Woolworths (WOW)

[specuvestor]

This is a great story about dogmatic belief in high level statistics vs back to basics and fundamentals

Woolworths - what went so wrong at the supermarket giant
Sue Mitchell
1203 words
9 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Retail Companies must always heed the warning signs

The complaints from Woolworths customers started escalating last year.

Using Twitter, Facebook, customer hotlines, exit interviews and focus groups, shoppers told Woolworths exactly what they thought of Australia's largest food and liquor retailer. There were common themes - shelves were often out of stock, prices were rising, meat and vegetables were past their prime, customer service was poor and popular brands had been removed from shelves.

"I have been shopping at Woolworths for the past few years but over the last six months or so every time I go to do my fortnightly shop the freezer and shelves are empty of special items in particular," a Horsham shopper told Woolworths last June. "Over the past couple of years this store has gradually reduced the variety of goods from cat food to coffee to the extent that they virtually tell you what you can buy," an Eagle Vale customer complained in September.

Woolworths's initial reaction was to ignore the rising tide of dissatisfaction.

The retailer's internal price index showed that its prices were not only competitive but slightly cheaper than Coles and its measure of on-shelf availability suggested that in-stock levels were the best in Australia.

And, after underperforming Coles for three years, same-store sales in Woolworths supermarkets were starting to accelerate by the middle of 2014, giving management confidence there was nothing seriously amiss.

"We had the strongest market share gains that we've had for three years - you can't achieve that if your prices aren't competitive," former food and liquor boss, Tjeerd Jegen, told investors in August.

Woolworths was finally forced to admit this week that something was seriously wrong.

Same-store sales growth in food and liquor rose just 0.2 per cent in the March quarter and group sales went backwards for the first time in 20 years.

In an embarrassing about-face, Woolworths acknowledged what investors and analysts had been telling the retailer for years - it had taken its eyes off the ball and had put profit growth ahead of customers.

"We have a very strong results oriented culture that, in part, has made Woolworths successful over the years and good outcomes for customers have gone hand in hand with that results oriented culture," chief executive Grant O'Brien said on Wednesday.

"But what is clear is it has not been the case in recent times - we haven't put customers first in recent times."

Mr O'Brien and new food and liquor managing director Brad Banducci, who replaced Tjeerd Jegen in February, blamed the company's internal metrics, saying the way it had been measuring prices, on-shelf availability and store labour for more than 10 years was wrong.

"Our customers were telling us that our prices weren't where they needed to be … our customers were telling us that our availability wasn't as good as it could be," Mr O'Brien said, "but when I looked at the metrics they were. We lost a bit of sight of the customer in the latter part of 2014 calendar year."

While prices on about 4000 key products were cheaper or as cheap as those at Coles, prices on thousands more products, particularly "back basket" products, were on average 100 points higher.

Woolworths was measuring stock-outs incorrectly, checking on-shelf availability in the morning or mid-week. By Sunday, the busiest shopping day of the week, the shelves were sometimes empty and Woolworths didn't have enough staff to restock them.

Even more shocking was Mr O'Brien's admission that Woolworths had been ignoring increasingly negative feedback from customers through a measure known as the net promoter score, a precursor of customer loyalty and revenues now used by major companies such as Qantas and the Commonwealth Bank to measure performance.

"That's a measure that pretty well predicts custom in our business and we didn't rely on it to the extent that we should have done," Mr O'Brien said.

Woolworths's mea culpa has been welcomed by analysts, who say it is an essential first step on the retailer's long road to recovery.

"We appreciated management's candour because admitting that it lost sight of the customer by focusing on the wrong metrics is a key step towards addressing the issues," Deutsche Bank's Michael Simotas said.

"While previous mistakes are concerning, admission of these failings is a significant step," said JPMorgan Chase's Shaun Cousins.

"It's like being an alcoholic - you have to admit you have a problem and Woolworths has finally admitted it has a problem," another analyst said, who declined to be named.

However, others have accused Woolworths of making excuses for problems that have been obvious to outsiders for years.

"You walk the stores and you can see that your prices are wrong - to hold this up as a reason [for weak sales] is ridiculous," CLSA analyst David Thomas said.

The analysts said Woolworths lost its edge several years ago, pointing to the unrelenting rise in gross margins - essentially the profit it makes buying and selling goods - since 2006 and underinvestment in store refurbishments since 2009.

Arnhem Asset Management fund manager, Martin Duncan said Woolworths took its eyes off the ball three or four years ago. "We started hearing comments from suppliers who said Woolies was pulling labour out of stores, not redoing planograms as much as they used to and stock availability was dropping off," Duncan said.

"They started ignoring the mantra that you should never let gross margins drift up. They got complacent and thought customers wouldn't notice if they pushed prices up," he said.

Contango Asset Management senior investment analyst, Stephen Scott said the number of stores refurbished each year had tracked below those at Coles since 2009.

"That's a big source of their current malaise," Mr Scott said. "They need to keep those stores fresh and bright and vibrant."

Woolworths is reviewing the metrics it uses to measure performance - including prices, stock-outs, comparable store sales, market share and net promoter scores - as part of a three-year recovery plan.

It is slashing costs by more than $500 million, reinvesting the savings in lower prices - saying it "will not be beaten on price" - and boosting labour in stores by 40 hours a week to improve service and on-shelf availability.

Woolworths is also ramping up store refurbishments, diverting $600 million in capex away from its underperforming BIG W business and in-the-red Masters business and boosting capex in supermarkets by $400 million.

Banducci has been given a mandate to do "whatever it takes" to restore sales momentum.

A new set of metrics will rate store managers, and changes to the way the Woolworths board rewards senior executives are on the cards, with more focus on return on capital employed.

