Woolworths (WOW)

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http://www.woolworthslimited.com.au/

Woolworths Q1 sales lift 3%
NOVEMBER 03, 2014 10:30AM

Mitchell Neems

Business Spectator Reporter
Melbourne
Woolworths has delivered a solid lift in first-quarter sales despite softer-than-expected trading in September and October.

Investors responded poorly to the update, with Woolworths shares falling steeply in early trade. At the 10.15am (AEDT) official market open, Woolworths shares were 2.88 per cent lower at $34.965, against a benchmark index lift of 0.07 per cent.

In the 14 weeks to October 5, Woolworths' total sales were $16.15 billion, a 3 per cent increase on the $15.68bn recorded in the previous corresponding period.

Excluding petrol, first quarter sales were $14.31bn, a 4.1 per cent lift on the previous corresponding period.

Woolworths' food and liquor sales in the period rose 3.9 per cent to $11.02bn. Same store sales for food and liquor increased by 2.1 per cent.

Woolworths' Masters business delivered a 30.8 per cent increase in first-quarter sales to $238m, while its broader home improvement sector saw a 20.7 per cent lift in sales to $472m.

The hotels business fell 1 per cent over the quarter to $399m.

Woolworths' general merchandise business saw a decrease of 0.4 per cent in quarterly sales to $1.1bn as transformation of BIG W continued to weigh on results.

Woolworths' chief executive, Grant O'Brien, said following a pleasing July result, trading was softer in August and September with growth impacted by differences in the timing of promotional activities compared to the prior year and the cycling of higher fuel discount activity.

“While first quarter sales were lower than expected, we are confident that our trading plans will improve momentum in the second quarter which includes the key Christmas period," he said.

Mr O'Brien said online sales across the group increased more than 30 per cent for the quarter with further development of its online business remaining a key focus.

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Woolworths Q1 sales disappoint
NOVEMBER 03, 2014 3:30PM

Mitchell Neems

Business Spectator Reporter
Melbourne
Woolworths has delivered lower-than-expected first-quarter sales after softer trading in September and October, sending shares in the supermarket heavyweight sharply lower.

At 3.20pm (AEDT), Woolworths shares were down 4.9 per cent at $34.23, against a 0.4 per cent fall in the benchmark index.

Woolworths' sales totalled $16.15 billion in the 14 weeks to October 5, a 3 per cent increase on $15.68bn a year earlier. Excluding petrol, first quarter sales were $14.31bn, up 4.1 per cent.

Woolworths' chief executive, Grant O'Brien, said following a pleasing July, trading was softer in August and September.

“While first quarter sales were lower than expected, we are confident that our trading plans will improve momentum in the second quarter which includes the key Christmas period," he said.

Woolworths' food and liquor sales in the period rose 3.9 per cent to $11.02bn. Same store sales for food and liquor increased by 2.1 per cent.

Woolworths' Masters business delivered a 30.8 per cent increase in first-quarter sales to $238m, while its broader home improvement sector saw a 20.7 per cent lift in sales to $472m.

The hotels business fell 1 per cent over the quarter to $399m.

Woolworths' general merchandise business saw a decrease of 0.4 per cent in quarterly sales to $1.1bn as transformation of BIG W continued to weigh on results.

Mr O'Brien said online sales across the group increased more than 30 per cent for the quarter with further development of its online business remaining a key focus.

Deutsche Bank analysts said the sales figures were disappointing across the board, with the three per cent rise in total first quarter sales short of an expected 3.5 per cent lift.

"Performance from the Australia food and liquor business was the key disappointment, with like-for-like sales growth of 2.1 per cent (Deutsche expectation: three per cent) - well below Coles' like-for-like sales of 4.3 per cent," Deutsche said in a research note.

Other divisions were also disappointing, with New Zealand, general merchandise and hotels all falling short of Deutsche's forecasts.

The one slightly more pleasing result came from the home improvement business.

"The key issue for us is the continued slowdown in momentum in the core food and liquor business both on an absolute basis and relative to the key competitor (Coles)," Deutsche said.

"We had previously thought the dip in the fourth quarter of fiscal 2014 was a short-term anomaly, but the continued deterioration has undermined our confidence in the underlying health of the business."

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Woolworths brand fires cheap shots

Sue Mitchell
933 words
8 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

An outbreak of frugality among ­Australia's 10 million grocery shoppers is testing food and liquor retailers Woolworths and Coles and the creative geniuses behind their marketing ­campaigns.

In the same week that Woolworths chief executive Grant O'Brien admitted the retailer was struggling to overcome perceptions its prices were too high, Coles boss John Durkan acknowledged the group needed to do more to gain customer trust in its prices.

