Is Telstra the new Woolies?
What ails Woolworths (ASX:WOW)? Once regarded as the best business in the land, the supermarket giant has lost market share at the hands of resurgent competitors. The problem, as many have identified, is that Woolworths returns were too high for too long. Those super profits enticed competition which are now the source of its woes.
There is another household name on the ASX that sounds eerily close to sharing this experience. Telstra (ASX:TLS) appears, on the surface, to be an exemplary business. Financial metrics are stunning – consistent returns on equity over 30%, twice as much as China Mobile (SEHK:941) and Singtel (SGX:Z74) and three times greater than Vodafone (LSE:VOD) while gross margins dwarf all three.
Operating metrics are also impressive: Telstra commands the lions share of mobile subscribers and the highest average revenue per user. There are difference between Telstra and its international peers but the gap in profitability is telling. A combination of higher volumes and higher prices has driven Telstra’s profits; in a truly competitive market, that combination would not be possible for so long.
Like Woolies, Telstra has been blessed with incompetent competitors for a long time. Vodafone, like Coles for many years, has been ineffective and Optus, until now, has not competed vigorously on price.
As a result, Telstra has been able to capture growth as mobile data consumption rockets. Fat profits have sustained generous dividends and investments in new ventures. The business is ticking along beautifully and, like Woolies a few years ago, little seems capable of troubling it.
Yet as Woolies experience warns, outsized returns are threat. Vodafone has been recapitalized by its global parent and is again growing its customer base. Shaken by competition, Optus has vowed to gain market share and become more aggressive on price.
In its results presentation this week, Telstra chief executive Andy Penn pledged to sacrifice margin for market share. He promised, in other words, to start a price war if needed and also pledged higher capital expenditure on network growth.
Super profits have done what they always do: flatter the business for a while then promote competition. I suspect Telstra is about to face real competition for the first time in years and those generous returns will be threatened. The treat is similar to Woolworths, we’ll have to see if the response is any better.
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Frequently Asked Questions about this Article…
Woolworths has lost market share due to increased competition. Its historically high returns attracted competitors, which have now become a source of its challenges.
Yes, Telstra is facing similar challenges as Woolworths. Despite its strong financial metrics, Telstra's high profits have attracted competition, which could threaten its market position.
Telstra's financial performance is notable for its consistent returns on equity over 30% and high gross margins, outperforming international peers like China Mobile and Vodafone.
Telstra has maintained its market dominance through a combination of higher volumes and prices, capturing growth as mobile data consumption increases, and benefiting from less aggressive competition.
Telstra is expected to face increased competition as Vodafone has been recapitalized and Optus plans to be more aggressive on price, potentially leading to a price war.
Telstra's CEO Andy Penn has announced a strategy to sacrifice margin for market share, indicating a willingness to engage in a price war and increase capital expenditure on network growth.
Super profits have initially flattered both Telstra and Woolworths, but they have also attracted competition, which now threatens their generous returns.
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