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.
95
%
of our fresh fruit and vegetables are grown and farmed in Australia.
of our fresh meat is sourced from Australian producers.
90
%
of Woolworths’ Homebrand range is sourced in Australia.
+80
%
of our fresh food suppliers have been our partners for 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 2 3 4 5 6 7 8 9 10
High standards of food safety Store close to home Clean and tidy store Convenient trading hours Good value Hygienically prepared food Easy parking Low prices Good quality fresh fruit and vegetables 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%
Woolworths 29%
29% of Woolworths’ customers weekly fruit and vegetable spend is spent at Woolworths.
Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
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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 term trading relationships. The benefits of working this way are better quality management, improved planning and forecasting and greater consistency and sustainability of supply. 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.
Sometimes we do buy small quantities of produce in the wholesale markets so we can pass on special offers to our customers. By working this way, we can find great specials for customers and help suppliers to clear their stock.
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.
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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.
7
Where 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 Atherton
Innisfail Tully
Bowen Ti Tree Bundaberg
Mundubbera
Carnarvon
Sunshine Coast
Chinchilla Lockyer Valley St George Bourke Dorrigo Perth Donnybrook Manjimup Pemberton
Renmark Sunraysia Swan Hill Bendigo Werribee
Orange Sydney
Hillston Griffith
Young Batlow
Cobram Shepparton Yarra Valley Gembrook Thorpdale
Fruit Growing Regions Vegetable Growing Regions Hard Produce Growing Regions (e.g. nuts, pumpkins, watermelons etc.) Maps not to scale.
8
Coffs Harbour
Menindee
Virginia Adelaide Hills Riverland
Gatton Warwick Stanthorpe
Launceston Huon Valley
How 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.
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How We Manage Quality Quality is extremely important to Woolworths. Our aim is to provide the best possible quality across all of our stores. If customers experience inconsistent quality levels when they eat our food, then they are less likely to buy it again.
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.
10
When we buy fresh food, particularly produce and meat, we work to strict quality specifications. These specifications are developed with our suppliers and are regularly reviewed. Essentially, they are based on our customers’ expectations of quality. Of course Mother Nature occasionally 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.
Where 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. Nearly two thirds of the cost of beef is spent before it reaches our stores.
A customer purchases a cut of meat for $10
Animal is purchased from feedlots or direct from farm
Animal is slaughtered and boned
Waste*
$3.80
$0.90
$1.53
*Waste occurs at several points in the supply chain when we have to discard 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.
In-store butchers prepare the cuts and package them
Waste*
Cut goes on sale for
$1.40
$0.72
$10.00
This is before we account for the costs associated with running a supermarket such as general store wages, rent, lighting, tax and marketing among other things.
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How 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 in the dollar before we then pay interest and tax. Our Net Operating Profit is about three cents in the dollar.
Notes 1. Includes paying staff, running stores, energy, rent, IT etc. 2. Earnings Before Interest and Tax. 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%
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How Can You Increase Your Profits AND Absorb Cost?
Woolworths Gross Margin 2003–2007 Gross Margin refers to how much Woolworths earns taking into consideration the cost of goods sold. This is expressed as a percentage of revenue.
Whilst Woolworths does not apply a standard margin to every product sold, there are several factors that can influence the average figure that have nothing to do with prices or costs.
Woolworths’ profit has continued to grow in recent years, and many people mistakenly assume that we must either be raising prices at the checkout or reducing the amount we pay our suppliers. We are able to increase profit in the face of rising food prices because we have become 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.
Since 1999, Woolworths has thoroughly revolutionised its supply chain, including stock and transport management systems. This has saved a massive $7.3 billion. A large proportion of these savings is then ploughed back into the business in three ways – lowering prices, absorbing cost increases and improving stores.
2003
24.39%
2004
24.11%
2005
23.30%
2006
23.01%
2007
1
Reducing waste (or shrinkage as we call it) When we have to throw away product that we’ve already paid for, it reduces our margin. This can happen for a number of reasons such as theft, mishandling and refrigeration issues. By developing better handling practices, storage practices, security precautions and quality assurance, we can reduce the amount of stock that we lose.