"Consumers are as value conscious as we've seen them – they're still concerned about the rising cost of living and we're seeing real wages growth in decline," Mr Durkan told analysts on Thursday, after unveiling the biggest shift in Coles's marketing strategy in four years.

Both retailers are now sidelining multimillion-dollar marketing campaigns that have defined their business strategies for many years in favour of short, sharp messages that leave consumers in little doubt that grocery prices are coming down.Cheap Cheap campaign

After delivering its weakest same-store food and liquor sales growth since 2012, Woolworths has launched a new marketing campaign called Cheap Cheap, and slashed the price of staples such as private label bread, carrots and mince meat.

Cheap Cheap is the third iteration of Woolworths' price-based marketing since 2011, when Mr O'Brien first acknowledged that Woolworths had problems with price perceptions.

At that time, Woolworths terminated its nine-year creative advertising relationship with M&C Saatchi in favour of Droga5. It then relaunched its 25-year-old Fresh Food People brand and rolled out a series of campaigns including "More savings every day" and "Extra Special Extra Simple".

Six months ago, Droga5 stepped aside in favour of ad agency Leo Burnett, and Fresh Food People was relaunched yet again in August.

The relaunch helped boost sales of fresh food but did nothing for packaged groceries, leading to the weakest same-store sales growth at Woolworths since 2012 and the creation of Cheap Cheap.

Advertising experts say Woolworths' chopping and changing threatens to confuse consumers and other stakeholders including staff.

"It's never a good idea to change your marketing tactics too frequently or too quickly after a big campaign launch, or if you have a brand positioning that's served you so well for so long,' said McCann Australia chief executive Ben Lilley. "But while consistency is key, so is creativity. There's no point trying to consistently bore customers into visiting your stores."Many consumer options

Mr Lilley said Fresh Food People may no longer be working for Woolworths because shopping habits have changed dramatically and consumers can now buy fresh food from many retailers. "What was right even five years ago for retailers is not right today. People can and do shop in so many different ways now," Mr Lilley said.

"While there's a lot to be said for consistency, there's also a lot to be said for ensuring your strategy is dynamic and relevant for today's market and today's consumer, not for yesteryear."

Woolworths director of supermarkets Tjeerd Jegen defended the ­continued use of Fresh Food People and the various value campaigns over the last three years.

"Fresh food is at the absolute core of what we do. When you look at us and our competitors we've always had a superior fresh offer for our customers and that's because it has been a key focus of the Woolworths business," Mr Jegen said. "We're known for it and that's why the message resonates with our customers. "

"Probably more than ever [consumers] are looking to keep their grocery prices down," he said. "Cheap Cheap calls out our value proposition. Nobody can mistake what it means to our customers. Prices are cheap and staying cheap at Woolworths."

Woolworths is also relying on pester power to boost sales, resurrecting the wildly popular Aussie Animals trading cards promotion that helped drive same-store food and liquor sales up 3.4 per cent in the December quarter last year, the best rate of growth since 2011.

This time last year, parents were forking out as much as $100 to buy Aussie Animals cards on eBay to fill gaps in their children's collections.

"I don't think anyone expected it to be the success that it was," said Mr Jegen. "Super Animals in some ways will be very similar, with the addition of the sound card reader to add something new."Coles's campaign

However, if Woolworths was hoping Cheap Cheap would be an effective counterpoint to Coles's Down Down campaign, it wasn't anticipating this week's change of tack by Mr Durkan.

Coles has maintained its four-year relationship with agency Big Red. However, in the first major change in its marketing position since 2010, when Down Down was introduced, Coles has moved to an everyday low-prices strategy and a new slogan, Every Day Value.

"Down Down and the big red hand will continue . . . we'll still have a mix of promotions, catalogues and everyday pricing . . . but we certainly are moving more of our pricing to trusted pricing every day," Mr Durkan said.

Citigroup analyst Craig Woolford says Coles's focus on value is not new but the shift in marketing tactics may cause indigestion.

"Weaning off promotions is never painless," Mr Woolford said. "The move towards everyday low pricing is often a struggle unless a retailer can demonstrate noticeably lower prices. Coles's cost of doing business is higher than Woolworths', so it will be hard to sustain lower prices," he said.


Fairfax Media Management Pty Limited

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Supermarkets under siege

Carrie LaFrenz
1950 words
15 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Grocery stocks With offshore rivals gaining market share, homegrown players need to lift their game, writes Carrie LaFrenz.

