Kmart EBITDA declines to $500-550M (below $620M base), consider strategic options (divestment, format change, or combination with other retailers).

Risk 3: Automation ROI Disappointment If automation capex delivers only 50bps margin improvement (vs. 150bps target), ROI falls to 9-10% (below hurdle rate). Mitigation: Rigorous project management, phased implementation.

RECOMMENDATION

Wesfarmers should pursue a "steady hand" strategy during 2030-2032: - Automate Bunnings (high ROI, defensible) - Transform Kmart or consider exit - Maintain dividend discipline - Position for economic uncertainty

This delivers 5-8% earnings growth while preserving defensive positioning.

The 2030 Report — Macro Intelligence "Strategic Insight for Demanding Leaders"