There's plenty of room left to grow

Those who had written off Woolworths as an ex-growth company might need to rethink after it produced a creditable result on Wednesday - at the very least it gave arch enemy Coles no more free kicks.

Woolworths has set itself a target of growing underlying same store profit by up to 7 per cent this year, even more than the 6.1 per cent profit growth it produced in the 2013 financial year.

To achieve this chief executive Grant O'Brien says two things need to happen: consumer confidence has to come back and the retail behemoth has to wrest even more market share from its rivals, and based on history this means from the smaller independent grocers and specialty stores.

Only the brave (or foolhardy) would put bets on consumer confidence staging a recovery any time soon. Talking about an election-led confidence recovery is a bit like talking about the falling interest rate-led consumption surge. Both are optimistic.

Business confidence is far more election outcome sensitive - at least there is a general view that the Coalition is more finance friendly.

Business responds to certainty more aggressively. Even if Labor returns to power, business will better know what it is dealing with.

As far as consumers are concerned just over half of them are going to have voted for whoever wins. And the hung parliament hasn't been as big of an imposition on the average person as many would have us believe. The public want an outcome because they are sick of reading about politics.

But O'Brien is right on the money when he talks about market share gains being the key to Woolworths' profit growth. Sure, the company can cut costs and boost productivity, but getting more customers into the stores will grow the revenue line.

It's a touchy point for the company that is keen to boast (to investors) that a record number of customers went though Woolworths group checkouts but which is paranoid about regulatory fallout.

There are major campaigns being waged by smaller independent grocers and by suppliers to Woolworths and Coles warning the two big supermarket operators have an unhealthy level of market power.

Independent grocery competitors have resorted to running print advertisements to push their case. It hasn't had much political traction yet apart from Malcolm Turnbull reiterating that the big guys' market share is a concern.

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?

Woolworths and Coles simply will continue to plough money into greater discounts. But this puts pressure on their margins. The game changer is loyalty - it's territory both are heavily competing for but neither has conquered.

According to Nielsen research, only 7 per cent of customers shopped exclusively at Woolworths over a four-week period. And only 1 per cent of the market shopped only at specialty outlets (such as greengrocers, butchers and bakers).

About a third of consumers (the largest group) shopped across Coles, Woolworths, Aldi, independent supermarkets and specialty shops over the four-week period. In other words when it comes to groceries, Australian shoppers are brand promiscuous.

Meanwhile, if there is movement against the supermarket giants we won't see evidence until after the election. The Coalition will undertake its root-and-branch review of competition policy and Labor will place its oar into the ongoing and supposedly collaborative effort between suppliers and supermarkets to create a voluntary code of practice.

A more likely determinant of how Woolworths performs in 2014 is the extent to which it can stem the losses of its hardware start-up, Masters. O'Brien will be hoping that he can grow profit at the upper end of its guidance range as it did in 2013.

Woolworths will have some additional cost initiatives in its arsenal. It made some good inroads in costs and shrinkage (which is the product that has to be thrown out) plus some logistics improvements.



Food and liquor still account for the bulk of Woolies' earnings... but growth is by far the strongest in hotels and gaming

Earnings growth (year on year) %

Hotels/Gaming 34.7

8.7 Food and liquor

8.3 Petrol

7.2 Big W

5.2 NZ supermarkets