Supermarket giants Coles and Woolworths – and smaller rival Metcash – were always considered reliable, defensive stocks, from which investors could make healthy div­idends and good capital gains with little worry about the retailers' growth prospects.

While the outlook for the Australian ­grocery market looks positive – underpinned by population growth and food ­inflation – the landscape is changing. In­ternational competitors are taking market share and the competition regulator is going after Coles for the treatment of suppliers.

Woolworths, the once mighty powerhouse of grocery retailing, has stumbled in the wake of a re­invigorated Coles, while its hardware venture struggles amid cost blowouts. Still the nation's largest ­grocer, Woolworths earlier this month posted its lowest quarterly sales growth for over a ­decade.

The poor sales performance jolted investors. The stock fell 3 per cent on the day, but has staged some recovery. While the tumble in share price may prompt some to buy the stock, industry experts have flagged changes in the $85 billion Australian grocery sector.

Wesfarmers-backed Coles and Woolworths still corner the market at a combined 74 per cent, Roy Morgan Research says. ­Germany's Aldi has overtaken IGA/Metcash at 10 per cent and 9.5 per cent respectively. Independent grocers make up the balance.

Philo Capital Advisers head of equity, Hugh Dive, says the market is noticing the growing share of discount grocers Aldi and US-based Costco. "These [supermarket] stocks are no longer stocks you can just put in the bottom drawer," Dive says. "The ­competitive landscape is changing. For years Coles and Woolworths have shrugged off Aldi – that's not the case any more.Discounters look to price lower

"While the sector has been dominated by the big two, Aldi and Costco are creeping in. The discounters are looking to price items about 20 per cent lower. Metcash has been hit the hardest, but Coles and Woolworths are feeling it. Costco is rolling out stores as well. The big thing as a fund manger is will this turn into a Tesco situation, where in the UK market [Tesco's] share is sliding due to two German discounters, Aldi and Lidl?"

Aldi and Lidl have almost doubled their share of the UK market to more than 8 per cent in the past few years. Aldi has been even more successful in Australia, as local ­consumers become more frugal and seek to reduce the cost of their weekly grocery shop.

UBS analyst Ben Gilbert agrees Woolworths has come under pressure due ­to discounters taking share, and says Coles is also lifting its game. "Momentum has slowed in Woolworths food and liquor, with like-for-like sales growth of 2.1 per cent (half of Coles) despite stronger market growth," he says. "Coles and discounters Aldi and Costco are putting more pressure on Woolworths, along with Metcash."

Gilbert says new initiatives at Woolworths – including the re-launch of the Fresh Food People campaign in August and the launch of Cheap Cheap in September – have not resonated with the market as well as management would have liked.

"We think the Australian grocery market is becoming more price-competitive, with Aldi leading the charge. They are highly ef­ficient, have compelling value to customers and are difficult for the major supermarket chains to compete against," Gilbert says.Majors losing to Aldi

UBS estimates Coles, Woolworths and Metcash will lose $250 million to $350 million of sales a year to Aldi. Gilbert suggests that for the majors to stem losses, they need to differentiate their offer via fresh food, service, in-stock positions and loyalty programs. He has a sell call on Metcash, ­noting the company's core grocery business is structurally challenged, with continued store roll-outs and discounting by Coles and Woolworths putting more pressure on independents. "Metcash needs to invest more in value, focus on the core 'buy as you need' shop and drive efficiencies through the business," Gilbert says.

He has a buy on Woolworths and neutral call on Wesfarmers/Coles.

Commonwealth Bank analyst Andrew McLennan says there is room for a second discount grocery chain in the Australian grocery market.

He sees scope for Danish supermarket Netto, Lidl or other discount operators to open locally – either on their own or in partnership with in­cumbents such as Woolworths, Coles or Metcash.

Lidl, owned by Germany's Schwarz Group, was reported to have been scouting for sites in Australia and speaking to ­potential suppliers this year with a view to opening its first stores in 2015.

Woolworths and Coles have consistently played down the perceived threat, saying Aldi had taken market share from Metcash and they were well-placed to compete after reducing prices and investing in customer loyalty and online retailing.

Philo Capital's Dive says Australia is an attractive market with some of the highest grocery margins in the world. But it is challenging in terms of distribution, giving the incumbents a leg up on rivals. The outlook is not all negative, Dive adds, with rising food inflation a plus for supermarket investors.

"The falling Australian dollar will help with pushing up prices of imported goods. This is positive for protecting the grocers' margins. In the near future, we may face higher inflation with century-low interest rates. Rates are only going up in years to come, which contributes to food inflation."

