Supermarket price war here to stay: Woolies chief Grant O’Brien

Blair Speedy
July 31, 2013
The Australian

WOOLWORTHS chief Grant O’Brien has signalled there will be no let-up in the price war with rival supermarket giant Coles, as worsening economic conditions continue to undermine consumer sentiment.

The company’s Australian food and liquor division slashed its average prices by 2.9 per cent over the past financial year, accelerating to 3.5 per cent during the June quarter as the slowing economy started to crimp household budgets.

“We’re continuing to invest in pricing . . . our objective is to have the cheapest basket in the marketplace and we haven’t erred from that and we continue to invest to ensure we maintain that position,” Mr O’Brien said.

The price-cutting coincided with what Mr O’Brien described as “challenging retail conditions and an economic environment underpinned by consumer uncertainty and low growth in disposable income”.

The economic slowdown was “particularly evident as the quarter progressed”, and Mr O’Brien said things had not improved in the new financial year.
GRAPHIC: Woolworths performance

“Customer sentiment continues to be challenged — it’s uncertain, and we expected that given the election,” he said.
“It’s the case whenever we have an election.”

Woolworths yesterday reported sales of $59.16 billion for the past financial year, up 4.3 per cent from the previous 12-month period, or 2.4 per cent when the benefit of an extra week’s trading was stripped out.

The Australian food and liquor business, the company’s biggest contributor of both sales and earnings, reported sales of $40.03bn, up 6.6 per cent or 4.7 per cent removing the extra week’s trade.

Excluding the benefit of new store openings, Australian food and liquor sales were up 2.9 per cent in the fourth quarter, down from 3.1 per cent in the third as the company continued to cut prices — in contrast to market expectations that the company was winding back its discounting campaign to increase earnings margins.

“Greater levels of price deflation suggest to us Woolworths has increased promotions to improve market share,” said Citi analyst Craig Woolford.

Woolworths has consistently underperformed Coles in growth from existing stores for the past four years, a trend divisional boss Tjeerd Jegen attributes to an aggressive store-opening strategy, including a net 25 new stores in the past financial year, bringing the total to 897 supermarkets but leading to short-term cannibalisation of sales from existing sites.

Liquor sales were a highlight, with total sales of $7.2bn for the year, up 7.0 per cent on an adjusted basis as the 175-strong Dan Murphy’s chain maintained its market dominance and Woolworths Supermarket Liquor outlets were revamped under the BWS banner.

However, discount department store chain Big W reported a sharp downturn during the fourth quarter, with sales from existing stores down 4.1 per cent, compared to a 0.8 per cent fall in the previous quarter and its third consecutive quarter of decline.

Big W director Julie Coates blamed the result on “subdued trading conditions and continued price deflation”, although Mr Woolford said the result might have been affected by rival discounter Target clearing out excess inventory, which prompted parent company Wesfarmers — which also owns Coles — to downgrade earnings forecasts from the chain in May.

The New Zealand supermarkets business reported annual sales of $NZ5.7bn ($5bn), up 4.1 per cent, or 5 per cent when adjusted for the exchange rate and an extra week’s trade.

Mr O’Brien said he was dissatisfied with the NZ division’s flat sales performance from existing stores.

He said lifting comparable sales growth in New Zealand was a priority for the new financial year.

Petrol sales were $6.8bn for the financial year, down 0.8 per cent excluding the extra week, which Mr O’Brien attributed to a shift towards more fuel-efficient cars.

Mr O’Brien, who was travelling overseas when the company warned that losses from its hardware joint venture Masters would be almost $40m higher than expected this year, yesterday defended the performance of the division, which racked up $1.24bn in sales, up 47 per cent.

“Masters is a long-term play — it’s a unique format in this market and it’s still very early days . . . I would caution anyone about judging this business in its infancy,” he said.