THE DISTILLERY: Retail rivalry

The scribes pit Woolworths against Wesfarmers, and speculate on the wash-up from Caltex's Kurnell closure.

Australia's scribes love a good retail rivalry, and there's none bigger than the one between Woolworths and a resurgent Wesfarmers. Now that both companies have handed down their final-quarter sales results there's the usual debate about which battles each company is winning and why, and also some interesting thoughts on the deflationary curse that has been cast over both groups. Elsewhere, ink is spilled over the closure of Caltex's Kurnell refinery in Sydney, and Qantas' talks with Emirates.

But first, The Australian's Richard Gluyas cheers the lifting of the "curse of the cheap banana," a phrase he uses to describe heavy food deflation following the end of Australia's drought. Wesfarmers chief financial officer Terry Bowen now says the worst may be over, outlining his expectations for "flat to low levels" of deflation going forward.

"The glory days for shoppers may have passed, but the news for shareholders is unmistakably good because of the benefits of fixed-cost leverage – higher revenue on an unchanged cost base. Again using Macquarie numbers, fresh food, including meat, bakery, deli and produce, accounts for 26 per cent of Coles' sales, of which fruit and vegetables is about 30 per cent. If fruit and vegetable prices rose 10 per cent, and volume and costs stayed the same, Macquarie said, earnings before interest and tax would lift by 5 per cent. The curse of the cheap banana would be consigned to history."

Malcolm Maiden makes a similar point at Fairfax, arguing, "Heavy food price deflation masked how well the Coles and Woolworths supermarket chains fared in the year to June…"

Business Spectator's Stephen Bartholomeusz compares Wesfarmers' results with Woolworths', noting a stand-out difference:

"The impressive aspect of Coles’ sales growth is that it isn’t being driven, as Woolworths’ is, by aggressive expansion of its store network, although there is now growth occurring in that network. Where Woolworths has been furiously growing its network – it opened 38 new supermarkets and 20 Dan Murphy’s outlets in the latest financial year – Coles has been very focused on improving the productivity of its existing network. It is only a third of the way through a refurbishment and re-formatting of its 749 stores."

And, at The Herald Sun, Terry McCrann says each retailer boasts its own strengths. In a piece thick with Olympic metaphor, McCrann says Coles "has the gold in power lifting" – that is, comparable store sales – while Woolies' strength is "synchronised swimming," or adding floor space.

"Coles' imported CEO Ian McLeod fundamentally changed the competitive dynamic between the dominant duo with his aggressive pursuit of sales. He now has to show he can build margin. Not just get more sales out of each supermarket, but more profit out of each dollar of those sales. For Woolies, margin was prime, so it initially resisted price-cutting. It aimed to counter Coles by aggressively building out its floor space. Now its relatively new CEO Grant O'Brien has to show he can switch from synchronised swimming to power lifting. Likes Coles, pumping more product out of each supermarket."

The other big story is Caltex's closure of its Kurnell refinery. The Australian Financial Review's Chanticleer columnist, Tony Boyd, considers Caltex's announcement from an investor's perspective, anticipating "more stable and consistent earnings growth," and a higher stock price. Meanwhile his colleague, Jennifer Hewett, thinks union backlash against the closure, which will cost more than 300 jobs, reflects a "dumbing down" of the debate over the painful structural changes facing some Australian industries. Resisting them, she says, "inevitably proves more brutal".

The Australian's John Durie considers the latest rumour about a change in strategy at Qantas – that the carrier might abandon its European routes in a code share deal with Emirates. After so many u-turns, Durie says "the question must be asked whether the company board and management have any clue about where it is heading."

At the same newspaper, Bryan Frith runs an eye over another deal in progress: the bidding war between APA Group and Pipeline Parners Australia over Hastings Diversified Utilities Fund. He says the target has little option but to grant APA Group's request for due diligence, now that it has lobbed a sweetened offer.

And finally, Fairfax's Elizabeth Knight has located the Scottish man behind the apparently bogus private equity bid for David Jones in New Zealand. There, John Edgar is said to have set up a new company without any assets and one share owned by him, similar to the RPV Private Equity entity used to launch his offer for DJs. Odd.

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