The Facts About Grocery Retailing at Woolworths - Autumn 2008 - Corporate-ir
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The Facts About
Grocery Retailing
at Woolworths
Autumn 2008
At Woolworths, we’re committed to providing our customers with the best shopping experience possible. That’s why we offer the finest quality fresh foods at the best value. Woolworths opened its doors 80 years ago. We have operated fresh food stores for 60 of those years after refrigeration technology revolutionised transport and storage. We take our lead from our customers – we continually change to meet what the consumer wants. Woolworths has changed a lot since we opened our first store in 1924 in Pitt Street, Sydney. However, there is something that hasn’t changed: we still work hard to make our customers happy. Contents 1 Did You Know? 2 How Competitive is Australian Food Retailing? 3 How People Choose Where to Shop 4 How People Shop for Groceries 5 Where do People Shop for Fruit & Vegetables? 6 How we Buy Fresh Food 7 Our Share of Total Domestic Production 8 Where Our Suppliers Come From 10 How We Manage Quality 11 Where Your Beef Comes From 12 How Much Profit we Make 14 How Global Factors Are Affecting Food Prices 16 The Facts About Food Inflation
Did You Know?
3,176
suppliers large and small
work with Woolworths.
107,000 100
employees in Australian
supermarkets.
%
of our fresh meat is sourced
from Australian producers.
95 %
of our fresh fruit
and vegetables are
90 %
of Woolworths’
Homebrand
+80 %
of our fresh food
suppliers have been
grown and farmed range is sourced our partners for
in Australia. in Australia. more than 10 years.
1
How Competitive is Australian Food Retailing? Woolworths is a strong supporter of competition. Competition helps to keep prices low for customers and challenges retailers to deliver the best possible service. The Australian food retail sector is highly competitive which is great news for customers. With a variety of new market entrants plus a growing independent and specialist food sector, there has never been more choice about where to shop. Woolworths 31.0% All Other Retailers Selling Food1 24.0% Mass Merchants2 1.5% Franklins 1.0% Aldi 2.5% Metcash/IGA3 17.0% Coles/Bi-Lo 23.0% Notes 1. E xcludes take-aways outlets and cafes/restaurants but includes fresh food specialties and fresh food markets. 2. Mass merchants are department stores and discount department stores. 3. Includes smaller foodstores and independent stores supplied by Metcash as well as larger supermarkets (IGA and Foodworks). Source: Pitney Bowes MapInfo based on company reports and ABS sources including Household Expenditure, Australia National Accounts and Australia Retail Trade Services 2
How People Choose Where to Shop
Customers shop at different stores at different times for
different reasons. Price is only one of many factors that
influence our shopping decisions. Each year a major
research company asks thousands of shoppers to name the
factors that are important to them. Here’s how they rate:
1 High standards of food safety
2 Store close to home
3 Clean and tidy store
4 Convenient trading hours
5 Good value
6 Hygienically prepared food
7 Easy parking
8 Low prices
9 Good quality fresh fruit and vegetables
10 Good range of fruit and vegetables
Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
3
How People Shop for Groceries
Very few shoppers are loyal to just one store,
instead buying from different outlets depending
on convenience or preference.
Did you know?
The average customer
shops at food retail outlets
2.51 times a week, with
Woolworths customers
spending about $35
a visit on a basket
of 10 items.2
Notes
1. Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
2. Source: Woolworths Limited. Excluding GST.
4
Where do People Shop for Fruit & Vegetables?
We know that most Woolworths shoppers also shop
at other stores. Woolworths shoppers were asked
where they bought fresh fruit and vegetables during
the week. Here is where they spent their money:
Other Supermarkets 6%
Other Stores 6%
Independent Supermarkets 6%
Coles 16%
71% of Woolworths’
customers weekly
fruit and vegetable
spend is spent outside
of Woolworths.
Fruit Shops / Markets 37%
29% of Woolworths’
customers weekly
Woolworths 29% fruit and vegetable
spend is spent at
Woolworths.
Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
5
How we Buy Fresh Food
Fresh food is our business and we’ve made it our
mission to partner with the very best farmers and
growers in Australia. We have hundreds of direct
trading relationships with fruit, vegetable and
meat suppliers.