While food inflation may help to stabilise margins, a less favourable regulatory ­en­vironment will make it tough for supermarkets to expand margins.Available profit pool shrinks

Morgan Stanley analyst Tom ­Kierath says profit growth for the major chains is likely to slow as the ­available profit pool shrinks and the federal government and the Australian Competition and Consumer Commission take a more active approach to increasing competition.

"While suppliers are profitable, we feel the profit migration from suppliers to retailers will need to slow, otherwise suppliers will [have] to exit the market," Kierath says.

The ACCC launched its second big legal action against Coles in six months, accusing the retailer of unconscionable conduct against five grocery suppliers by forcing them to plug gaps in its profits, pay for wastage in stores and pay fines for late deliveries.

Coles has rejected the allegations, describing its communications with suppliers as "normal topics for business discussions" between grocery suppliers and retailers worldwide.

The competition watchdog has also forced Coles and Woolworths to stop ­offering excessive fuel discounts subsidised by grocery profits, and has stepped in to unwind restrictive lease provisions that prevented rivals from opening stores.

"Less favourable regulation will make it more difficult for those majors to expand margins," Kierath says. He has a buy on Wesfarmers/Coles, a sell on Woolworths and a hold on Metcash.

While the regulator's decisions may open the door to a more competitive market, Woolworths is facing ongoing problems with its hardware venture, Masters.

Sales appeared to stabilise during the first quarter, but it has a long way to go before becoming profitable in 2016. Analysts say accumulated losses at Masters could reach $1 billion before it breaks even.Strategy questioned

Masters losses rose 12 per cent to $176 million in 2014, while profits in the home hardware business fell 60 per cent to $7 million.

Aberdeen Asset Management senior investment manager Andrew Preston ­questions some of the strategy.

"When it was new off the ground, Woolworths had targets but were not meeting [them]," Preston says. "We were prepared to given them more time. They have con­tinued to roll out stores, but don't seem to be getting traction in stores that are now two or three years old. There is a Masters near me in Toorak Road, which you would say intuitively is not the place for such a store.

"The most ­successful stores are in the outer suburbs where new housing is going up, people are looking for lower price-point kitchens and bathrooms. I don't think they have sited these stores correctly. I think the ­strategy has not been ideal.

"However, I think the new chief executive has changed the perception of the stores and changed the marketing approach, which should have some positive results."Asia opportunities

Elsewhere, while the Tesco accounting scandal raised eyebrows around the globe, it may present an opportunity for Australia's big two supermarkets in Asia.

The UK supermarket is considering ­spinning off or selling its Asian supermarket operations to raise cash and plug a hole in its accounts after a £260 million ($474 million) accounting scandal, according to British media reports. Tesco is one of the largest grocery retailers in Asia, with more than 2000 stores in Malaysia, Thailand, China and South Korea and combined revenue of more than £10 billion.

Woolworths and Wesfarmers (Coles) have been looking for acquisitions in Asia for years and now have teams on the ground assessing opportunities. They are keen to leverage their retail, sourcing and supply-chain expertise and tap new markets as growth becomes constrained in Australia.

Analysts' picks

Summary goes along here please, writes Yolanda Redrup.

Giselle Roux

chief investment officer

Escala Partners

There are really only three stocks in Australia you would consider – Woolworths, Metcash and Wesfarmers. In practice, if you want pure supermarkets you have to buy Woolworths; if you buy Wesfarmers you get 45 per cent supermarket exposure, but other assets may be the focus in the future. Metcash is a wholesale business, so it has far less control on the outcome. Metcash may provide a stable option, but it's discounted because its growth opportunities are far fewer. From the valuation perspective, both Wesfarmers and Woolworths are both relatively expensive against the market.

Danial Moradi

equities strategist

Lonsec

Our pick would be Woolies because it's the purest in terms of trading on the grocery retail sector. Wesfarmers has other businesses . . . Woolies generates higher returns. It has been underperforming and losing market share to Coles, but it has a strong track record in Australia. The recent share price weakness is due to short-term weaknesses . . . a poor quarterly result and an indifferent performance from Masters, which we think hasn't matured yet. You have to give the benefit of the doubt to the management team because they've always delivered in the past. Metcash would be the last choice. It's facing big competitors.

Tim Montague-Jones

analyst

Morningstar

Woolworths is the best value for money because it recently announced quarterly sales numbers which the market was disappointed in and has sold down quite a bit on the back of that. Comparing it with Coles, you would say Coles is taking market share, but we believe one lot of quarterly numbers isn't reflective of the real sales activity in the market. We always take a longer-term view looking at a business. Both Coles and Woolworths have strong long-term competitive advantages because of scale. We believe there will be even fewer independent supermarkets in the future.

