Woolworths plans price offensive

Posted by Josette Dunn on 1st March 2010

Supermarket group Woolworths Ltd plans to ramp up its investment in price in order to drive sales volumes.In its earnings release on Friday (26 February), Woolworths posted a 6% increase in half-year revenues to A$27.2bn due to rising own-brand sales and lower prices.

Woolworths logo

During the half, Woolworths spent A$120m on lowering prices on 3,500 grocery items, cuts that came on top of the retailer’s programme of weekly promotions, CEO Michael Luscombe revealed during a presentation to analysts.

However, Luscombe emphasised that the majority of the investment was made at the start of the half and was therefore already reflected in the group’s 11.4% lift in net profit.

Nevertheless, Woolworths management revealed it expected to increase the company’s investment in pricing, which will be funded by margin expansion.

“We have been investing for the best part of a decade in becoming a very efficient business and, whilst we still have some head room in continuing to become more efficient, we are now in the position to employ the retail double-loop. That enables us to reinvest savings in cost – and savings that we generate through gross-margin management into lower prices to drive volume and hence profit,” Luscombe explained.

Gross profit margins increased 56 basis points to 25.88% in the six-month period and, while Luscombe likened Woolworths’ supply chain to a “well oiled machine”, he insisted that strong margin management would continue to drive EBIT.

“There are plenty more efficiencies,” he insisted.

Savings identified include Woolworths’ ability to “increasingly squeeze” and “fine-tune” replenishment systems and increasingly buy imported goods directly.

The company has also invested in its store renovation and opening program, with the opening of 89 new outlets in the half.

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