Contrasting growth stories in Australian supermarkets results

Posted by AFN Staff Writers on 4th September 2012

While competition between Australia’s 2 main supermarkets groups remains intense, several commentators have identified significant differences in strategic direction between Woolworths and Coles.

Recently, Woolworths reported its full-year net profit slumped 15 per cent to Au$1.82 billion (US$1.89 billion) due to extra costs and write-offs associated with its exit from the unprofitable Dick Smith electronics chain.

Woolworths, Australia’s largest food retailer which is in a battle for dominance for the supermarket sector with rival Coles, said sales revenue in the year to June 30 was Au$55.1 billion, up from Au$52.6 billion.

Excluding losses from the Dick Smith operations, Woolworths’  net profit from continuing operations was Au$2.18 billion, up 3.6 per cent from the previous year.

Chief executive Grant O’Brien said the underlying performance was pleasing but warned the company expected the retail sector to continue experiencing challenging trading conditions.

“Despite some of the toughest retail conditions in recent times we have delivered value to customers through lower prices and value to shareholders through solid returns within guidance,” he said.

Steve Spencer, from Freshlogic, a specialised consulting and analysis business with a strong focus on the food industry, interprets market and supply chain conditions  and economic settings to explain what has been happening in the Australian supermarket food industry sector.

Through a comparison of the total absolute growth in sales and EBIT of both Coles and Woolworths over the past 3 years, he concludes that despite sales momentum being clearly with Coles, interestingly over this three-year period the addition to earnings from new sales has favoured the higher-margin Woolworths.

Woolworths added to its food & liquor bottom lines faster in 2011/12, and liquor helps make Woolworths’ numbers look better. Woolworths not only owns the Dan Murphy liquor chain but is a 75% owner of ALH Group, one of Australia’s biggest chains of pubs with poker machine income too.

Freshlogic’s Steve Spencer said in the firm’s most recent newsletter FreshIncite that the two supermarket groups “have different store network strategies, radically different balance sheets, and will seek growth through different approaches – Woolworths is relying on more stores, while Coles is making inroads to sales and margins through better store productivity (sales per m2).”