Woolworths’ answers pose many questions

Posted by Daniel Palmer on 24th July 2009

Is Australia’s largest supermarket chain looking over their shoulder more cautiously?

Woolworths has been dominant in the Australian supermarket sector for the best part of a decade, grabbing market share at will and recording consistent double digit profit growth. Reporting sales growth of 7.5 per cent this week would suggest all is well, but this is Woolworths and analysts have come to expect more. The results were, after all, not as brilliant as the first quarter despite the impact of the stimulus package. So is there something bothering the supermarket giant?

Rarely, in recent times, have they been drawn into any notion that there is a battle with Coles. The focus on discussing Aldi and independents with journalists suggests an attempt to deflect discussion of a duopoly in the sector – and perhaps a desire to disregard the Coles turnaround story, publicly anyway. Their reaction to the recent outbreak of heavy discounting by Coles appears strange however, particularly given recent history.

First, they matched the petrol discount of Coles last week and then followed up with an attack on Coles’ offer to seniors this week – claiming it was a sign their competitor was desperate. A spokesperson for the chain told the Herald Sun that it was “a very expensive stunt for a business that is clearly struggling”.

In contrast, a different spokesperson for Woolworths reported the week before – to the same paper – that further snap reductions could be expected from both major chains.

“Price cuts of this magnitude are not sustainable for long periods of time but, with people under the pump with the economy the way it is, more one-offs are likely in the future,” he advised.

And then, in Wednesday’s conference call, Chief Executive Michael Luscombe added that the petrol and seniors discounts weren’t stunts, merely unsustainable promotions.

“I wouldn’t say they were stunts, but they were not sustainable and not part of what we are about, which is creating long-term value for our customers,” he said.

So they’re expensive stunts one day then simply unsustainable later in the same week. But wait, if they are not what Woolworths is about, then why did they follow suit on the petrol offer?

Hold that thought.

Mr Luscombe was on ABC Radio National yesterday discussing the results and was clearly irritated with the reporter after she questioned the need to resort to “publicity stunts like the recent three day petrol offer”.

“Well, a stunt is a word you use,” he countered.

Mr Luscombe went on to indicate that they would happily meet any special offer made by competitors.

“If someone comes out with a broad market offer, even for a short period of time, that puts us at a disadvantage, we’re going to react very quickly.”

Crystal clear. But then what was the seniors discount? A deal by Coles that provides a ten per cent discount for seniors is surely going to put them at a disadvantage.

To wrap up an odd flow of information: they’re stunts but they’re not stunts, unsustainable and not what Woolies is about, yet they are likely to do more in the future.

And then there was the attack on the leading food and beverage manufacturers operating in the country.

Typically, when quizzed about food inflation, Woolworths will point to the ACCC’s Grocery Inquiry, the drought, food commodity prices, private label, and/or what they say are low margins in their business. But not this week.

Mr Luscombe was happy to avoid stirring Alan Jones when queried about a supposed war between the radio broadcaster and the retailer, but couldn’t help but get drawn into the food inflation debate.

His answer to the question started out in a similar vein to what appears an almost scripted response, but then strayed toward blaming the “multinationals that dominate our food supply” in a sign of underlying tension between the retailer and manufacturers.

Perhaps the retailer, sick of constant criticism of market power, has simply decided to fight fire with fire. But why attack those who haven’t attacked them? Woolworths lashed out at the major manufacturers who tend to blame food commodity prices for the inflation rates in the country.

So, just competitive banter and a slight crossing of wires that leads to inconsistent commentary or something more?

I guess we’ll get a greater understanding when Coles releases their results.

Watch this space.

To hear the complete Radio National interview please visit: mpegmedia.abc.net.au/rn/podcast/2009/07/bst_20090723_0747.mp3 

Disclosure: the writer holds no shares in Woolworths, nor shares in any other Australian retailer.