Craig Young

analyst

Nikko Asset Management

There is a big price differential between Wesfarmers and Woolworths. Woolworths' food and liquor business is a larger proportion of the overall business and that's the best for both Woolies and Wesfarmers. It's a stable, high cash flow business. My understanding is Metcash is doing poorly. Feedback from suppliers suggests that Metcash's sales growth is poor and it is very exposed to the entrance of Aldi into South Australia and Western Australia. Looking at what's happened [so far], Metcash has lost market share and the entrance of Aldi will continue to put pressure on the business.

Yolanda Redrup


Fairfax Media Management Pty Limited

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Woolies defies critics with profit guidance
THE AUSTRALIAN NOVEMBER 28, 2014 12:00AM

WOOLWORTHS has defied the market perception of its performance by sticking to its guidance of growth of 4-7 per cent in net profit after tax despite a slump of 14 per cent in its share price in the past month.

Company chairman Ralph Waters told the company’s annual general meeting in Brisbane yesterday that the retail market was increasingly competitive and that the company’s soft quarter sales had been reflected in the share price.

“The market appears to have drawn conclusions about the company’s outlook that the board does not share,” he said, before reaffirming the previous advice.

The company dealt with the issue of the short-term drop in the share price by pointing out that in the past three years, Woolworths had delivered total shareholder returns of about 50 per cent and its share price had increased by more than 30 per cent, which was in line with the ASX 200.

The market responded well yesterday, with Woolworths shares rising 2.16 per cent to close at $31.75.

Chief executive Grant O’Brien gave an upbeat address to shareholders, telling them that there was good progress in the online division and liquor retailer Dan Murphy’s, while the New Zealand supermarket operation was “delivering pleasing results”.

Mr O’Brien even saw an upside in the company’s troubled hardware division, Masters, which he said was “bringing real competition to the market”.

“While financial-year 2014 losses were higher than anticipated, we have established a solid foundation and are focused on transitioning from a start-up to a scalable, profitable business,” he said.

While acknowledging that the first quarter was soft, he said that the second quarter would rely heavily on the next six weeks — Christmas trading — and “like many retailers, we have started Christmas marketing and promotional programs earlier to strengthen the festive season’s trading outcomes”.

“These improved sales trends are pleasing, given the soft first quarter,” he said.

Several shareholders asked whether the Australian market might mirror the British experience, where aggressive cost-cutting by the likes of Aldi and Costco had led to profit writedowns among market leaders Tesco and Sainsbury.

Mr Waters said Aldi already had 300 stores in Australia and was growing, but the company had been in Australia for several years now, and its presence was “not new competition”.

He said stores in Britain were generally larger than in Australia and new floor space in Australia was growing at 4 per cent compared with 7 per cent in Britain.

“We don’t blindly say it couldn’t happen here,” Mr Waters said.

“But we do find that there are significant differences between what’s happened here and there.”

[kelvesy]

Hi GG,

I am personally interested in this company. How do you view about the pessimism surrounding the company? I think it is a good time to get in.

They are overplaying the situation and all the market headliners are creating panic. Ever since Aldi entered the competition in FY10, I still see increasing EBIT margins. Grant is coming out with Mercury II with different phases. It will take time for plans to come materialise.

Can refer to Carrefour on how they fought and won over those "deep discounters" and returned to rising profitability.

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Competitive structure of the basic staple market is changing hence investors expectations should be changing as well...

Woolworths’ plan to take on Coles, Aldi
• BUSINESS SPECTATOR
• MAY 06, 2015 12:28PM

Mitchell Neems

Business Spectator Reporter
Melbourne
Eli Greenblat

Senior Business Reporter
Melbourne

Woolworths restructure an admission of past failings


Woolworths CEO Grant O'Brien at the company’s headquarters in Sydney Source: News Limited