Investors have also called for an overhaul of the board and the appointment of senior retailers with fast-moving-consumer-goods experience However, the turnaround will take time and analysts believe profits are likely to fall for the next two years, testing investor patience.


Fairfax Media Management Pty Limited

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[Contrarian]

> But with a stronger focus on sales, analysts believe it must come at the cost of margins — which at about 8 per cent are among the
> highest in the world for a full-service supermarket — and ultimately profit.

I wonder which supermarket chain can sustain 8% margin without new players.

Looks like price drop has somewhere to go...

[greengiraffe]

Supermarket wars to escalate with Lidl’s entry
THE AUSTRALIAN JUNE 11, 2015 12:00AM

Eli Greenblat

Senior Business Reporter
Melbourne
Lidl’s entry is likely to cause even more pain for market heavyweights Woolworths and ColLidl’s entry is likely to cause even more pain for market heavyweights Woolworths and Coles, as well as independents Source: Getty Images < PrevNext >
••
The supermarket wars will escalate when German powerhouse Lidl enters the Australian market, with the global discount chain applying for hundreds of trademarks covering thousands of supermarket products as a precursor to opening its doors here.

It is believed that Lidl has also been in contact with logistics providers in recent weeks in an effort to help create a network of distribution centres and transport links to shift food, groceries and merchandise around Australia.

Lidl, which was recently ranked by Deloitte as the fourth-biggest retailer in the world with nearly $US100 billion ($128bn) in annual sales, has applied for a portfolio of trademark classes with trademarks registry IP Australia covering thousands of items typically found in a full-line supermarket, The Australian can reveal.

Lidl is seeking to protect its name in Australia for a range of goods and services including paints, laundry and cleaning ­liquids, tools, cooking equipment, alcohol, stationery, furniture and camping equipment, household utensils, clothing, coffee, pastry and jams as well as meat, dairy, fruit and vegetable products.

Similar to its fellow German retailer Aldi, which has boomed in Australia since arriving in 2001 by stripping market share from Woolworths, Coles and independents, Lidl offers a no-frills shopping experience that includes private label groceries often displayed in their shipping pallets and with minimal store staff.

Lidl was expected to open in Australia last year, with speculation it had opened a corporate office and approached real estate agents to source store sites.

Documents lodged with IP Australia show Lidl is also seeking protection for its company logo featuring its blue, red and yellow colours that now dominate high streets and shopping centres of Europe.

Together with Aldi, Lidl has shaken up the supermarket sectors to strike a popular chord with shoppers from Britain to Bulgaria.

If Lidl, whose slogan is “where quality is cheaper”, does launch into the $90 billion Australian grocery sector, it will probably trigger even more pain for market heavyweights Woolworths and Coles, as well as independents, which have already seen Aldi snap up nearly 11 per cent market share on the east coast.

Although Lidl has a strategy similar to that of Aldi in selling a limited line of groceries based on a private label offer, the German discounter also has a range of premium brands and a strong range of high-end wines.

Both Lidl and Aldi have proved ferocious and successful competitors in the markets they have entered, especially in Britain where they have grown faster than major chains such as Tesco and Asda. In the past few years Aldi and Lidl have doubled their share in the British grocery market. In 2012, Lidl beat Twitter as British students’ favourite brand.

Commonwealth Bank analyst Andrew McLennan said the Australian market was large enough for “hard discounters” such as Aldi and Lidl to grab as much as a 20 per cent market share.

“We believe there is definitely room, when you look at most markets ... particularly in Europe the share of the market grabbed by hard discounters tends to be around 20 per cent,” he said.

He said Aldi, which has more than 370 stores in Australia and is pushing into South Australia and Western Australia, was unlikely to hit 20 per cent on its own.

“There is an opportunity because Aldi can’t do it on its own, and in the short term there is definitely an opportunity for someone to step in and take some space,” he said.

Mr McLennan said local chain Franklins at its peak had 20 per cent of the NSW grocery market, with shoppers keen to embrace low-cost supermarket operators such as Lidl.

[greengiraffe]

Merrill Lynch tips Woolworths shares to soar after shake-up
Date
June 18, 2015 - 3:04PM

Sue Mitchell

The departure of Woolworths chief executive Grant O'Brien clears the way for a change in strategy under a new CEO. Photo: Louie Douvis

One of Woolworths' harshest critics, Merrill Lynch analyst David Errington, has applauded a management shakeup and potential change in strategy at Australia's largest retailer, saying Woolworths shares could soar 50 per cent if investor sentiment turns from sour to sweet.

Woolworths' shares fell 48¢, or almost 2 per cent, to $26.31 on Thursday as investors digested the company's latest profit downgrade the second in four months – and the subsequent resignation of chief executive Grant O'Brien.

Most analysts cut their profit forecasts for 2016 and 2017, saying a new chief executive will likely "reset" profits by taking the knife to margins and write-down or even sell underperforming businesses such as Masters and BIG W.

However, Mr Errington, who has been a vocal critic of Woolworths' strategies, including its entry into home improvement and heavy investment in new stores, has lifted his price target for Woolworths from around $24 to $40 and now rates the stock a 'buy'.

Mr Errington says the resignation of Mr O'Brien and a shift in focus from short-term gains to long-term growth are the first steps to turning the company around.

"The basis of the change is our increased confidence toward Woolworths changing its strategic direction and management structure," Mr Errington said. "The company has significant upside – it needs to find the right strategy."

Merrill Lynch expects Woolworths' underlying net profits to fall by $150 million or 6 per cent over the next two years as margins are cut in Australian supermarkets to regain lost sales to Aldi and Wesfarmers' Coles.

