The battle in the supermarket sector is about to heat up, with Woolworths (WOW) outlining a glimpse of its future strategy at its recent investor day.
Woolworths provided a blunt and honest assessment of the performance of its business, with the key Woolworths Supermarket business the main focus. Management admitted that it had lost sight of its customers and focussed too hard on maximising shareholder returns. This allowed rival Coles to make up ground and outperform the Woolworths supermarket business in like-for-like sales growth for 18 consecutive quarters.
The importance of the supermarket business for Woolworths and Wesfarmers (Coles) should not be underestimated. The charts below break down the earnings of both companies and highlight the importance of food and liquor to Woolworths (78% of EBIT) and the Coles business to Wesfarmers (46% of EBIT).
Woolworths announced it is going to skew its capital investment into supermarkets, with the division to receive 64% of total capital expenditure, up from 52%. Capex will be reduced at Big W (no new stores) and Masters (rollout reduced to 4-10 stores per annum for the next three years).
Management made the embarrassing admission that its price comparison measure was found to be inaccurate and while it worked in the past, it is no longer an accurate measure for comparison. Using its updated price comparison measure, management believes Woolworths prices are around 100 basis points higher than Coles for an average shopping basket. This is even after $125 million of cost savings was reinvested into lower prices so far this calendar year, which could mean they were 200 basis points higher at the start of the year.
Management has continually stated that its prices were in line with its key competitors despite analysts highlighting the higher prices and customers voting with lower purchases at Woolworths supermarkets.
Woolworths will seek to neutralise its prices versus Coles rather than beat them, which may reduce the possibility of a price war breaking out in the supermarket sector. This was a major concern of shareholders and could have significantly impacted margins and profits in the sector.
Management aren’t overly concerned about discounter Aldi’s prices as they believe they have ‘value’ products at similar price points. Their main concern is increasing the range of these types of products to better compete with Aldi. They also commented that Aldi products are considered ‘brand name’ products by customers whereas Woolworths’ products are still considered ‘homebrand.’ Management are working on this area and we could see Woolworths’ ‘own brand’ products being marketed more as a brand.
It is interesting to note that 90% of Woolworths Supermarket customers also shop at Coles. This highlights that foot traffic isn’t the issue, but the value perception of customers that is resulting in a lower number of products in customer baskets. This could also be a positive, with price reductions, refurbishments and new products resonating with customers more quickly and without the need for large marketing campaigns.
Management highlighted that convenience is the number one factor valued by customers, with price coming in second and shopping experience third. This means that reducing price isn’t going to be the solution to all Woolworths’ problems. A number of initiatives are being introduced to make the shopping experience more enjoyable, including new trolleys, new signage and new LED lights. The store refurbishment program is also going to be lifted to around 80 stores per year.
Woolworths is going to reinvest back into the shopping experience by adding extra staff, with 58,000 additional hours added to supermarkets this year, with a further 63,000 hours in fiscal 2016. Management did not comment on whether these additional hours fully replace the number of hours that were taken out of the supermarket business over recent years.
Woolworths will also introduce a new initiative in fresh produce, with less visually appealing product offered at lower prices. This initiative is called ‘Odd Bunch’ and will help farmers sell product that may have previously been thrown away, which can could be the difference between a profit and a loss for farmers. This initiative has the potential to strengthen Woolworths’ relationship with its key fresh produce suppliers.
It was pleasing to see the Woolworths management team admit to mistakes of the past and outline a basic strategy of how it will try to turnaround the number one supermarket business in Australia. Investors will be closely watching quarterly sales numbers for signs that the new strategy is working.
