The Coles Group Ltd (ASX: COL) share price is in focus after the supermarket business announced it was spending $105 million on two milk processing facilities.
Coles may be best known for its supermarket business, as well as the liquor businesses including Liquorland and First Choice Liquor.
Coles’ milk acquisition
The supermarket business announced it is buying two automated milk processing facilities from Saputo Dairy Australia for $105 million.
Each of these facilities has a capacity to process around 225 million litres a year and they are mostly used today to process Coles’ own brand 2L and 3L milk. They are located in Laverton North (Victoria) and Erskine Park (New South Wales), close to its distribution centres.
Coles explained that this will improve the security of its milk supply and its supply chain resilience in the dairy sector. The supermarket business also said that these facilities have sufficient capacity to further growth opportunities through “new product innovation”. This sounds like it could be helpful for the Coles share price.
The employees at both facilities will be offered employment contracts with Coles.
Management commentary
The Coles CEO Steven Cain said:
These facilities are state-of-the-art, delivering exceptional production efficiency and quality through highly automated processes.
The acquisition will build on the strong relationships we have developed with our dairy farmers since launching our direct sourcing model in 2019. Around 90 dairy farmers supply milk direct to Coles, allowing these farmers to invest for the future and ensuring the long-term sustainability of their farms.
My thoughts on the Coles share price
Coles is spending quite a lot of money on these facilities, so the company must think it’s worthwhile to buy them. This could add improved milk supply, which is important for customers, and it gives the company an opportunity to either improve the margin on its milk products, or sell it for cheaper, or perhaps a bit of both.
The company didn’t tag its announcement as ‘market sensitive’, so it’s not that important in the grand scheme of things. But, I think it can help.
Coles is making the most of the current inflationary environment. I think it’s one of the good ASX dividend shares, but I don’t think it has a lot of share price growth potential due to the nature of supermarket retailing. However, ongoing population growth increases its total customer base.