23.41%
2
3
When we engage in major promotions, such as our recent Rollback price reduction program, sales of those products are boosted. When the mix of products that we sell changes, it can cause the gross margin to change.
Own brand labels such as Homebrand and Select are more profitable for supermarkets because they don’t carry the same costs associated with marketing as branded products. In the last two years Woolworths has increased the volume of private label products sold, which increases the average gross margin across the business.
Promotional campaigns
Success of private label
4
Improvements in buying practices With our direct buying practice we can consistently source the best products. We get improved quality and efficiency, plus we can pass on lower prices. This hard work means our stores are more profitable.
Source: Woolworths Limited Annual Reports (2003–2007).
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How Global Factors Are Affecting Food Prices Higher fuel costs? Increased rent? Paying more for insurance, energy, health and transport? The rising cost of living affects businesses and individuals in a similar way. These higher prices are also occurring in countries right around the world, mainly because world prices of key commodities like grain, oil and metals have increased significantly.
14
This affects food prices in Australia because we operate in a global market. Australian food producers export to other countries and our farmers and manufacturers rely on imported commodities like grain not only to make a vast range of food like bread, biscuits and cakes but also to feed cattle and poultry. So while you may not think that Australian food prices have anything to do with food prices in Mexico or 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.
Drought
Weather
Grain
Australia has experienced the worst drought in one hundred years. With over 70% of Australia currently drought declared, the agricultural sector is still feeling the pinch. This leads to failed crops and a reduction of supply.
Other major weather-related events can also have a big impact on prices. Fruit prices rose 64% in the year to June 2006, mainly due to a 330% increase in banana prices following Cyclone Larry, which devastated crops in far north Queensland.
Source: Bureau of Rural Sciences.
Source: Australian Bureau of Statistics / Woolworths.
There is a global shortage of grain and its price has increased over the past few years. One reason for the shortage is that many farmers in North America’s wheatbelt are diverting grain from food production to biofuel production. Grain is not only the main ingredient in staple foods such as bread, pasta and 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 transport costs in Australia. As recorded by the CPI, the cost of automotive fuel has risen by more than 60% over the decade, and by more than 40% over the last five years. For such a large, geographically diverse country, road transport is the only way to move food to remote areas and we are heavily reliant on freight and therefore fuel.
Prices for Australian farm sector products are strongly integrated with global commodity price movements as it is estimated that around two-thirds of Australian farm output is exported each year.
The world price of tin has increased significantly in recent times and has reached a 19 year high. Tin is an essential packaging commodity for many food items.
Source: Department of Agriculture, Fisheries and Forestry (2005); Australian Agriculture and Food Sector Stocktake.
Source: London Metal Exchange.
Source: Australian Bureau of Statistics.
What This Means at the Checkout These factors impact on prices in different ways. Most major retailers work on long term contracts with suppliers so any cost changes midway through a contract must be negotiated. If we are asked to pay a higher price the supplier must justify it. In the last few months, more and more suppliers have presented well documented evidence to support their requests for cost increases – many of which have been substantial.
Of course, just because the retailer pays more, it doesn’t automatically mean that the consumer pays the same increase at the checkout. What usually happens is that some of the cost increases will flow through to the customer over time. Woolworths has invested tens of millions of dollars in order to absorb rising costs.
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The Facts About Food Inflation Each month, Woolworths calculates its own inflation rate on a whole supermarket-sized basket of goods. This measures the degree to which our customers’ shopping basket has increased in price, taking into account the changing mix of goods our customers buy. We provide these figures to the Reserve Bank of Australia.
Inflation – When you compare Woolworths inflation rate on food items to the Consumer Price Index for food, you can see that our figures track well below the CPI rate. The reason for this marked difference is that Woolworths Food Index is expenditure based, reflecting what customers actually buy in our stores at our prices. The CPI measures a fixed basket of goods over time
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.
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Many 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
Source: Australian Bureau of Statistics Data / Concept Economics.
2006
2007
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:
[email protected]
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