Woolworths Limited (ASX:WOW) is down about 1% near the end of trading hours today in an overall red day on the ASX . Rod Sims, the chairman of the Australian Competition and Consumer Commission (ACCC), has recently claimed that Woolworths has some of the highest profit margins in the world for a supermarket. Mr. Sims believes this is because of a “very cosy duopoly” between Woolworths and their main competitor Coles. But a new competitor, the German discount grocer Aldi, is starting to rival these two giants. Aldi has been making significant gains in the $88bn Australian supermarket and food industry. The credit rating agency Moody has recently released a report suggesting that Aldi’s stores will grow 5-6% over the next 5 years, doubling the projections for both Woolworths and Coles. Moody’s report claims “Aldi’s increasing acceptance among Australian consumers and aggressive expansion plans are a long-term threat to the duopoly structure in Australia’s grocery market.”
Woolworths appears to be adjusting to this new data. Woolworths announced a $500m cost is savings program to cut costs for their customers. They are attempting to take this cost from the supply chain, information technology, logistics and store support services rather than taking the cost from suppliers. The problem with this program is that it will lower their all-important profit margins. A report from JP Morgan views this move as a necessity, saying “After consistent EBIT margin expansion over many years a rebasing is now expected to occur, with Woolworths realising (belatedly perhaps) an investment in price and service is required to regain competitiveness”. WOW is trading around $29.8 near the end of market hours today, down around 0.9%. The recent struggles are reflected in the share price as WOW is at a 2 year low after peaking at an all-time high in May 2014. This cost savings move by Woolworths is seen as required and it will indeed cut into their profit margins. However in order to maintain its dominant position and ensure market competitiveness WOW has to adjust to the current market environment and also take emerging competitors seriously.
Author: Imran Valibhoy
Mar 09, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.