Woolworths CEO Grant O’Brien insists the company has to grow more aggressively to stay ahead of overseas rivals Aldi and Costco. But the argument doesn’t stack up.
There’s nothing like a threat of government regulation to get one of our monopolist national retailers hauling out the “national champion” and “global rivals” arguments to support a call for the right to unfettered expansion in the local market.
Plenty have done it before: BlueScope Steel in its core area (via trying on a tariff rort against “unfair” rivals); BHP Steel; Arrium (OneSteel); retailers trying to control or tax internet transactions to limit competition; farmers lobbying to impose bans on imports of grain (unsuccessful) and vegetables (there’s been wins and losses); car makers conning subsidies out of compliant governments to maintain local skills and capacity, while busily importing the models Australians want to buy, putting further pressure on locally-made models.
There’s always an element of hypocrisy, and so it is with Woolworths CEO Grant O’Brien, who yesterday trotted out a blatantly self-serving argument in favour of being allowed to continue expanding, unchecked by regulators. O’Brien made his call in a speech to an Australian Institute of Company Directors lunch yesterday:
“If you’re Aldi or you’re Costco and you’re a business three times the size of Woolworths, you get some pretty serious grunt with suppliers,” The Australian Financial Review quoted him as saying. The story went on: “Mr O’Brien claimed that Woolworths, which has annual sales of $A57 billion, is one third the size of Aldi and Costco and needed to grow to achieve better trading terms with suppliers and pass efficiency gains onto customers.”
How accurate is that claim? Well, Costco reported its fourth-quarter and full-year profit on October 10, disclosing sales of just over $US97 billion and net after-tax earnings of $US1.709 billion. In the year to the end of June, Woolies reported a net profit of more than A$2.2 billion before the $420 million write down of the Dick Smith chain (now sold) was taken into account. Even after that Woolies earned $A1.816 billion, which was still more than the larger Costco earned.
So on that O’Brien is wrong. Costco isn’t three times larger, it’s less than twice as large. He neglected (according to the AFR) to point out Woolies is far more profitable from that significantly smaller sales base. That would indicate Woolies is already getting great trading terms from its suppliers.
Getting a handle on his claim about Aldi is harder because it is a privately-owned German group. According to Wikipedia, the group had sales in 2009 of €53 billion. At current exchange rates, that’s around $A66 billion. Using an exchange rate from 2009 when the Aussie dollar was much lower (57 v 76 euro cents) gives a sales figure of around $A92 billion. Aldi’s profitability is unknown, but seeing it’s a family-owned deep discounter, it could be a couple of cents in the dollar (Costco is a deeper discounter than Woolies) — less than half Woolies’ margin.
Either way Costco and Aldi are not three times the size of Woolies as O’Brien oddly claimed (both would have to have annual sales in excess of $A170 billion for the latest 2012 financial year). If they did they would be global giants larger than Tesco of the UK and Carrefour of France, which are runners-up to the world’s biggest retailer in Walmart of the US. The AFR accepted these claims at face value.
Both Aldi and Costco have adapted business models that have seen them carve out growing chunks of highly competitive markets. In the US, Costco runs into wholesale discounters Walmart-owned Sam’s Club (Costco is a “membership-based” discounter), plus other huge chains like Kroger and Safeway. Aldi operates throughout Europe where it runs up against Carrefour (which invented the huge hypermarket concept) and Tesco. So both Aldi and Costco are hyper-competitive, aggressive retailers that are starting to impact on Woolies, as is the resurgence of local rival Coles (which is part of Wesfarmers).
Both Woolies and Coles dominate the Australian supermarket industry. Yet on the evidence of his speech yesterday, O’Brien seems to think his company is being unfairly controlled by the competition regulator, which has started cracking down on Woolies’ creeping acquisition policy in supermarkets, liquor and now hardware.
Aldi has been in Australia for more than a decade and has built a sales base of more than $1 billion by being the cheapest operator with limited home brands but deep discounts. Costco has three outlets and is planning more. Both will never have the coverage across Australia that Coles and Woolies enjoy, nor the sales base (over $100 billion annually). It would be in Woolies’ best interests to wish Aldi and Costco all the best and hope they thrive — their success will take some of the regulatory and political pressures off Woolies (and Coles for that matter)
O’Brien’s warning is nothing but special pleading from a highly-profitable and well-entrenched retailer feeling the heat of competition from a long-dormant rival and a couple of aggressive newcomers. Consumers may benefit, but shareholders won’t.