"However, we see Woolworths lowering its (very) high margins an an opportunity for the business, which we believe other retailers will not be able to match," Mr Errington added.

Price war likely
Most other analysts still rate the stock a 'hold' or 'sell', saying Woolworths' earnings are likely to worsen before they start to improve.

UBS analyst Ben Gilbert fears that an all-out grocery price war is more likely as Woolworths cuts prices harder to boost comparable store sales, which fell 0.7 per cent in the fourth quarter.

"We believe it will take at least 24 months to return to a defendable like-for-like sales growth trajectory and along the way, there is a very real risk of a major earnings and margin rebase," Mr Gilbert said.

"Coles and Aldi will not stand still while Woolworths turns the ship."

Deutsche Bank analyst Michael Simotas fears the Woolworths board, led by chairman Ralph Waters, will not appoint the right CEO needed to get the job done.

Mr Waters said on Wednesday that the new CEO would not necessarily have to have supermarkets experience or even a retail background.

"I wouldn't preclude someone who doesn't have retail experience providing their industry was relevant to what's required here," Mr Waters said.

"There are some industries where many things are customer facing and technology driven and it wouldn't be too big a jump."

However, Mr Simotas said Woolworths' problems would be difficult to address, as the $125 million invested in prices over the last few months had done little to change customer shopping habits.

"In our view, the most effective CEO for this business would be one who brings food retail experience from a competitive international market," he said.

"We are concerned that there may be deep cultural issues in the organisation which could take a long time to change, and we fear the delay before a new CEO is selected could make things worse."

There are also new questions about the long-term future of the loss-making Masters chain, given that Mr O'Brien, the architect and chief cheer leader of the strategy, is stepping down.

"We believe an exit of Masters one way or another would be positive for the share price given the large losses and capex," Mr Simotas said.

Woolworths is now trading around 13.9 times forward earnings per share, the lowest level since 2012, and a 14 per cent discount to the market multiple of 16.2.

"The stock looks cheap on this basis, but we believe it is justified given the uncertainty," Mr Simotas said.

[greengiraffe]

How Woolworths lost its way
1636 words
20 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Retail Hubris has played a part in Woolies' recent woes, write Jemima White and Sue Mitchell.

It was 2013. Woolworths chief executive Grant O'Brien - the board's surprise choice two years before and architect of the Masters' hardware strategy - had a pressing problem. He didn't think the latest advertising campaign, pushing Woolies' latest price cuts, was quite right. He turned his attention to the task. And then, despite the well-progressed campaign, killed it.

O'Brien, the 53 year old who this week resigned after presiding over two profit downgrades in four months and a 30 per cent dive in the company's share price in the past 12 months, is a renowned micro-manager.

Marketing chiefs - of which there were five in four years, including Kurt Kamp who oversaw the campaign that never made it to air - bore the brunt of his attention more than most. Fiddling around with advertising copy and marketing campaigns, obsessing over data and the findings of the seemingly endless stream of McKinsey & Co consultants are just some hallmarks of the way the Woolies lifer ran the business.

Clearly the "safe pair of hands" the board - then led by the late James Strong - had chosen over Greg Foran, the protege of former CEO Roger Corbett, hasn't proved the right choice.

But it takes more than O'Brien's control freak tendencies to account for the wobbly trolley approach at Woolworths, which currently holds the mantle as Asia's most shorted stock, with $2.7 billion of shares betting its price will keep tumbling.

Increasingly, the consensus is the problems stem from management and the board and their failure to understand what the market grasped many months before - that Woolworths' strategy to protect its margins at all costs was simply not up to scratch.

"You're delusional if you believe that in retail you can look after the shareholders and not the customer," says former Woolworths executive Bill Wavish, who alongside Corbett delivered years of double-digit profit growth.

"At what stage and was there enough light shone on the strategy by the board when there were doubts about it? Were they critical enough along the way, genuinely critical, or the issue is pride, face and ego ... at what point do you put your hand up and say 'we've got this wrong'?," fund manager John Sevior says. His firm, Airlie Funds Management, doesn't own shares in Woolworths, and Sevior describes his views as coming from "the cheap seats".

"It's a big company problem. The business plan gets signed up off in C-suite and there's so much energy, emotion and so much reputation signing off on a big project, that there's too much of a loss of face to turn around," Sevior says.

The "Woolworths way" is talked about a lot at the retailer's sprawling headquarters at Bella Vista, which is about one hour from Sydney's CBD. The site, bought during the era of Corbett, who now chairs the Fairfax Media board, was originally dreamed up on a much more lavish scale, with a Woolworths university and hotel attached, although successor Michael Luscombe scaled that back. It was designed to foster the best of the "Way" - which the company describes as a combination of hard work and family.

But others say it's been more a culture of arrogance and hubris.

Just look at how they have treated suppliers.

Or take Luscombe's comments to a UK investment conference in 2009 about Coles' management team. To a room full of people, Luscombe declared it was worse than the previous team, and not really much chop (or words to that effect). In that context, it was a confrontational comment to make to a large audience. And it looked even more misjudged once it was known that Coles' then finance director Terry Bowen was in the room. And what was worst, in hindsight, Coles was by that point was on the way to beating Woolworths' on same-store sales growth for the first time in years.

In the last few months, the arrogance has caught up with them.

And for many investors - not least the short sellers that remain in force - this week's profit downgrade and CEO resignation is just the latest signpost on the way down.

After a gruelling week being publicly drilled by analysts and investors (Deutsche Bank said the chairman's investor call did not give them any confidence and the board would appoint the right CEO, while CLSA said it "beggars belief" that Waters described supermarkets as uncomplicated), Waters told AFR Weekend that the board wasn't as alert as it should have been during the crucial Christmas trading period.

