Woolworths faces $1b hit from price cuts
2015-05-19 07:14:50.438 GMT
By Sue Mitchell
May 19 (Financial Review) -- Woolworths' plan to cut the
price of private label grocery brands to better compete with
Aldi and Coles may cost the retailer as much as $1 billion,
reducing earnings from food and liquor by almost a third,
according to brokers.
Woolworths is reviewing its private label grocery strategy
after admitting a week ago that consumers perceived the quality
of Aldi's private label brands to be on par or better than
Woolworths' Select brand and superior to its entry-level
Homebrand range.
According to analysis by Morgan Stanley, Aldi's prices are
21 per cent more expensive than Woolworths' budget Homebrand
range, but 27 per cent cheaper than Woolworths' mid-tier Select
range.
Aldi's brands are 6 per cent cheaper than Coles' own-brand
range, but Coles' brand prices are on average 34 per cent
cheaper than Woolworths' Select brand.
Morgan Stanley analyst Tom Kierath??? says the pricing
discrepancy has contributed to consumer perceptions that
Woolworths' prices are higher than those of rivals across the
board.
"Private brand strategies are critical for the Australian
supermarkets, as consumers view this as central to the overall
price positioning of each chain," said Mr Kierath.
"Put simply, if a supermarket is able to show its private
brand prices are low, consumers are more likely to believe all
of its prices are low."
Woolworths has flagged plans to add more entry-level
products to its private label range and match prices on key
private label items to "close the gap" with Aldi and Coles.
"We're not going to be beaten on price relative to our
major full line supermarket competitor," Woolworths' new Food
Group managing director, Brad Banducci???, told investors
earlier this month. "The issue we've got with Aldi is providing
the same value experience in our store as you would in an Aldi,
which requires us to rethink and re-engineer some of our entry
level products including some of our entry level own-brands."
Private label groceries are estimated to account for about
17 per cent of Woolworths' Australian food and liquor sales and
the Select brand about 9 per cent of sales. Woolworths' other
private label brands include Macro, Gold and Free From.
Mr Kierath said that if Woolworths cut the price of Select
products by 10 per cent it would reduce food and liquor margins
by 84 basis points to 6.57 per cent, cutting earnings before
interest and tax by $388 million.
If Woolworths bit the bullet and reduced the price of
Select products by 30 per cent it would reduce food and liquor
margins by 230 points to 5.09 per cent, cutting earnings before
interest and tax by $1.05 billion or 33 per cent.
This exceeds the private label investment estimated by
other analysts such as Citigroup's Craig Woolford???, who says
the investment in private label prices could cost Woolworths
$396 million and wipe 92 basis points off margins.
Woolworths has invested $125 million since January
reducing grocery prices in stores and online but conceded
earlier this month that its prices were still higher than
Coles' by "less than 100 basis points".
The retailer plans to reinvest $500 million over two years
from cost savings into reducing prices and improving service in
stores and is boosting inventories by half a day to improve
onshelf availability.
However, analysts believe Woolworths may need to invest
between $600 million and $1 billion into prices and stores to
close the gap with Coles and Aldi and regain lost market share.
The retailer also needs to improve its marketing to
convince consumers that its prices are competitive. Earlier
this week, Woolworths confirmed it had parted ways with its
fourth marketing director in as many years, with CMO Tony
Phillips stepping down after a year in the role.
"Without improved marketing, Woolworths will continue to
struggle with its value perception," said Deutsche Bank analyst
Michael Simotas???.
Coles is expected to outline its response to Woolworths'
plans at Wesfarmers' annual strategy day in Sydney on Wednesday.
Click here to see the story as it appeared on Financial Review
web site.
Financial Review
Copyright © (2015) Fairfax Media Publications Pty Limited.
www.afr.com. Not available for re-distribution.
-0- May/19/2015 07:14 GMT
2015-05-19 07:14:50.438 GMT
By Sue Mitchell
May 19 (Financial Review) -- Woolworths' plan to cut the
price of private label grocery brands to better compete with
Aldi and Coles may cost the retailer as much as $1 billion,
reducing earnings from food and liquor by almost a third,
according to brokers.
Woolworths is reviewing its private label grocery strategy
after admitting a week ago that consumers perceived the quality
of Aldi's private label brands to be on par or better than
Woolworths' Select brand and superior to its entry-level
Homebrand range.
According to analysis by Morgan Stanley, Aldi's prices are
21 per cent more expensive than Woolworths' budget Homebrand
range, but 27 per cent cheaper than Woolworths' mid-tier Select
range.
Aldi's brands are 6 per cent cheaper than Coles' own-brand
range, but Coles' brand prices are on average 34 per cent
cheaper than Woolworths' Select brand.
Morgan Stanley analyst Tom Kierath??? says the pricing
discrepancy has contributed to consumer perceptions that
Woolworths' prices are higher than those of rivals across the
board.
"Private brand strategies are critical for the Australian
supermarkets, as consumers view this as central to the overall
price positioning of each chain," said Mr Kierath.
"Put simply, if a supermarket is able to show its private
brand prices are low, consumers are more likely to believe all
of its prices are low."
Woolworths has flagged plans to add more entry-level
products to its private label range and match prices on key
private label items to "close the gap" with Aldi and Coles.
"We're not going to be beaten on price relative to our
major full line supermarket competitor," Woolworths' new Food
Group managing director, Brad Banducci???, told investors
earlier this month. "The issue we've got with Aldi is providing
the same value experience in our store as you would in an Aldi,
which requires us to rethink and re-engineer some of our entry
level products including some of our entry level own-brands."
Private label groceries are estimated to account for about
17 per cent of Woolworths' Australian food and liquor sales and
the Select brand about 9 per cent of sales. Woolworths' other
private label brands include Macro, Gold and Free From.
Mr Kierath said that if Woolworths cut the price of Select
products by 10 per cent it would reduce food and liquor margins
by 84 basis points to 6.57 per cent, cutting earnings before
interest and tax by $388 million.
If Woolworths bit the bullet and reduced the price of
Select products by 30 per cent it would reduce food and liquor
margins by 230 points to 5.09 per cent, cutting earnings before
interest and tax by $1.05 billion or 33 per cent.
This exceeds the private label investment estimated by
other analysts such as Citigroup's Craig Woolford???, who says
the investment in private label prices could cost Woolworths
$396 million and wipe 92 basis points off margins.
Woolworths has invested $125 million since January
reducing grocery prices in stores and online but conceded
earlier this month that its prices were still higher than
Coles' by "less than 100 basis points".
The retailer plans to reinvest $500 million over two years
from cost savings into reducing prices and improving service in
stores and is boosting inventories by half a day to improve
onshelf availability.
However, analysts believe Woolworths may need to invest
between $600 million and $1 billion into prices and stores to
close the gap with Coles and Aldi and regain lost market share.
The retailer also needs to improve its marketing to
convince consumers that its prices are competitive. Earlier
this week, Woolworths confirmed it had parted ways with its
fourth marketing director in as many years, with CMO Tony
Phillips stepping down after a year in the role.
"Without improved marketing, Woolworths will continue to
struggle with its value perception," said Deutsche Bank analyst
Michael Simotas???.
Coles is expected to outline its response to Woolworths'
plans at Wesfarmers' annual strategy day in Sydney on Wednesday.
Click here to see the story as it appeared on Financial Review
web site.
Financial Review
Copyright © (2015) Fairfax Media Publications Pty Limited.
www.afr.com. Not available for re-distribution.
-0- May/19/2015 07:14 GMT