Our preference is to have direct, long Sometimes we do buy small
term trading relationships. The benefits quantities of produce in the wholesale
of working this way are better quality markets so we can pass on special offers
management, improved planning and to our customers. By working this way,
forecasting and greater consistency and we can find great specials for customers
sustainability of supply. and help suppliers to clear their stock.
We are very proud of the relationships
that we have with our suppliers and
many of them have been able to grow
their business thanks to the surety of a
long term partnership with Woolworths.
More than 80% of suppliers have been
partners for more than 10 years.
Different Prices,
Different Places
– Why?
No national retailer in Australia has a
truly national pricing system. There will
always be slight regional variations,
particularly for locally sourced fresh
food, including milk and bakery
products. However, Woolworths does
ensure that the majority of private
label products are the same price,
regardless of where you shop – that’s
well over a thousand everyday items.
For branded products, we aim to
ensure that prices are the same at
stores within each state.
6
Our Share of Total Domestic Production
Australian farmers produce food for export to other
countries, as well as for Australian retailers, wholesalers,
manufacturers and food service businesses. When you
take all this into account, Woolworths’ share of total
production is relatively small.
12% of Australia’s fruit and veg is sold fresh at Woolworths
6% of Australia’s beef is sold fresh at Woolworths
15% of Australia’s lamb is sold fresh at Woolworths
Sources: Meat & Livestock Australia; ABS; Pitney Bowes MapInfo; Department of Agriculture, Fisheries & Forestry Foodmap 2007.
7Where Our Suppliers Come From
Did you know that 95% of our fresh fruit and
vegetables are grown in Australia? Our fresh fruit,
vegetables and meat come from hundreds
of suppliers across the country.
Fresh fruit and vegetables
Darwin
Katherine
Kununurra
Mareeba Innisfail
Atherton
Tully
Bowen
Ti Tree
Bundaberg
Carnarvon Mundubbera
Sunshine Coast
Chinchilla
Lockyer Valley Gatton
St George Warwick
Stanthorpe
Bourke
Dorrigo Coffs Harbour
Virginia Menindee
Perth
Hillston Orange
Adelaide Hills Renmark
Donnybrook Sydney
Manjimup Riverland
Sunraysia Griffith Young
Pemberton
Swan Hill Batlow
Bendigo Cobram
Shepparton
Werribee Yarra Valley
Gembrook
Thorpdale
Fruit Growing Regions
Vegetable Growing Regions Launceston
Hard Produce Growing Regions Huon Valley
(e.g. nuts, pumpkins, watermelons etc.)
Maps not to scale.
8How We Work with Suppliers
Right across our business, we abide by voluntary
codes of conduct in relation to supplier trading
relationships. We were an inaugural member
of the Produce and Grocery Industry Code of
Conduct which is a voluntary code aimed at
promoting fair trading practices and building
better business relationships.
The Code also provides access to a simple and
accessible dispute resolution procedure for any
individuals or groups in the event of a dispute.
Meat
Lamb Regions
Beef Regions
Pork Regions
Distribution Centres
Maps not to scale.
9How We Manage Quality
Quality is extremely important to Woolworths. When we buy fresh food, particularly produce
and meat, we work to strict quality specifications.
Our aim is to provide the best possible quality These specifications are developed with our
across all of our stores. If customers experience suppliers and are regularly reviewed. Essentially,
they are based on our customers’ expectations
inconsistent quality levels when they eat our of quality. Of course Mother Nature occasionally
food, then they are less likely to buy it again. intervenes with climatic conditions affecting the
quality, size or shape of certain crops.
Our quality specifications for fruit and
vegetables are publicly available at
www.woolworths.com.au/vendors.
The Woolworths Quality Assurance program
is a rigorous quality standard system that applies
to all fresh food and private label suppliers.
The system examines product specifications,
manufacturing processes, cleaning procedures,
product labelling and other relevant food safety
matters. All Woolworths fresh food suppliers
are accredited and regular external audits
are conducted.
Apples and Apples
When it comes to produce,
it’s important to compare
apples with apples. No
two batches of apples are
the same, which is why
quality specifications are so
important when you make
comparisons. Fruit and
vegetables are graded by
growers according to size,
appearance, colour, variety
and a whole range of other
factors that help determine
their value. So if an apple at
one retail outlet costs 40c
and an apple at another retail
outlet costs 50c, there’s
every chance that there’s
a quality difference too.