"The gap between Woolworths and the competition in the June quarter [in same store sales growth] was the lowest for 20 months," Mr Waters said.

"There was an impression we might cross the line or even beat them in the next month. Unfortunately if anything, that success pushed our sights off the ball."

It might not sound like a big concession. But Waters - who ran Fletcher Building and manufacturer Email - doesn't admit mistakes often. When he made the rounds of large institutional investors early this year, he took at least two aback with his arrogance and dismissive response to questions.

Throughout the crucial December trading period, O'Brien was receiving daily sales figures and sending them to the board each Sunday.

The figures were softer than expected, but Waters said the board had no reason to panic, and was comfortable sticking to its November guidance of 4 to 7 per cent net profit growth. To ensure they'd hit that number, O'Brien was cutting costs by reducing the number of hours worked by staff in-stores, leading to long queues at the check-outs, gaps on shelves and poorer quality fruit and vegetables.

At the same time, Woolies was alienating suppliers, as they pushed for extra discounts but failed to deliver on promises to give the products better positioning near the check-outs. While management and the board were congratulating themselves on the good June quarter figures, analysts were becoming increasingly concerned that the rot had set in. In May and June, Woolies started putting up prices on low-profile products (known as "back basket") so it could fund deeper promotional discounts.

It was chasing Coles, which has 1500 products on deep discount at any one time. In comparison, Woolies has up to 2500 on promotion but at far smaller discounts. If Woolies thought its customers wouldn't notice, it was wrong.

Woolworths' loyal customers have traditionally been at the premium end, choosing the retailer for service and quality, and price. But they walked away in droves when they realised they can get better prices and service elsewhere and better. And they haven't come back.

The supermarkets were underperforming, but they were still the least of the company's problems.

Masters, the $3 billion push into the home improvement market dominated by Wesfarmers' Bunnings, was a disaster, losing $500 million in three years. Woolies insists the rationale for getting into the market was valid, but even it admits the execution has been poor. Meanwhile, earnings had halved at Big W in three years as customers walked to Wesfarmers' Kmart chain. Another black mark on the strategy front is just how close the company came to making a potentially disastrous acquisition of a Hong Kong supermarket chain a year ago.

"The board and the chairman have to take responsibility for some of the poor decisions that have been made," Nikko Investment Management's Craig Young says. "The approach to Masters has not been good enough."

Many in the market say Waters' own position is untenable. Waters says the board needs stability while it searches for a new CEO, but the clock is ticking. The only question is when he will resign, and who will replace him. The board is searching for new directors, and there's been persistent chat that Corbett would be keen to return and that he has been lobbying investors. It is more likely that an existing board member would step up, with Michael Ullmer and Christine Cross tipped as possible contenders.

Investors are confident Woolies will restore its blue chip status, and although many believe it represents value at the moment they are waiting to see what a new CEO will do.

"It still is a blue chip but it's slightly tarnished - it needs to be polished up and will be bright and blue (chip) again," said Alphinity Investment Management fund manager Bruce Smith.

"It's the biggest operator in a not very competitive industry that's essential for people - the potential is still there for it to be a massively profitable company again."

Meanwhile, O'Brien has to deal with being seen as a lame duck CEO while he serves out another 13 months until he turns 55 and can access the retailer's generous defined benefits superannuation scheme.

Announcing his resignation last week, a subdued O'Brien, who only four months ago claimed he was bounding out of bed every morning, said: "Our recent performance has not been acceptable to any of us."

He shared his concerns with former Woolworths CEO Reg Clairs, now 77, at a Woolworths awards night for long-serving staff in Brisbane a few months ago.

O'Brien chewed the fat with Clairs for hours. There was plenty to talk about, although Clairs won't reveal his secrets.

"Over time you see the rise and fall of empires and the rise and fall of companies.

"Grant took on a company that has been highly successful for many, many years. He applied his best endeavours to maintain that," Clairs says.


Fairfax Media Management Pty Limited

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[greengiraffe]

• Jun 23 2015 at 10:48 AM

• Updated Jun 23 2015 at 10:48 AM
Why Woolworths' landlord is a better bet for investors

Investors should consider investing in real estate investment trusts that generate earnings from the properties leased by the big supermarkets.


