Sales growth in Australian Supermarket sector has been witnessing some bit of hammering over the last one year or so, given the challenging retailing environment and emerging competitiveness. This sluggish trend has also been highlighted in Australia Food and Grocery Council’s recent report, wherein Australia’s food and grocery sector has been noted to be witnessing pressure at the back of stiff competition in retail sector along-side subdued macroeconomic environment that is impacted by high cost of doing business and currency fluctuations. On the other hand, the current supermarket industry size is around $102.0 billion that employs over 360 thousand people in Australia; and given the improving demand of premium food products (such as fruits and vegetables), the industry might even grow by about 2.2% in FY18 (as evaluated by some market experts). Although the pace of growth seems to be below expectations at the moment.

Amidst this scenario, Woolworths Group Ltd (ASX: WOW) seems to be giving a different dimension to the supermarket landscape as this Supermarket player is gradually building up its market share which is expected to be around 37.2% in the full financial year. The key aspect is that the group has been cutting down prices to compete with its competitors, Coles and ALDI. WOW is continuing to leverage the position with some key strategic movements based on heavy investments in customer service and upgrading and refurbishing old stores.

The latest interim result reinforces the position with continued improvement in customer metrics driving sales growth with Group sales from continuing operations up 3.8%, Australian Food sales up over 4.9% and Endeavour Drinks up by 4.8%. Further, Group EBIT from continuing operations has gone up 9.9% with Australian Food EBIT up 11.1% despite continued investment. The net profit from continuing operations has been up 14.8% with strong sales growth in supermarkets at the back of boosted food margins. The roll out of ‘Pick up’ service to over 1,000 Australian Food sites in the half have yielded good result and this is improving the online shopping and delivery experience.

Growth in grocery business led the Supermarket earnings jump up 11.1% and this has been a key driver towards the increased market share scenario. There has been strong operating leverage as sales rose 4.9% ahead of market growth of 2.5%. Voice of the customers scores have improved in the half with overall customer satisfaction touching 82% against 78% in last year.

While the group lifted its profit and dividend, its FY18 operating capex guidance of $1.8bn has remained unchanged. Fully franked FY18 interim dividend of 43 cents per share has been up 26% on prior year while DRP discount of 1.5% has been retained for FY18 interim dividend, which will not apply to FY18 final dividend or for the foreseeable future. Looking at the overall prospects, we have a “Buy” recommendation on the stock at the current price of $26.92
 

1H FY18 Performance (Source: Company Reports)
 
On the other hand, retail conglomerate Wesfarmers (ASX: WES) has seen Coles supermarket’s earnings performance dipping 14.0% during H1 FY18 due to intense price competition as noted in December quarter. While WES aims to have better trading conditions in second half, the journey looks a bit long. On the other hand, ALDI focusses to expand its store network in western Australia and south Australia market and upgrade them along with Easter seaboard. Currently, ALDI has 500 stores across Australia and plans to scale up chain store to tap 9.2% market share in supermarket industry by end of FY18. As opposed to this, Woolworths has prioritised online as a long-term growth strategy while Coles has attempted to grow the channel profitably in near future. Tug of pricing war among these major players is putting pressure on small retailers, resulting into competitive pricing being offered to customers. Nonetheless, average retail spending over the rest of the year will be crucial to watch out.

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.