Woolworths is aiming to “neutralise” the impact of its chief rivals Coles and Aldi on its grocery sales, outlining a new pricing and value strategy after falling well short of expectations for its third-quarter sales.
In the 13 weeks to April 5, Woolworths (WOW) delivered total sales of $14.956 billion, which represented a 1.6 per cent decrease on the previous corresponding period, or a 2.1 per cent decline adjusted for Easter.
Woolworths said cost reductions also formed an important part of the strategy. The company’s cost reduction drive is expected to deliver more than $500m in savings across fiscal 2015 and fiscal 2016.
Around 400 support roles have already been cut and Woolworths said it expects to cut a similar number moving forward.
Start of sidebar. Skip to end of sidebar.
• MOREWoolies loses more ground to Coles
• MORECostco welcomes supermarket price war
End of sidebar. Return to start of sidebar.
Woolworths flagged weakness in its food and liquor sales at its half-year results, saying sales in December and January has been disappointing.
Today, chief executive Grant O’Brien said April was also more subdued than expected, despite some signs of improvement in February and March.
Admitting to investors today that “we still have much to do”, Mr O’Brien said sales at its flagship supermarkets operation had slowed in December and January, showed some improvement in March but sales were once again subdued in April.
He said Woolworths would “turbo charge’’ its new “lean retail” model by investing more than $500 million into lower prices, better service and more attractive offers.
Mr O’Brien said Woolworths would implement a new ‘lead retail model’ that would invest efficiency savings into all aspects of the supermarket customer offer.
“What is clear is that while lower prices are essential, the true battleground is the overall customer experience. So we will not be beaten on price, and we will provide better convenience, superior freshness and a more appealing range, and a focus on innovation,” Mr O’Brien said.
Woolworths Food Group — the new streamlined division encompassing its Australian and New Zealand grocery operations — managing director Brad Banducci said moving forward the company was placing the customer at the start of everything it does.
“This strategy will result in lower prices, more compelling offers, and greater innovation,” he said.
“What is clear is that while lower prices are essential, the true battleground is the overall customer experience.”
The Woolies plan includes a detailed strategy for improving Own Brands.
“Own Brands will play a key role in competing with limited range discounters,” the company said.
“Woolworths will create higher quality and better priced Own Brands to close range gaps where no branded alternative exists.”
The group said the new strategy will rebalance capital expenditure between new stores and existing store refurbishments, with plans for more than 80 stores to be refurbished each year into the foreseeable future.
This is well above the 23 stores refurbished in fiscal 2014 and the 61 refurbished in fiscal 2015.
Woolworths has also established a new division called Woolworths FoodCo, which will have responsibility for developing new product categories, improving fresh meat supply and processing facilities, and developing strategic sourcing relationships with Woolworths’ primary industry partners.
Turning to service offers, Mr O’Brien said around 250 new click and collect locations will be added over the next two years taking total click and collect network to around 1000 stores.

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Rivals leaving Woolworths on the shelf
THE AUSTRALIAN MAY 07, 2015 12:00AM

Eli Greenblat

Senior Business Reporter
Melbourne

Woolworths restructure an admission of past failings

The competitive threats snapping at the Woolworths retail empire have helped push the group to its first retreat in quarterly sales for more than two decades, as the company’s flagship food and ­grocery business falls further ­behind rival Coles.

And it is unclear whether the $125 million recently invested by Woolworths in lower shelf prices is making a dent in the problem, with chief executive Grant O’Brien ­yesterday conceding while sales had picked up in March they were subdued in April.

Fears are growing that the sales growth gap between Woolworths and Coles is becoming entrenched, with newer entrants such as US discounter Costco and German retailer Aldi also peeling away customers across a range of categories including fresh food, packaged groceries and apparel.

Woolworths yesterday posted a headline 2.1 per cent fall in third-quarter sales to $14.95 billion, its first quarterly sales fall in 20 years.

Adjusting for the timing of Easter and changes to the retailer’s petrol alliance with Caltex, third-quarter sales rose 2.3 per cent.

Falling petrol prices and new arrangements around the Caltex partnership caused some of the March quarter sales fall, with ­general merchandise arm Big W still bleeding sales as it works through a protracted transformation program.

The biggest disappointment came from the workhorse Australian supermarkets business, which accounts for more than 90 per cent of pretax earnings.

Australian food and liquor sales for the quarter were $10.6bn, up 2.3 per cent or 1.7 per cent higher adjusted for Easter. But like-for-like sales — which strip out the impact of new stores — rose just 0.7 per cent, against market expectations of a 1 per cent improvement. Adjusted for Easter, same store sales growth was only 0.2 per cent.

They are the worst comparable sales figures for Woolworths since the third quarter of 2012, and contrast sharply with Coles, which last week posted like-for-like sales growth of 3.8 per cent for the March quarter. The gap in sales growth of 3.1 per cent is the widest since the first quarter of 2012, and has blown out from a gap of less than 1 per cent throughout 2014.

Coles has now beaten Woolworths in quarterly sales growth since the first quarter of financial 2010 — or 23 consecutive quarters.

Woolworths’ New Zealand ­supermarkets business saw an ­increase of 7.7 per cent in total sales to $NZ1.5bn ($1.4bn) with like for like sales up 3 per cent.