by Trevor Hoey
Australia's fresh food people, Woolworths, is looking for a fresh face to lead the group out of trouble. However, that isn't going to be easy given the company has unsuccessfully tried various strategic initiatives to date, all to no avail. In fact, UBS says earnings uncertainty and the chances of a price war have increased and that a turnaround will take longer and cost more money than originally anticipated.
The broker reaffirmed its sell recommendation, took a knife to earnings per share forecasts over the next three years and reduced its 12 month price target from $26.90 to $24.00.
Michael Simotas from Deutsche Bank wasn't quite as scathing but he said, 'Continued deterioration in trading, despite meaningful price investment and attempts to improve execution suggests the issues run deep and could be more difficult to address than we first thought'.
The industry is becoming even more competitive as Aldi and Costco spread their wings, exacerbating the impact of price deflation in the retail food space.
Historically, investing in Woolworths or Coles was predominantly about capitalising on non-discretionary consumer spending. The strategy remains sound, but one of the other key benefits hinged on the oligopoly position enjoyed by Woolworths and Coles prior to the arrival of Aldi and Costco.
WOW VERSUS SCP
Investors looking to maintain exposure to the non-discretionary spending theme should consider investing in real estate investment trusts (REITs) that generate earnings from the property assets leased by Woolworths, Coles and similar entities.
In September last year Smart Investor suggested that as opposed to holding shares in Woolworths, shareholders could receive better returns from investing in SCA Property Group (SCP), the entity that held Woolworths' property assets.
The share price performances since then tell the story with SCP up 20 per cent and Woolworths down 25 per cent. Despite the former's strong share price run it is still yielding approximately 5.2 per cent relative to consensus forecasts for fiscal 2015.
By comparison, Woolworths forecast dividend of $1.39 for the same period implies a similar yield. This raises the question as to whether investors should stick with SCP or look to Woolworths as a rebound story.
Given there isn't any evidence to support a near-term recovery in Woolworths underlying grocery business, SCP looks the better option. However, investors would be wise to size up the new look Federation Centres, intended to be renamed Vicinity Centres following the acquisition of Novion Property Group.
It provides significant exposure to non-discretionary retail spending, but there are also a number of other aspects to like about the business including a superior yield to that offered by SCP.
FEDERATION CENTRES
Before examining Federation Centres it is useful to gain an insight into SCP's portfolio in order to make a meaningful comparison. Using gross rent as a measure, Woolworths grocery stores accounts for 49 per cent of the portfolio.
Based on the same metrics specialty stores represent 38 per cent of the portfolio while Big W is the largest other tenant, accounting for 7 per cent of gross rental income.
With specialty tenants making up a sizeable proportion of the portfolio it is important to break down their related industry segments. Fresh food, food catering and liquor are the largest contributors by gross rent, accounting for 32 per cent. Pharmacy and medical is the other key non-discretionary representative, accounting for 16 per cent.
While acknowledging SCP was in good shape, James Druce from UBS highlighted in early June the group's share price had performed well and currently reflected the strength of the underlying business. With SCP's shares trading broadly in line with his 12 month share price target of $2.12, Druce sees better value elsewhere with Federation Centres one of his preferred options.
While its shares have also increased some 20 per cent over the last 12 months there is still implied upside relative to UBS's 12 month price target of $3.12.
Federation Centres has just confirmed its second half distribution per share of 8.5 cents. While this is positive, the group's yield potential can be better appreciated by examining distribution projections for fiscal 2016 (18 cents) and beyond.
Running the ruler across the group's financial metrics relative to its recent trading range of approximately $3.00, UBS's Grant McCasker estimates Federation Centres is trading on a fiscal 2016 yield of approximately 6.2 per cent.
He said, 'Relative to the large REITs it offers the highest total return (distribution per share yield + growth) of 12 per cent compared with the average large REIT of 9 per cent'.
While the numbers certainly indicate a switch from SCP to Federation Centres makes sense it is worth looking at the property assets of the combined businesses.
Based on assets under management prior to the merger, Novion sat at number three and Federation Centres was positioned in fifth ranking among the ASX listed retail asset managers. The combined entity will be second only to Scentre Group (SCG) with assets under management of $22.2 billion as opposed to SCG with $36.7 billion.
With regard to industry representation it is quite ironic that the merged group will be the largest landlord to Woolworths and Wesfarmers Group (Coles supermarkets) with combined store numbers of 132. Supermarkets sales will represent 32 per cent of total portfolio sales. The fact that anchor tenants represent 56 per cent of sales is positive in terms of rental stability.
Analysts John Lee and Lou Pirenc from Morgan Stanley have covered Novion and Federation Centres respectively and they are bullish about the outlook for the merged group saying, 'Lower interest expenses, ongoing cost efficiencies and a more aggressive and self-funded development pipeline will combine to deliver superior compound annual growth of between 6 per cent and 7 per cent'.
Their fiscal 2016 distribution projections are similar to consensus, implying a yield of approximately 6.1 per cent relative to a share price of $3.00. However, the 12 month share price target of $3.30 is ahead of most other analysts.

[greengiraffe]

Jun 23 2015 at 3:36 PM Updated Jun 23 2015 at 3:36 PM
Woolies let its fresh food strategy go stale

Retail After working hard to earn its "fresh food" position in the market Woolworths was on top, but Coles used price discounting to pull ahead of its rival.


by Dr David McKinna
It's hard to believe that a retail powerhouse like Woolworths could squander a strategic advantage so completely. Until recently, Woolworths had consistently achieved store growth and strong profitability for over two decades. This stellar performance was built on 'the fresh food people' strategy, initiated in the late-1980s. It was a robust strategy that they failed to defend.

I was fortunate enough to work on original strategy as consultant to the inspirational then CEO Reg Clairs. The strategy was devised to capture market share from independent retailers, as Coles was not considered the real competitive threat at that time. Back then, few Woolworths' customers were buying their meat, fruit, vegetables, seafood and deli items in the supermarket. The independent butchers, fruiterers and specialist merchants in local shopping centres then owned the fresh-food mantle. The research behind the strategy clearly showed Woolworths' fresh food offering was not perceived to be fresh.

The fresh food people program began as a marketing strategy but there had to be a product-value proposition underpinning the promise. It would take a major shift in product quality and range for consumers of that era to believe that supermarkets could deliver on truly fresh food. The fresh food people program therefore involved a fundamental restructuring of the supply chain including: sourcing directly from suppliers rather than through central markets; locking in closed-loop supply chains; perfecting store-within-a-store formats; and investing in staff training. Although this supply chain-oriented approach is now standard supermarket practice, the model was pioneering in Australia at the time.

TWO DECADES OF SUPREMACY

The fresh food people strategy underpinned Woolworths' supremacy for over two decades. Although the fresh-food offerings of competitor supermarkets improved radically, Woolworths had the first-mover advantage and therefore owned the perception of freshness. The campaign drove customer traffic, increased the shopper basket size and lifted the image of the overall brand.

