The Distillery: Woolies check-out

Jotters had muted enthusiasm for Woolworth’s results, eyeing tough roads ahead but opportunity for tech-focused growth.

Jotters have hailed Woolworths’ results as creditable – but the numbers give little indication the retail behemoth will go forward with rapid supermarket growth. Attention is firmly on that arm of the business and many continue to ask if Woolworths is a victim of its own success – a problem most businesses would kill for.

So for most commentators the supermarket giant’s numbers were alright, but scarcely much better than that.  The Australian’s John Durie noted the closing gap between Coles and Woolworths as reason for the latter to be a little less enthusiastic.

“In the scheme of things, then, the Woolworths profit was OK, thanks to a huge effort in taking costs out, which is, at best, a short-term measure…Sales per square metre in Woolies supermarkets have fallen from $16,172 in the 2011 year to $15,973, and until that trend is improved the stores are effectively going backwards. Across the same period that Woolies has gone backwards, Coles sales per square metre have increased from $14,148 to $15,052 – a 3 per cent increase, against a 1.2 per cent fall at Woolies… Yet O'Brien was almost effusive in talking up yesterday's profit numbers, taking on the role of team cheerleader, but in reality the numbers are, at best, reflective of a work in progress and buoyed by a series of one-off items that clouds the quality of the result.”

Durie’s colleague at The AustralianRichard Gluyas, was similarly unimpressed by the results, noting that it isn’t easy being a Woolworths exec. The opportunity for stronger growth, he notes, is still there, it’s just a bit harder to see.

“While it was a creditable result from Woolies yesterday, the truth is that the chunky cost savings in the various phases of Project Refresh are no longer there. (Chief executive Grant) O'Brien has the "misfortune" of already running a world-class supply chain, and an EBIT (earnings before interest and tax) margin that doesn't suffer by comparison with any of its global rivals. But as the Woolies boss made clear yesterday, there are still opportunities to chip away at the cost base. Even if they are incremental, they start to add up when implemented across a $40bn-a-year food and liquor business.”

Fairfax’s Elizabeth Knight was a bit more enthusiastic on the prospects for growth. The word “creditable” was once again used to describe the results – it’s trending – but Knight also had an interesting take on why the ‘big two’ will be able to keep lifting customer numbers.

“When one takes into account the growth of German uber-discount supermarket chain Aldi, the increased customer numbers that Woolworths and Coles are reporting are even more amazing. Woolworths had a record 28.4 million people per week in stores in 2013 but Coles also gained market share during that period. It’s hard for political parties to buy into a fight with the big supermarkets when, for example, Woolworths reduced the cost of a basket of goods by almost 3 per cent in 2013. It has the capacity to ramp up discounting even more. Who wants to electioneer on a policy of increasing grocery or fuel prices?”

Who indeed?

The theme was further illuminated by the Herald Sun’s Terry McCrann, who outlined why the pain for suppliers and competitors will just get worse.

“The continuation of the complementary strategies of the big two, pretty much into the foreseeable future, will make it exquisitely tough for those suppliers. They'll continue to be squeezed ruthlessly on price by Woolies and Coles, determined to keep cutting prices to shoppers. But they'll have to stay on their shelves, because that will also deliver the suppliers the volume growth, without which they couldn't survive the price-cutting.”

While the commentariat wasn’t exactly swooning over the company’s data release, The Australian Financial Review’s Matthew Stevens noted that the market had other ideas. With uncertainty reigning supreme, investors saw the ‘typical’ result as a reason to buy.

“Now, for all that, the investment market offered a resounding tick to Woolworths’ fiscal 2013 results, adding 1.7 per cent to the retailer’s share price on what was a generally depressed day’s trading. And that is fair reward given that O’Brien’s latest numbers were very much a classic of the Woolworths kind. For generations of Woolworths management, success has been measured by the ability of the business to sustain a virtuous cascade that sees profit grow at a faster rate than sales on the back of prudent trimming of costs across the broadest imaginable plain. So it was through fiscal 2013...”

Business Spectator’s own Stephen Bartholomeusz pointed out that modest tweaks were the best way forward and as long as you don’t mention the hardware elephant in O’Brien’s room, Woolies is doing a pretty good job.

“About two years ago, when Grant O’Brien outlined his strategic vision for Woolworths, it was neither bold nor radical, but rather a broad series of modest tweaks to businesses that had lost their competitive edge rather than their way. If the teething pains from Woolworths’ costly excursion into hardware could be excluded, he’d be very comfortable that the group is on track to deliver what he promised.”

Finally, The Australian Financial Review’s Chanticleer columnist, Tony Boyd, takes a different tact, focusing on technological initiatives at Woolworths. Its IT focus, he suggests, could see it gain an edge on its rivals and on this front it has reached a turning point.

“For the first time, the money earmarked for the Woolworths supply chain’s information technology, multi-option strategy and stay-in-business projects will exceed refurbishment...The first priority for technology investment in 2014 is to upgrade the point-of-sale systems at 3000 stores through Australia. The systems in every checkout lane will be upgraded as part of a 10-year strategy to roll out improved customer services…The beauty of the upgraded point-of-sale system is that it will be more easily integrated into the group’s enterprise management system supplied by SAP. The combination of a cutting edge point-of sale-system, data analytics, loyalty cards and core systems that connect with suppliers should put Woolworths ahead of competitors.”

Moving to the markets, and The AFR’s Philip Baker looks back at historical data to suggest current turbulence could be exacerbated in September and October.

The Australian’s Rowan Callick also urges investor caution, this time focusing on emerging markets. The growth rates among BRICS countries in the 2000-2010 decade may indeed be a thing of the past.

Callick’s fellow scribe at The AustralianDavid Uren, meanwhile, argues it’s time we distance ourselves from the notion that gifting money to carmakers is good for the economy.

And Fairfax’s Malcolm Maiden spotlights the reason why Flight Centre has yet to be internet roadkill: baby boomers.

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