No wonder Woolworths will be responsible for more than 2% of expected capital investment by the private sector over the 2010 financial year.

That’s $19 billion from a total of $91 billion estimated in the June quarter and reported yesterday by the Australian Bureau of Statistics. It’s more than last year when more than $1.6 billion was spent.

Outside the resources sector, Woolies is one of the biggest investors in the country. The money is being spent on its refurbishment plan, which is about 40% complete for its 1000 or so Australian supermarkets, with the other parts of the chain at lesser levels.

The revamping of its chains is driving the group’s supermarkets and Big W margins faster than sales (but not so far in consumer electronics), and that in turn is tightening the group’s grip on Australian retailing.

It’s an investment in itself, rather than spending it buying back shares. Shareholders normally like that, but with such a strong rise in dividends, profits and sales, they are benefiting triply from the heavy spending on refurbishment.

And when the federal Government revealed two stimulus packages, Woolies (like Westfield) was one of the biggest beneficiaries as its highly efficient model took the extra cash (especially in BIG W, its discount general merchandise division) from customers, extracted rising profit margins from (and employed more people to help do so) which, in turn, supported growth in sales, earnings and dividends.

No wonder former CEO Roger Corbett is on the Reserve Bank board. The Woolies he helped develop is a perpetual money-making machine. No wonder so many smaller competitors fear it.

The move into hardware with Lowes of the US grabbed the headlines this week, but the real story for the company, and the reason why it can support the heavy spending on its stores (plus its advertising and marketing and image and the coming $1.5 billion on hardware), can be found in the performance of the Australian supermarkets, and BIG W.

The supermarket business is at the heart of the Woolies cash machine; with enormous earnings drive coming the way it holds down costs, boosts profit margins and in doing so effectively uses its suppliers to finance much of its day to day trading.

It is now earning a net profit of 5.98 cents in every dollar Australians spend in the supermarkets: that’s the so-called EBIT margin, (earnings before interest and tax) and it’s the best way to measure retailing profitability across businesses (as is comparable store growth for sales, or outlets open for a year or more).

Woolies EBIT margin rose 0.46c (or 13%) in the year on an 8% increase in sales to $38.29 billion. (That excludes petrol and liquor).

Profit grew more than twice as fast as the increase in sales.

“For the full year Australian Supermarket division sales increased 8.0%, of which food and liquor sales grew 9.6%, the company said. “EBIT grew faster than sales, increasing by 17.0%. The Australian Supermarket division’s EBIT margin increased from 5.52% to 5.98%, an increase of 46 basis points or bps.” Comparable store sales rose 7.3% in 2009 from 6.3% in 2008.

In the BIG W chain, EBIT jumped sharply, up a quarter, which is a huge rise (from $161 million to $200 million) for a discount chain that is up against the likes of Target, KMart and parts of Myer, plus Best and Less and several specialty chains. BIG W grew sales by 10.5%.

Profit in BIG W grew two and a half times the rate in sales growth.

Comparable sales for the full year were 7.1%. EBIT grew faster than sales, increasing by 25.9% to $200.2 million. The BIT margin rose 0.57c (or more than half a cent) to 4.69 cents in the dollar. That was a rise of 13.8% and yet the combination with the strong sales growth produced a 25% jump in earnings before interest and tax.

On top of this there’s the growing use of private labels through the supermarkets and Big W division, which is boosting margins, and hurting suppliers, who are further monstered (in the nicest possible way) by tough trading terms which means Woolies is getting its money in faster from its retail outlets than it pays its creditors

It keeps a tight hold on its stocks of unsold goods waiting to be distributed and effectively finances much of that through lengthening its trading terms with suppliers and cutting the amount of time it takes to sell those goods (the co-called stock turn).

Woolies is using its suppliers to reduce its dependency on its bankers and further boosting retail margins and making more money. That’s clout. No wonder it’s feared by competitors and suppliers alike.

Peter Fray

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