Then the competitor landscape shifted and Woolworths did not re-calibrate their strategy in response. Wesfarmers installed a new management team into the dysfunctional Coles business. The restructure brought hard-nosed supplier negotiations, aggressive price-discounting, revamped private-label programs, an ambitious program of store refurbishment and an increased investment in marketing. Coles' use of celebrity chefs featuring novel, fresh foods neutralised the Woolworths fresh food advantage. It also made Woolworths look costly.

Woolworths was caught short with a high price perception and was unable to leverage its strategic advantage. Its defensive response was to match Coles' price discounting. Clearly this hasn't worked – Coles is now pulling ahead in every quarter. Effectively, Coles and Woolworths are now both chasing the heavy half of the market with an almost identical product offering and 'me too' marketing with Coles now having the upper hand.

The entry of Aldi and Costco into the market has played havoc with the big two. Although Aldi and Costco cannot compete with Coles and Woolworths on everyday shopping due to much narrower ranges, the big two are still attempting to price-match the discounters. Aldi and Costco are destination stores with totally different business models, service levels and shopping experiences.

Presumably Woolworths' management felt that the fresh food proposition was no longer relevant in the new market environment. This is a little surprising given that consumers have become even more driven by fresh food and food provenance than ever before, as evidenced by the growing popularity of farmers markets. The logical strategy for Woolworths would've been to capitalise on the fresh food people strategy, ratcheting it up a level by offering improved service (eg butchers or greengrocers in store); telling the story about the food and its origins; and perfecting new fresh food specialist formats (as opposed to Thomas Dux which is perceived as gourmet food).

Now that Woolworths have effectively lost the fresh food positioning, it would be difficult, but not impossible, to win it back. Abandoning the strategy that made them famous may in fact turn out to be a fatal blow if an international takeover transpires.

Dr David McKinna is the principal of McKinna et al, a consultancy specialising in global agrifood.

AFR Contributor

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KKR Woolies bid?
THE AUSTRALIAN JUNE 26, 2015 12:00AM

Bridget Carter

Mergers & Acquisitions Editor
Sydney
Gretchen Friemann

Mergers & Acquisitions Editor
Sydney
A lame duck chief executive, a boardroom lacking strong retail experience and a collapsing share price — all music to the ears of hungry private equity, and no surprise then that Woolworths is on the menu for many offshore players that dabble in the private equity world.

But at a market capitalisation of more than $33 billion, it would be one of the biggest, if not the ­biggest, takeover in Australian corporate history and would probably require a consortium of private equity firms and dollops of debt.

And so fresh rumours running through the market yesterday were that KKR, which in the late 1980s pulled off the then biggest deal ever when it bought RJR Nabisco for $US25bn, is now putting to­gether a bid which might be almost ready for the Woolworths board to consider.

The deal would go something like this: KKR makes its bid, sells off struggling hardware chain Masters and Big W and then refloats part of the new, leaner Woolworths, which is squarely focused around food, grocery, convenience stores and petrol and liquor.

With the Australian dollar falling, the deal becomes cheaper by the day for KKR.

[greengiraffe]

War on two fronts
2048 words
27 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Supermarkets Coles and Woolies are up against a well-oiled German machine. Aldi is growing and consumers are shifting allegiances. And now it's become political, write Sue Mitchell and Simon Evans.

There is a mysterious serendipity about the sudden interest in the tax affairs of German-based discounter Aldi. Last Monday morning, as the Senate economics committee met informally in Canberra to discuss the coming hearings into corporate tax avoidance, independent senator Nick Xenophon suggested it take a look at Aldi Australia.

The suggestion took most committee members by surprise, as Aldi's name - unlike those of Apple, Google and IKEA - had not come up during previous hearings and it was not one of 20 major corporations facing an audit by the Australian Taxation Office (ATO).

Less than three hours later, at a business lunch in Melbourne, Wesfarmers chief executive Richard Goyder suggested Aldi may not be paying its fair share of tax, saying: "Someone should go and have a good look at how much tax Aldi pays in this country because I suspect they're very profitable."

"That's when the penny dropped," said one staffer who had been sitting in on the Senate committee meeting. "[Senator Xenophon's suggestion] was very much from left field - we thought, 'where has this come from?"' the staffer said.

"Now we presume he's been speaking with Coles [which is owned by Wesfarmers] in some capacity and that's where that idea came from."

The next day, the phone rang in the western Sydney office of Tom Daunt, the Ballarat-born father of three who has been running Aldi Australia for the past four years. On the line was a Senate economics committee staffer, who politely asked Daunt if Aldi would be interested in making a submission to the corporate tax inquiry. These invitations are usually a precursor to companies being asked to appear before the hearings.

It is understood that Aldi has not been asked to appear. But, after having been all but branded a tax dodger by Goyder, one of Australia's most respected businessmen, Daunt may well feel the time has come to clear Aldi's name.

Aldi has denied Goyder's insinuations, denouncing suggestions it is not paying enough tax as "misinformed and factually incorrect". The company says it paid $81.6 million in income tax in 2013 on sales of $5.3 billion and a similar amount in 2014 on sales of $6 billion. Its average corporate tax rate for the past three years was almost 31 per cent of profits.

And, unlike tech companies such as Apple and Google, Aldi does not minimise its tax bill through mechanisms such as intercompany loans, licence fees or royalty fees to its German parent, Aldi Süd. Aldi may have a clear conscience, but mud sticks. And Aldi's detractors have continued to cast aspersions, suggesting its $81 million tax bill includes other taxes such as payroll tax.

