Home brands raise Woolies profits

Jane Harper
Herald Sun
June 05, 2012

WOOLWORTHS is likely to boost its strong profit margins thanks to a streamlined supply chain and its push into private label goods, analysts say.

The supermarket giant, which has bigger margins than global counterparts including Tesco and Walmart, will continue to reap significant dividends from its efficient business model.

In a note to investors, a Deutsche Bank analyst team led by Michael Simotas said the higher margins were not the result of unsustainable mark-ups.

Instead, they were a product of Woolworths’ investment in programs to improve efficiency.

“Woolworths enjoys high operating margins largely as a result of its low-cost of doing business,” the note says.

“We believe this is an outcome resulting from considerable investment in its supply chain over the period of a decade which would be unlikely to be replicated by a competitor in the short-to-medium term.”

The analyst team said Woolworths was likely to enjoy further improvements to its underlying pre-tax margin as its supply chain became even more efficient, food prices started to rise again and the supermarket increased its sales of private-label products.

But a separate analyst note from the Commonwealth Bank warns that Woolworths’ store-expansion program could be a drag on future growth.

The CBA team, led by Andrew McLennan, said industry feedback and sales estimates excluding liquor suggested Woolworths was struggling to hold its share of supermarket spend, despite a roll out of 39 new supermarkets flagged for this financial year.

Mr McLennan said the supermarket group had been outpaced for the past 11 quarters by smaller rival Coles on a like-for-like sales basis, which strips out the impact of stores that have opened or closed.

“Reliance on store expansion to drive sales is coming at a significant cost,” the note said. “New stores are not a substitute for comparable store sales growth.”