Big W continued to suffer from tough trading conditions and a ­restructure. Sales for the quarter fell 2.1 per cent to $907m, or 5.7 per cent adjusted for Easter. Like-for-like sales fell 4.1 per cent.

Sales at struggling hardware chain Masters were $217m, up 21.1 per cent on the previous corresponding quarter, or 19.2 per cent adjusted for Easter. The home ­improvement division, which ­includes Home Timber and Hardware, had sales of $445m for the quarter, up 21.7 per cent.

Hotel sales for the quarter were $359m, an increase of 0.6 per cent, with comparable store sales up 0.2 per cent. There was some ­improvement during the quarter, particularly in gaming and bars in Queensland and Victoria.

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Woolworths gets thumbs down after update
THE AUSTRALIAN MAY 08, 2015 12:00AM

Eli Greenblat

Senior Business Reporter
Melbourne
The nation’s leading analysts have taken a scalpel to their profit forecasts for Woolworths following Wednesday’s strategy update and concessions from chief executive Grant O’Brien that the supermarket group would need to slash grocery prices and ease off on its record high margins to better compete with Coles and German discounter Aldi.

While Mr O’Brien’s mea culpa and honesty over operational mistakes made by Woolworths was welcomed as refreshing by the investment community, it did not stop them from ruthlessly hacking away at Woolworths’ earnings forecast as the brutal reality of competition is set to rub out earnings over the next three years.

Mr O’Brien unveiled a three-year strategy to take back the company’s once tightly held reputation as the best and cheapest supermarket operator in Australia. Using the savings from 800 job losses and a reduced store rollout program, it will pump $500 million into lower shelf prices and better in-store service.

It will aim to strip customers from Coles with a new range of entry-level-priced private label groceries to directly appeal to those customers who are pouring into Aldi.

Underlining the size of the challenge facing Mr O’Brien, for the March quarter Woolworths posted comparable-store sales growth of just 0.7 per cent, against Coles’s 3.8 per cent.

But with a stronger focus on sales, analysts believe it must come at the cost of margins — which at about 8 per cent are among the highest in the world for a full-service supermarket — and ultimately profit.

Citi’s Craig Woolford axed his profit forecast for 2015 by 1.2 per cent to $2.42 billion, and stripped his 2016 profit forecast by 5.1 per cent, and a revised 7.3 per cent growth to 2017 profits. He has maintained a sell recommendation on the stock.

“Woolworths investor day provided some clear messages that we believe will ultimately lead to lower profits. The recognition of the challenges is refreshing, but the reality is in the core food and liquor division, the profit pool is likely to drop,” Mr Woolford said. “The margin reset given a more competitive grocery market could drag on for a few years.”

Commonwealth Bank analyst Andrew McLennan has revised his profit forecast by 0.7 per cent for 2015 and 1.1 per cent in 2016.

“Management saying the right things but not going hard enough,” Mr McLennan said.

“The strategy for turning around the food business revolved around all the areas we had expected: price, service, fresh and refurbishments. While pleased with the actions proposed by management, we remain unconvinced the magnitude of response (constrained by the cost out of around $500m) is sufficient to counter the current underperformance while maintaining margins in an increasing competitive market against Coles and Aldi.”

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Woolworths - what went so wrong at the supermarket giant
Sue Mitchell
1203 words
9 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Retail Companies must always heed the warning signs

The complaints from Woolworths customers started escalating last year.

Using Twitter, Facebook, customer hotlines, exit interviews and focus groups, shoppers told Woolworths exactly what they thought of Australia's largest food and liquor retailer. There were common themes - shelves were often out of stock, prices were rising, meat and vegetables were past their prime, customer service was poor and popular brands had been removed from shelves.

"I have been shopping at Woolworths for the past few years but over the last six months or so every time I go to do my fortnightly shop the freezer and shelves are empty of special items in particular," a Horsham shopper told Woolworths last June. "Over the past couple of years this store has gradually reduced the variety of goods from cat food to coffee to the extent that they virtually tell you what you can buy," an Eagle Vale customer complained in September.

Woolworths's initial reaction was to ignore the rising tide of dissatisfaction.

The retailer's internal price index showed that its prices were not only competitive but slightly cheaper than Coles and its measure of on-shelf availability suggested that in-stock levels were the best in Australia.

And, after underperforming Coles for three years, same-store sales in Woolworths supermarkets were starting to accelerate by the middle of 2014, giving management confidence there was nothing seriously amiss.