10Where Your Beef Comes From
There are many steps involved in putting beef
on the shelf and naturally, costs are incurred at
every point in the process. Take beef for example. A customer
purchases
Nearly two thirds of the cost of beef is spent a cut of meat
before it reaches our stores. for $10
Animal is purchased from Animal is slaughtered *Waste occurs at several
feedlots or direct from farm and boned Waste* points in the supply chain
when we have to discard
$3.80 $0.90 $1.53 non-saleable products
Delivery to processing plant, storage and aging, delivery to stores
$0.15
Our margin on
beef is around
15% or $1.50
on a $10.00 cut.
This is before we account
for the costs associated
with running a supermarket
such as general store wages,
In-store butchers rent, lighting, tax and marketing
prepare the cuts Cut goes among other things.
and package them Waste* on sale for
$1.40 $0.72 $10.00
11How Much Profit we Make
As a listed company, Woolworths Limited releases
fully audited and publicly available accounts. Our
sales, profit and gross margin are calculated every six
months and can be viewed in our Annual and Interim
Reports which are available on our website.
As a group, Woolworths Limited makes about five cents Notes
in the dollar before we then pay interest and tax. Our 1. Includes paying staff, running stores, energy, rent, IT etc.
2. Earnings Before Interest and Tax.
Net Operating Profit is about three cents in the dollar. Source: Woolworths Limited Annual Reports (2003–2007).
Our supermarkets are
high volume, low margin
businesses. We make
our profits by selling large
amounts of grocery items
at low prices.
Cost of goods sold 76.59%
Cost of doing business1 18.25%
What Woolworths gets before
we pay interest and tax2 5.16%
12How Can You Woolworths’ profit has continued to grow
in recent years, and many people mistakenly
Since 1999, Woolworths has thoroughly
revolutionised its supply chain, including stock
Increase Your
assume that we must either be raising prices and transport management systems. This has
at the checkout or reducing the amount saved a massive $7.3 billion. A large proportion
we pay our suppliers. of these savings is then ploughed back into
Profits AND We are able to increase profit in the face
of rising food prices because we have become
the business in three ways – lowering prices,
absorbing cost increases and improving stores.
Absorb Cost? even more efficient. When you’re in the business
of selling high volumes of product at very low
margins, being efficient is important. Lots of
tiny changes can add up to significant gains.
Woolworths 2003 24.39%
Gross Margin
2003–2007
2004 24.11%
Gross Margin refers to
how much Woolworths 2005 23.30%
earns taking into
consideration the
2006 23.01%
cost of goods sold.
This is expressed as a
percentage of revenue. 2007 23.41%
Whilst Woolworths does
1
Reducing waste
2
Promotional campaigns
3
Success of private label
4
Improvements in
not apply a standard (or shrinkage as we call it) buying practices
When we engage in major Own brand labels such
margin to every product
When we have to throw promotions, such as our as Homebrand and Select With our direct buying
sold, there are several
away product that recent Rollback price are more profitable for practice we can
factors that can influence
we’ve already paid for, reduction program, sales supermarkets because consistently source
the average figure that
it reduces our margin. of those products are they don’t carry the same the best products.
have nothing to do with
This can happen for a boosted. When the mix costs associated with We get improved quality
prices or costs.
number of reasons such of products that we sell marketing as branded and efficiency, plus we
as theft, mishandling changes, it can cause the products. In the last two can pass on lower prices.
and refrigeration issues. gross margin to change. years Woolworths has This hard work means our
By developing better increased the volume stores are more profitable.
handling practices, of private label products
storage practices, security sold, which increases
precautions and quality the average gross margin
assurance, we can reduce across the business.
the amount of stock that
we lose.
Source: Woolworths Limited Annual Reports (2003–2007).
13How Global Factors Are Affecting Food Prices
Higher fuel costs? Increased rent? Paying more for This affects food prices in Australia because
we operate in a global market. Australian food
insurance, energy, health and transport? The rising producers export to other countries and our
cost of living affects businesses and individuals in a farmers and manufacturers rely on imported
commodities like grain not only to make a vast
similar way. These higher prices are also occurring range of food like bread, biscuits and cakes but
in countries right around the world, mainly because also to feed cattle and poultry. So while you
may not think that Australian food prices have
world prices of key commodities like grain, oil and anything to do with food prices in Mexico or
metals have increased significantly. Italy, they are actually intrinsically connected.
