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Price wars impact on Woolies result

by Jon Condon, 23 April 2012

Retail discounting wars with major competitor Coles have impacted heavily on Woolworths’ third quarter January-March trading results released on Friday.

Woolworths Limited announced overall company Q3 sales of $14.07 billion, an increase of 3.8 percent on the previous year.

But within that overall result, the company’s Australia supermarket division sales for stores open this time last year (‘same store’ sales) were unchanged – the first time that has happened in eight years. Most analysts were expecting modest growth, of about 0.8pc. The same quarter last year produced 3.3pc growth in sales.

Contributing to the flat result in supermarket sales, Woolworths is still experiencing significant price deflation, with average prices falling 4.4pc, the majority of which is due to the ongoing price war with Coles.

Another listed retailer, Metcash Ltd, which runs Franklins and IGA, earlier reported being impacted by the ongoing price war, which broke out with beef in late 2010, and quickly escalated into $1/litre milk, bread and other lines.

Woolworths' chief executive Grant O’Brien said the third quarter result had been achieved in a continuing tight consumer market.

“There were two key factors impacting on the Q3 sales outcome: cycling the natural disasters of 2011, and accelerating deflation. In addition to these factors, sales were affected by an unseasonably cold and wet summer period during which some States, such as NSW, experienced their wettest months in more than 50 years,” he said.                             

Australian Food and Liquor sales for the third quarter were $9.4 billion, an increase of $0.3 billion or 2.9pc on the previous year. Within this, comparable store sales were flat despite the growth in customer numbers and units sold.

Even though retail conditions were challenging during the quarter, Woolies still managed to increase customer numbers by 2.5pc on a comparable-store basis, while market share and sales by volume were also higher.

Sales growth in the third quarter was impacted by artificially high sales the previous year as a result of panic buying and the temporary closure of competitors’ stores within some affected areas following the Queensland/NSW floods and Cyclone Yasi.

The loss of fruit and vegetable crops following those events in 2011 also saw significant price inflation last year, Friday’s statement to the financial market said.

Woolworths managing director of Australian supermarkets, Tjeerd Jegen, said the fresh food department continued positive sales momentum, led by fresh meat, bakery, deli and seafood.

“We continue to see strong results from new products such as our Meat Standards Australia accredited beef,” he said (see Beef Central’s article last week, "MSA-backed Woolies picks up beef market share").

Woolworths opened six additional supermarkets during the quarter, bringing its national total to 867, with plans for an additional eight in the final quarter of the 2012 financial year.

Woolworths’ majority owned ALH hotel/pub division also continued to grow, opening three new hotels during the quarter, bringing the total number of venues to 297. Since 2009 ALH has abandoned the use of MSA-graded beef in its hotel steakhouses for cost reasons, instead buying generic 100-day commodity beef to a company spec out of the market and applying its own ‘Grazier’ label to it, in an attempt to mimic the product integrity normally associated with legitimate branded beef products.

Mr O'Brien forecast that the round of constant price cuts would moderate in coming quarters, helping boost comparable sales growth.

"One of the main factors on our sales result – deflation – will ease in the new financial year," he said.

However the company remained cautious about the outlook for the fourth quarter, particularly given uncertainty about the impact of the carbon tax and interest rates.

Woolworths is still expected by analysts to make more than $2 billion in profit for the full financial year to June 30.

Analysts expect the Wesfarmers-owned Coles supermarket chain to report comparable-store sales growth of about 3pc when it reports to the market this week, continuing a long sequence of stronger quarterly results than Woolworths’.

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