"We had the strongest market share gains that we've had for three years - you can't achieve that if your prices aren't competitive," former food and liquor boss, Tjeerd Jegen, told investors in August.

Woolworths was finally forced to admit this week that something was seriously wrong.

Same-store sales growth in food and liquor rose just 0.2 per cent in the March quarter and group sales went backwards for the first time in 20 years.

In an embarrassing about-face, Woolworths acknowledged what investors and analysts had been telling the retailer for years - it had taken its eyes off the ball and had put profit growth ahead of customers.

"We have a very strong results oriented culture that, in part, has made Woolworths successful over the years and good outcomes for customers have gone hand in hand with that results oriented culture," chief executive Grant O'Brien said on Wednesday.

"But what is clear is it has not been the case in recent times - we haven't put customers first in recent times."

Mr O'Brien and new food and liquor managing director Brad Banducci, who replaced Tjeerd Jegen in February, blamed the company's internal metrics, saying the way it had been measuring prices, on-shelf availability and store labour for more than 10 years was wrong.

"Our customers were telling us that our prices weren't where they needed to be … our customers were telling us that our availability wasn't as good as it could be," Mr O'Brien said, "but when I looked at the metrics they were. We lost a bit of sight of the customer in the latter part of 2014 calendar year."

While prices on about 4000 key products were cheaper or as cheap as those at Coles, prices on thousands more products, particularly "back basket" products, were on average 100 points higher.

Woolworths was measuring stock-outs incorrectly, checking on-shelf availability in the morning or mid-week. By Sunday, the busiest shopping day of the week, the shelves were sometimes empty and Woolworths didn't have enough staff to restock them.

Even more shocking was Mr O'Brien's admission that Woolworths had been ignoring increasingly negative feedback from customers through a measure known as the net promoter score, a precursor of customer loyalty and revenues now used by major companies such as Qantas and the Commonwealth Bank to measure performance.

"That's a measure that pretty well predicts custom in our business and we didn't rely on it to the extent that we should have done," Mr O'Brien said.

Woolworths's mea culpa has been welcomed by analysts, who say it is an essential first step on the retailer's long road to recovery.

"We appreciated management's candour because admitting that it lost sight of the customer by focusing on the wrong metrics is a key step towards addressing the issues," Deutsche Bank's Michael Simotas said.

"While previous mistakes are concerning, admission of these failings is a significant step," said JPMorgan Chase's Shaun Cousins.

"It's like being an alcoholic - you have to admit you have a problem and Woolworths has finally admitted it has a problem," another analyst said, who declined to be named.

However, others have accused Woolworths of making excuses for problems that have been obvious to outsiders for years.

"You walk the stores and you can see that your prices are wrong - to hold this up as a reason [for weak sales] is ridiculous," CLSA analyst David Thomas said.

The analysts said Woolworths lost its edge several years ago, pointing to the unrelenting rise in gross margins - essentially the profit it makes buying and selling goods - since 2006 and underinvestment in store refurbishments since 2009.

Arnhem Asset Management fund manager, Martin Duncan said Woolworths took its eyes off the ball three or four years ago. "We started hearing comments from suppliers who said Woolies was pulling labour out of stores, not redoing planograms as much as they used to and stock availability was dropping off," Duncan said.

"They started ignoring the mantra that you should never let gross margins drift up. They got complacent and thought customers wouldn't notice if they pushed prices up," he said.

Contango Asset Management senior investment analyst, Stephen Scott said the number of stores refurbished each year had tracked below those at Coles since 2009.

"That's a big source of their current malaise," Mr Scott said. "They need to keep those stores fresh and bright and vibrant."

Woolworths is reviewing the metrics it uses to measure performance - including prices, stock-outs, comparable store sales, market share and net promoter scores - as part of a three-year recovery plan.

It is slashing costs by more than $500 million, reinvesting the savings in lower prices - saying it "will not be beaten on price" - and boosting labour in stores by 40 hours a week to improve service and on-shelf availability.

Woolworths is also ramping up store refurbishments, diverting $600 million in capex away from its underperforming BIG W business and in-the-red Masters business and boosting capex in supermarkets by $400 million.

Banducci has been given a mandate to do "whatever it takes" to restore sales momentum.

A new set of metrics will rate store managers, and changes to the way the Woolworths board rewards senior executives are on the cards, with more focus on return on capital employed.

Investors have also called for an overhaul of the board and the appointment of senior retailers with fast-moving-consumer-goods experience However, the turnaround will take time and analysts believe profits are likely to fall for the next two years, testing investor patience.


Fairfax Media Management Pty Limited

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