In fact, a United Nations report released in
February 2008 said that global food prices
had increased by 40% in a year and in many
developing countries, food is becoming scarcer.
14Drought Weather Grain
Australia has experienced the Other major weather-related events There is a global shortage of grain
worst drought in one hundred years. can also have a big impact on prices. and its price has increased over
With over 70% of Australia currently Fruit prices rose 64% in the year to the past few years. One reason for
drought declared, the agricultural June 2006, mainly due to a 330% the shortage is that many farmers
sector is still feeling the pinch. increase in banana prices following in North America’s wheatbelt are
This leads to failed crops and a Cyclone Larry, which devastated diverting grain from food production
reduction of supply. crops in far north Queensland. to biofuel production. Grain is not
only the main ingredient in staple
Source: Bureau of Rural Sciences. Source: Australian Bureau
foods such as bread, pasta and
of Statistics / Woolworths.
cereals, it is also the main source
of animal feed.
Source: ABARE, Australian
Commodities, March 2008.
Transport Export Markets Metals
High world oil prices affect our Prices for Australian farm sector The world price of tin has increased
transport costs in Australia. As products are strongly integrated significantly in recent times and
recorded by the CPI, the cost with global commodity price has reached a 19 year high. Tin is
of automotive fuel has risen by movements as it is estimated that an essential packaging commodity
more than 60% over the decade, around two-thirds of Australian for many food items.
and by more than 40% over the farm output is exported each year.
Source: London Metal Exchange.
last five years. For such a large,
Source: Department of Agriculture,
geographically diverse country,
Fisheries and Forestry (2005);
road transport is the only way to
Australian Agriculture and Food
move food to remote areas and
Sector Stocktake.
we are heavily reliant on freight
and therefore fuel.
Source: Australian Bureau
of Statistics.
What This Means at the Checkout
These factors impact on prices in different Of course, just because the retailer pays more,
ways. Most major retailers work on long term it doesn’t automatically mean that the consumer
contracts with suppliers so any cost changes pays the same increase at the checkout.
midway through a contract must be negotiated. What usually happens is that some of the cost
If we are asked to pay a higher price the supplier increases will flow through to the customer over
must justify it. In the last few months, more and time. Woolworths has invested tens of millions
more suppliers have presented well documented of dollars in order to absorb rising costs.
evidence to support their requests for cost increases
– many of which have been substantial.
15The Facts About Food Inflation
Each month, Woolworths calculates its own inflation Inflation – When you compare Woolworths
inflation rate on food items to the Consumer
rate on a whole supermarket-sized basket of goods. Price Index for food, you can see that our figures
This measures the degree to which our customers’ track well below the CPI rate. The reason for
this marked difference is that Woolworths
shopping basket has increased in price, taking into Food Index is expenditure based, reflecting
account the changing mix of goods our customers what customers actually buy in our stores at
our prices. The CPI measures a fixed basket
buy. We provide these figures to the Reserve Bank of goods over time
of Australia.
Index value
130
125
Australian Food CPI
120
115
Woolworths Food Index
110
105
100
2003 2004 2005 2006 2007
Above: Mapping the Woolworths Food Index against the ABS Australian Food CPI shows that the Woolworths
price trend, while increasing, is significantly lower than the ABS Australian Food CPI and much less volatile.
Source: Australian Bureau of Statistics Data / Concept Economics.
16Many other aspects of the CPI have increased in
recent years, with several sectors experiencing
increases that far outstrip price increases for food.
The costs of education and health are increasing
at a faster rate than food.
Index value
300
Education
250 Alcohol and tobacco
Health
200
Food
Transportation
All groups
150
Housing
Recreation
Household contents and services
Communication
Clothing and footwear
100
2003 2004 2005 2006 2007
Source: Australian Bureau of Statistics Data / Concept Economics.precinct.com.au We hope you’ve found this guide useful in gaining a better understanding of the complex and challenging issues involved in grocery retailing in Australia. As a major food retailer in this country, Woolworths realises that it has a responsibility to inform its customers and the broader community of what’s happening to their weekly shopping spend. If you would like any more information, please visit our website: www.woolworthslimited.com.au or write to us at: Woolworths Supermarkets PO Box 8000 Baulkham Hills NSW 2153 or email us at: feedback@woolworths.com.au Printed on 100% recycled and processed chlorine free (PCF) paper using soya bean based inks.
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