Sharechat Logo

Opinion: Woolworths indulges in some serious retail therapy

By Simon Louisson of NZPA

Friday 27th May 2005

Text too small?
On the face of it, swapping one Australian owner for another shouldn't greatly change the face of the grocery business in New Zealand.

Retailer Woolworths Australia on Wednesday did its own bit of retail therapy, shelling out $2.7 billion for Foodland Associated's New Zealand assets including the Foodtown, Countdown and Woolworths (no relation) supermarket chains.

The three chains, collectively known as Progressive Enterprises, account for about two thirds of Foodland's business but will only make up 15% of the supersized Woolies.

What the new owner will have in spades is buying power, with $37 billion in turnover and it plans to exercise that muscle.

Chief executive Roger Corbett said the group's grunty buying might will be able to force suppliers' prices down to the advantage of consumers.

The New Zealand operations will benefit from Woolies' ten-year programme to improve distribution, technology and logistics systems over the ditch.

Supermarkets are about pumping products down the pipeline as cheaply as possible and scale and system count.

Corbett said Woolworths plans to replicate its Australian model here, eventually moving into general merchandising, liquor retailing through stand-alone stores and big-box outlets. It is also moving into pharmacy retailing in Australia.

Analysts believe stage one will involve bedding down the purchase and implementing the new systems and prices. Stage two may be introducing Dan Murphy's liquor stores followed by a move into general merchandising.

New Zealand's supermarket scene is a not so cosy duopoly with Progressive holding 44% of the market and most of the rest held by locally owned cooperative Foodstuffs - operator of the Pak'N Save, New World and Four Square chains.

Despite its old fashioned structure, the low profile Foodstuffs has been a very effective operator. Woolworths competitor Coles Myer owned Progressive in the 1990s and thought it would carve up the hillbilly co-op only to retreat home, tail between legs.

Foodstuffs chief Tony Carter reckons Pak'N Save is the most efficient supermarket chain in Australasia and Foodstuffs generally has lower prices than Progressive chains. Woolworths may change that.

As well as cutting prices, Woolworths can be expected to make an aggressive play of linking petrol to its supermarkets as it has done successfully in Australia. There, it operates a loyalty card with Caltex, where customers who buy over $A30 ($NZ32.50) at the supermarket get 4c a litre off their petrol bill.

Pak'N Save already operate a similar scheme at some of its supermarkets.

Woolworths' move into general merchandising is likely to be through the Big W stores - discount department stores like K-Mart.

Foodland had been looking at a possible megastore format here and analysts said Woolworths may follow that through, putting a supermarket, Big W, Dan Murphy's and Dick Smiths (which it also owns) under one roof.

Progressive already has two sites with one in Manukau having resource consents. However, the hyperstore format may be some years away.

Despite being bitten once, Coles Myer had a good look at Progressive. Chief executive John Fletcher reckoned the price was too rich and it would not generate acceptable returns.

He does not believe the addition of the New Zealand operations will add materially to Woolworths' purchasing power, nor is he particularly enamoured with the New Zealand economy. This, despite the fact that Progressive consistently outperformed Foodlands' Australian operations (which will be bought by Metcash for $A780m.

But Corbett has gained comfort from his involvement in another major New Zealand purchase that has pleasantly surprised. He is on the Fairfax board which bought Rupert Murdoch's New Zealand newspaper publishing operations for $1.2 billion in 2003.

Woolworths is paying 12 times prospective earnings before interest and tax for the New Zealand operations - well within the range of Grant Samuel's independent valuation. Coles reckoned it could only extract a 9% return.

Something that could upset Woolies' shopping cart is the entry of no-frills German grocery giant Aldi to New Zealand. It has confirmed it is eyeing New Zealand and has almost 130 applications to trademark its brands in New Zealand since February.

Aldi, which has more than 5000 stores worldwide, opened its first Australian store in January 2001 and now has about 100 stores there.

However, analysts don't rate Aldi a major threat, saying its European format with a limited range of around 1000 products lines has not translated particularly well into Australia where shoppers buy nearly all household goods at the one supermarket.

The most noticeable effect on the local sharemarket of this week's deal has been on The Warehouse, whose shares slumped towards a six-year low of $3.10. The Woolworth entry hit on two fronts - Woolworths plans to muscle in on The Warehouse's traditional general discount market and, secondly, it will make it tougher to implement plans to expand into grocery market.

The Warehouse response was to say it would accelerate plans to expand into groceries. It expects to have its first hypermarket, including full grocery service, up and running before the end of next year.

The company says it already has a significant share of the limited number of consumables it already carries and believes there is a place for a third significant player in the grocery sector.

Whether there is room for it and Aldi remains to be seen.

Citigroup's analyst cut its valuation on The Warehouse to $3.05 from $3.66 and said earnings and margins in 2007 would be trimmed. The analyst said "time is of the essence" for The Warehouse. It must protect its Red Sheds and squeeze its three-year rejuvenation programme into a tighter timeframe.

It may also prompt The Warehouse to into making "the hard decision" to exit Australia to concentrate all efforts on core division.

So while consumers can look forward cheaper prices resulting from intensified competition, Consumers Institute chief executive David Russell does not see it as unadulterated good news.

He said Woolworths' ability to knock down prices in Australia was created by dealing with a limited number of suppliers. Aldi also operates by selling limited lines, so consumers may have choice reduced.

"It's really a wait-and-see situation," Russell said. "But the clout Woolworths has is potentially good news in terms of prices."

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

Woolworths lifts supermarket sales in NZ by 2.9%
Woolworths to close 100 Dick Smith stores

IRG See IRG research reports