THE DISTILLERY: Woolworths winner

Jotters outline why Grant O'Brien has overseen a spike in Woolworths' stock, but for some the praise is qualified.

Woolworths chief executive Grant O’Brien has been in the top job for about a year now and the company’s share price is up 19 per cent against an 8 per cent increase in the benchmark index. Nice one! While the progress that O’Brien has made in reshaping Woolworths amid leaner retail conditions, two commentators explain why O’Brien still has some convincing to do. Although both point out that times are lean and it’s still early days in his tenure at Woolies.

Also this morning, another top company boss, Ten Network’s chief James Wharburton, has one hell of a task ahead of him, a Fairfax columnist explains why. Elsewhere, some innovative economists win some high praise.

Firstly, The Australian Financial Review’s Chanticleer columnist Tony Boyd says O’Brien would normally deserve strong credit for the fact that Woolworths is one of the best performing defensive stocks in the market.

"But it is not as simple as that. While Woolworths shares have outperformed the broader market and other defensive stocks such as Wesfarmers and Coca-Cola Amatil in the past year, O’Brien has struggled to deliver strong profit growth. His first full-year profit showed a 2 per cent increase in earnings. Also, Woolworths is struggling to convince the hard heads in the analyst community that he can deliver strong returns on invested capital. The hallmark of the O’Brien era has been the $2 billion investment in expanding the company’s footprint in supermarkets and homewares through the Masters joint venture.”

Indeed, Business Spectator’s Stephen Bartholomeusz says the signs of O’Brien’s impact can be seen in the stronger executive of promotions.

"In Big W, within that segment of department store retailing that has been hit hardest by a combination of the downturn in discretionary spending and the disruptive but highly successful deep-discounting model adopted by rival Kmart, there have also been gradual signs of improvement, aided towards the end of last year by the Gillard government’s financial-year-end cash splash. As this year unfolds the impact of the Reserve Bank’s rate cuts on consumers’ confidence will presumably also start to be reflected in the numbers generated by the major retailers. Until Woolworths produces its profit numbers, however, it isn’t possible to determine whether the stronger sales are due to better retailing or have been bought at the cost of margin.”

We all know that Ten Network is in a tough spot, particularly after hitting some trouble in the sale of outdoor advertising company EYE Corp. But Fairfax’s Elizabeth Knight explains why the free-to-air networks can’t turn on a dime.

"The trouble with a television turnaround story is that it is a long-winded process. First the network needs to find the right program mix to attract the audience, and it needs to be sustained for at least a year before the advertising market will respond by spending the dollars. At best, it will take a couple of years to rebuild. Being the third-ranked network is not necessarily a bad outcome if the overall market is buoyant. But it is a lousy place to be when the advertising environment is depressed. Where Nine and Seven have spent big dollars on programs – particularly sport – to keep audiences, this is not an option readily available to Ten, whose finances are more limited.”

Elsewhere, The Australian’s economics correspondent Adam Creighton laments the concession by International Monetary Fund managing director Christine Lagarde for indebted European nations to stop cutting so hard into their budgets if they need more time. Instead, he promotes the work of Bank of Sweden prize-winning economists Alvin Roth and Lloyd Shapely, as examples of those who lift the standing of the profession.

"Freely set prices are the best way to direct scarce resources in an economy, but sometimes ethics or inertia demand a different mechanism. Often students need to rank their preferences strategically when applying for universities and schools, for instance, while organ donors are not permitted to sell their body parts to the highest bidder. Shapely and Roth, through abstruse mathematics and scrupulous studies, worked out a set of arrangements that, without any recourse to a price or payment, saw people matched up with products or institutions they wanted yet left no two parties with an incentive to match up with another. Their method dramatically improved the allocation of young doctors to hospitals and pupils to high schools in the US. In university admissions, the Shapley-Roth formula means students can rank their preferences honestly without fear they will end up somewhere they had not even listed.”

In other economics news, Fairfax’s Michael Pascoe urges other commentators to update their ‘China 7 per cent rule,’ which dictates that the emerging superpower (can we consider it emerged yet?) needs to grow at least at that pace to avoid civil unrest.

"Now that it’s the world’s second biggest economy and on-track to become the biggest on a purchasing power parity basis in five years, growth of much more than 8 per cent would not be healthy.”

Fairfax’s Malcolm Maiden explains how Kohlberg Kravis Roberts managed to hold on to its share of Seven Network when private equity rival CVC Asia Pacific lost its grip on Nine Entertainment so spectacularly.

The Australian’s Glenda Korporaal reminds readers that calls for further engagement with India, many of which have been relayed and endorsed in this column, need to be tempered by the reality that India’s business practices still aren’t up to standard.

She brings word from Australia event managing expert Ric Birch, who’s still fuming from the way many businesses were treated by the Indian government in the wake of the Dehli Commonwealth Games. Many contracts have yet to be honoured and some Indian officials have simply lashed out at the reputations of the suppliers.

To think that India’s business standards still have some improving to do in comparison to China is saying something. It’s not as if Beijing doesn’t change the rule to suit its own ends on a relatively consistent basis.

In company news, The Australian’s Matthew Stevens welcomes the arrival of shale gas to the Santos portfolio, with South Australian Premier Jay Weatherill set to turn the tap on the Moomba 191 well today.

The Australian’s Bryan Frith argues that the draft changes to the ASX’s continuous disclosure rules underline the need for a ‘put up or shut up rule’ when it comes to potential bids. As readers of this column will know, Frith is perhaps the most informed mainstream writer on M&A regulation in the country and anything he delivers on the subject is always worth a look.