A competitive market for Woolies & Wesfarmers

Woolworths and Wesfarmers both highlighted at their annual results that the competitive landscape in food and grocery remains robust. Competition has increased from new store expansion from Aldi, and the industry-wide focus to pass on efficiency gains to customers, and invest in lower prices. However, sales growth is likely to be harder to obtain than recent years, and margin growth is unlikely given management’s strategy is to pass any efficiency gains onto customers. Although Aldi is gaining market share, it has largely been at the independent retailer’s expense. Costco is also growing, Metcash's marketing has had some success, and there are now rumours emerging of German retailer, Lidl, entering the market.
Morgans Financial Limited

Morgans Financial Limited

Unlike the UK to which the domestic market is often compared, we believe Coles and Woolworths have greater defendable competitive advantages than the UK majors do. The key barrier is the Woolworths and Coles network of strategically located large sites, which are unlikely to be replicated. Therefore, we do not view an irrational price war as a likely outcome, and believe the increased competition will have more of an impact on sales growth rates rather than margins. Aldi is gaining traction on the East Coast, and early expansion plans in Western Australia and South Australia appear to be ahead of initial expectations. In WA particularly early success could lead to a faster-than anticipated rollout rate of new stores. Costco continues to grow with eight warehouse stores in Australia, and there has been unconfirmed speculation in the press of other new market entrants such as German based Lidl. Metcash (IGA) is also investing in reduced prices for IGA and the other independent retailers. Its IGA ‘Price Match’ and new ‘Diamond store’ campaigns have had some success, but given their comparatively smaller scale and weaker service offering, we believe Metcash and the independent retailers remain the most exposed to the rise of Aldi. There’s no doubt the operating environment for the incumbents will remain challenging and investors will need to recalibrate their expectations. However, WOW and WES’s dominant position is more entrenched than global peers and backed by competent management. In addition the renewed focus on their core food and grocery business will provide a foundation for them to withstand the competitive challenge.

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2 stocks mentioned

Morgans Financial Limited
Morgans Financial Limited
Morgans Financial Limited

Morgans is Australia's largest national full-service retail stockbroking and wealth management network with over 240,000 client accounts, 500 authorised representatives and 950 employees operating from offices in all states and territories.

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