Aldi Australia has kept its accounts away from prying eyes by registering as a limited partnership. As such, it is not required to disclose its accounts to the Australian Securities and Investments Commission, although it is required to lodge tax returns.

This will change in October, when new ATO requirements come into force, requiring all businesses with revenues of more than $100 million to lodge total sales, taxable income and income tax payable figures.

Aldi says it will comply with these requirements so, for the first time in years, its rivals will get a better idea of how much money it is making in Australia and how much of a threat it represents.

The smear campaign highlights the level of angst among Aldi's competitors as the discounter cuts a swath through the $88 billion grocery market.

After opening its first store in Marrickville in Sydney's inner-west in 2001 with modest plans for just 100 stores, Aldi now has more than 370 stores in Queensland, NSW, Victoria and the ACT. It plans to open the first of about 120 stores in South Australia and Western Australia early next year, investing almost $700 million and taking its total investment in Australia to $4 billion.

According to Roy Morgan Research, Aldi's market share has tripled in 10 years - from 3.1 per cent to 11.6 per cent.

The discounter has taken share mainly from independent retailers such as Metcash's IGA stores, but also from the major supermarket chains. Coles' market share has fallen from 37 per cent to 31.8 per cent since 2006, on Roy Morgan's numbers, and Woolworths' share is down from 40.3 per cent to 38.5 per cent.

Retail analysts such as Ben Gilbert at UBS believe Aldi's national market share could reach 15 per cent in a few years, challenging the duopoly structure and seriously undermining margins at Coles and Woolworths by skimming off sales of commodity products such as toilet paper and washing powder, and forcing them to reduce prices on national brands and private-label products.

When Aldi first appeared on the scene 15 years ago, the incumbents downplayed the threat. Australian consumers preferred the convenience of buying all their groceries in a single shop, they would never embrace Aldi's limited range of around 1200 private-label brands - even if its prices were 20 per cent to 30 per cent cheaper - and they were addicted to weekly specials rather than Aldi's everyday low prices model.

The sceptics have been proven wrong. Roy Morgan estimates that in any four-week period, more than 35 per cent of Australians shop at Aldi, while a UBS survey last year found that 52 per cent - or one in two shoppers - in areas where Aldi has stores had visited in the previous month.

Gilbert believes Aldi's sales could grow by at least 12 per cent a year over the next five years - three to four times the rate of growth at Woolworths and Coles - and have as big an impact on the Australian grocery market as Aldi and its European rivals Lidl and Netto have had in Britain.

Coles and Woolworths have already been forced to roll out a wider range of private-label products in an attempt to match Aldi's products (private-label share of the market has doubled since Aldi arrived) and have been gradually moving away from deep discounts in favour of everyday low prices, with varying levels of success.

Aldi has maintained the 20 per cent to 30 per cent price gap with the major chains, even after Coles and Woolworths have pumped more than $1 billion into reducing prices. A Choice survey earlier this month found that a basket of private-label groceries at Aldi was still 28 per cent cheaper than a similar basket of private-label goods at Coles and 34 per cent cheaper than Woolworths, while a basket of Aldi house brands was almost half the price of a basket of similar national brands at the major chains.

"We'll always price a product to provide a significant discount to our competition," Daunt told The Australian Financial Review in a recent interview. "It's very dangerous territory to get into for a discounter to allow others to encroach on that area and that's certainly not part of our plan."

Aldi was founded just after World War II by brothers Theo and Karl Albrecht, who took over their father's single store in Essen. After years of rapid growth, they split the business more than 30 years ago into two separate companies, Aldi North and Aldi South, carving up the US, Britain and Europe before Aldi Süd finally turned its attention to the southern hemisphere 15 years ago.

Aldi has tweaked its format and way of doing business to cater to Australian shopping habits, adding a few national brands such as Vegemite, Nescafe and Kelloggs cornflakes to the mix, and opening stores in shopping centres rather than high streets. It has also broken its founder's ban on advertising, with quirky TV ads boasting "Smarter Shopping" and "Like Brands. Only Cheaper."

However, the local company has perpetuated the Albrechts' low-cost culture so it can continue to undercut major rivals. Aldi saves money by having identical easy-to-stock stores, using shelf-ready packaging which can be wheeled into place rather than unpacked by hand, operating on a just-in-time distribution model rather than storing big inventories, employing only a handful of staff in each store and limiting the number of stock-keeping units or SKUs to one or two rather than a multitude of pack sizes.

The cost savings and scale advantages are ploughed back into prices. "Grocery is a high-fixed cost business and ... our scale provides cost efficiencies and operational efficiencies that allow us to reinvest in price," Daunt said.

After years of harsh treatment at the hands of Coles and Woolworths, suppliers have jumped on board, welcoming the company's way of doing business, including simple trading terms with no retrospective changes and no shelf fees.

While Woolworths and Coles have lost sales to Aldi, independent retailers have been hit hardest. IGA retailers supplied by wholesaler Metcash have seen their market share fall from 18 per cent to around 12 per cent in the eastern states over the last six years, and further losses are expected when Aldi opens its doors in South Australia and Western Australia next year.

Independents have a much larger market share in South Australia and Western Australia than they do in the eastern states - more than 30 per cent in SA and 24 per cent in WA - and have a lot more to lose when Aldi arrives.

IGA "barons", multi-store owners such as Roger Drake, Romeo's Retail Group and the Chapley family, are planning to meet the Aldi assault head-on, playing the "local" card for all it's worth - more local products made by local food producers and more local staff employed.

Colin Shearing, chief executive of the Independent Supermarket Retailers Guild of SA, which oversees the interests of 236 outlets, says the Foodland, Friendly Grocer and IGA stores supplied by Metcash won't be sitting on their hands. "The dollars actually stay here," he says, referring to the local ownership of Foodland and IGA stores. He says the labour costs of a Foodland supermarket are almost three times as high as an Aldi store as a percentage of turnover.

South Australian shoppers are notoriously parochial. "That's been proven. That's a given," Shearing says. Foodland, in particular, makes a virtue of the number of state-based producers it stocks on shelves. That was reinforced in mid-2013 when pickles, honey and gherkin maker Spring Gully was saved from collapse by an extraordinary public support campaign.

However, Aldi is undaunted by the challenge. Viktor Jakupec, who spearheaded Aldi's expansion into Queensland in 2004, was hand-picked by the company to steer the expansion in SA and WA. A 32,000-square-metre distribution centre is nearing completion in the western Adelaide suburb of Regency Park and there are plans for 40 to 50 stores in the state, with at least 17 sites secured.

The prize in Western Australia is even bigger. Aldi is steaming ahead with the construction of a 48,500-square-metre distribution centre at Jandakot Airport which will be finished early in 2016. The Jandakot distribution centre will service up to 70 Aldi stores.

One rival retailer in the picturesque wine region of the Barossa Valley in South Australia is having a bet both ways. The Co-op, a community of hundreds of grape growers and winemakers, operates a $65 million-a-year operation including a full-line Foodland supermarket and a shopping centre.

Co-op chief executive Graeme Longmuir won't confirm it directly, but plans lodged with the local council suggest Aldi will have exclusive access to one of the loading docks for deliveries. The Co-op is taking a pragmatic approach - if Aldi is going to snare some of its supermarket business, it will in turn be collecting rent from the German retailer.

[greengiraffe]

http://www.smh.com.au/business/heres-why...icgix.html

Here's why consumers are choosing Aldi over Woolworths and Coles
Date
July 15, 2015 - 5:41PM

Sue Mitchell
Senior Reporter

Fresh food is no longer the main attraction: Value is becoming an increasingly important driver of shopping behaviour, according to a Morgan Stanley survey. Photo: Brendon Thorne

Supermarkets relying on freshly baked bread, heritage tomatoes and aged beef to lure customers from discounters such as Aldi and Costco may be fighting a losing battle as value for money becomes more important than fresh food.

According to a survey of more than 1500 consumers by Morgan Stanley, value for money and good promotions have become more important drivers of shopping behaviour in the last two years, while quality of fresh foods and the range of fresh foods have become less important.

As Aldi and Costco move into the mainstream, they appear to be having an impact on what consumers look for in a supermarket.

Morgan Stanley analyst Tom Kierath
About 44 per cent of respondents rated value for money as being the most important factor in selecting a supermarket, compared with 39 per cent two years ago, while 27 per cent cited the quality of fresh foods as being most important, down from 30 per cent in 2013.

The trend was most pronounced among women aged 35 to 54, almost half of whom (45 per cent) rated value for money as the most important factor when choosing where to buy groceries.

Alarm bells for Woolworths, Coles
The finding will ring alarm bells at Woolworths and Coles, which are increasingly relying on the freshness and breadth of their offer in fresh foods such as fruit and vegetables, meat, poultry and dairy to differentiate themselves from discounters Aldi and Costco.

"As Aldi and Costco move into the mainstream, they appear to be having an impact on what consumers look for in a supermarket," said Morgan Stanley analyst Tom Kierath.

"We think that differentiation within fresh (food) departments has reduced as Coles and Aldi have improved their fresh offer, which has led to consumers placing less importance on this factor," Mr Kierath said.

"Potentially this is an alarming development for the full line supermarkets as this is one of the only areas where they have a clear point of difference with the discounters, in our view," he said.

Woolworths and Coles are cutting grocery prices to reduce a 15 per cent price gap with Aldi and increasing the frequency and depth of promotions.

However, as Woolworths and Coles can never compete on price alone with the low-cost operator, they are attempting to differentiate their offers by improving their fresh food ranges – devoting more floor space to fruit and vegetables, installing bread ovens and in-store butchers, cheese counters and sushi bars – and fixing supply chains to reduce the time it takes to get fresh food into stores.

Cheeky Tweets
The survey findings were released as Aldi kicked off a cheeky new social media campaign urging consumers to tweet when they "made the switch" to the discounter.

Figures released last week showed that Aldi's sales have risen by about 20 per cent a year over the last two years, albeit off a lower base, reaching $6 billion in 2014.

In comparison, Woolworths's food and liquor sales have risen an average 4.7 per cent a year and Coles's sales by around 4.9 per cent a year since 2013.

Morgan Stanley says consumer awareness of Aldi has risen from 82 per cent to 87 per cent as the chain opens new stores and advertises on TV, while awareness of Costco has risen from 54 per cent to 68 per cent as the members-only discounter opens new warehouses.

However, while awareness has risen, only a minority of consumers shop at Aldi and Costco on a regular basis, due to their smaller store networks and, in the case of Aldi, its narrow range of mainly private label products.

The Morgan Stanley survey found that 52 per cent of respondents had shopped at Aldi and 11 per cent at Costco in the past 12 months, and even fewer were regular shoppers (Aldi 27 per cent and Costco 4 per cent).

Aldi's newest customers are coming increasingly from Coles, rather than Woolworths, because of superior value for money and promotions, the broker said.

"Looking ahead we think awareness (of Aldi and Costco) will continue to move higher and likely finish somewhere near Coles and Woolworths, which should drive overall customer visitation," Mr Kierath said.

Morgan Stanley believes Aldi and Costco will increase their share of the market to more than 13 per cent by 2020, taking customers from Woolworths, Coles and independent supermarkets supplied by Metcash.