australia australian supermarkets - macquarie.com.au · the market share loss to aldi in australia
TRANSCRIPT
Please refer to page 46 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
AUSTRALIA
Inside
Keep Calm and Carry On 2
Woolworths 5
Wesfarmers 6
Valuation: WOW the standout 7
UK a cautionary tale, not a crystal ball 9
Key differences between UK and Australia 13
Focus on UK space growth 16
Australia space growth to remain rational 18
Coles vs. WOW key in absence of tail risks 20
Scenarios for the Australian supermarkets 24
Are EBIT margin differentials sustainable? 25
Supermarket price perception vs. reality 28
Private label battleground 35
Appendix 1: MICAWBER Methodology 43
6 February 2015 Macquarie Securities (Australia) Limited
Australian Supermarkets Keep Calm and Carry On Will Australia repeat the UK experience?
The Australian supermarket industry is structurally different to the UK, which saw
significant earnings and margin pressure in 2014. While some of the features of
the market are consistent (e.g. discounters), there are several fundamental
differences. We do not expect the Australian market will follow the UK.
Why is Australia different?
Balanced Australian Supply-Demand growth is the key differentiator vs. the
UK, as the Australian market is not oversupplied with space. We expect rational
supply and demand of 2.4%p.a. and 2.5%p.a. respectively over the next 5 years.
Small price differentials between: 1) Aldi vs. basic private label offerings from
Woolworths and Coles; 2) Woolworths and Coles’ ‘typical baskets’.
Macro backdrop more supportive of WOW and Coles than it has been for UK
majors: 4 years of Australian food price deflation, stronger income growth, lower
unemployment, population growth, etc. are supportive of WOW and Coles.
Aldi a headwind but not ‘crowding out’ WOW and Coles
Aldi’s aggressive expansion plans will likely see them grow sales at ~12% p.a.
for the next 5 years, with market share rising from 6.4% to 10.0%. Due to the
robust demand backdrop and rational supply of supermarket space, Coles and
WOW are expected to produce F&L sales growth of 4.2% and 3.8% p.a.
respectively. We expect sub-scale independents to lag the market with growth of
1.8% p.a. as Aldi takes greater share from this sector, particularly in SA and WA.
Coles vs. Woolworths remains the main game
We estimate Coles’ supermarket sales per square meter surpassed Woolworths’
supermarkets in FY14. While Coles will continue to outperform at the top line, we
expect the gap in growth rates to narrow due to:
Coles turnaround near completion. Coles’ comps have benefited from
elevated closures of underperforming stores and fewer immature new stores.
Space growth rates are converging at ~2.5% - 3.0% p.a.
WOW addressing price perception via marketing, promotional activity, and
price investment, while Coles shifts focus to a turnaround in Liquor.
Are Woolworths’ F&L margins sustainable?
While Woolworths’ F&L EBIT margin (8.0%) is elevated vs. Coles (5.3%) and
global peers, in our view they are sustainable at current levels due to: 1) the
historic and ongoing investment in supply chain and logistics (Project
Refresh/Mercury 1 and 2); 2) IT transformation program; 3) incumbency in a
highly consolidated industry; 4) GM similar to Coles given consistent pricing.
Earnings and Target Price Impacts
As operating performance differentials narrow in FY16 and FY17, while WOW
maintains its 250 – 300bps EBIT margin premium vs. Coles, we expect WOW to
re-rate towards a 15% - 20% PER premium to the market.
WOW is fundamentally mispriced at current levels and presents 9.5%
upside to our target price. Maintain Outperform recommendation.
WES is performing well but is fully valued at 19.2x. While we do not see
material share price risk, little upside remains. Downgrade to Underperform.
Small earnings changes reflect a full review of the industry.
Macquarie Wealth Management Australian Supermarkets
6 February 2015 2
Keep Calm and Carry On Executive Summary
Market power should not be underestimated.
The Australian supermarket duopoly has come under increased scrutiny by investors in
recent months. As with many industries in Australia which tend towards powerful duopolies or
oligopolies (telcos, media, insurance, banking), Coles and Woolworths have a powerful
incumbency position in food and liquor. The barriers to entry and scale benefits of their
existing operations are significant. Despite this strong market position, the recent UK
experience and emergence of ALDI brings the future of this market structure into question.
We analyse the causes of the UK experience as a read through for Australia while looking in
detail at price perception and private label strategies.
UK an interesting case study…
The major UK supermarkets experienced unprecedented volatility in 2014 as comps turned
negative and margins compressed. The key factors contributing to this were:
1) Space growth well ahead of demand growth across the industry for many years.
2) Strategic development errors, as hypermarkets in poor locations have held back
growth.
3) Capex deployed primarily towards new stores rather than refurbishments of the
existing network. As comps declined, cost cutting centred on headcount, reducing service
standards.
4) Expanding gross margin and EBITDAR margins required to cover increased operating
lease payments on expanding property portfolios just to maintain flat EBIT margins.
5) Inflationary environment driven by limited discounting which enabled Aldi and Lidl to
gain a foothold in what has been a challenging employment and income growth
environment.
6) Poorly executed private label strategy by major supermarkets – product quality of
basic private label below discounters’ initially impacted customer confidence and
perceptions of private label.
Fig 1 UK Supply of space expanding at 4% p.a. between FY08 and FY13 as Demand growth turned negative
Source: Company Accounts, UK Office for National Statistics, Macquarie Research, February 2015
… But key differences exist between the UK and Australia.
While many of the issues highlighted above are familiar to the Australian supermarket
industry, we consider the magnitude of the UK earnings and share price outcomes to be
unlikely in Australia. This is due to:
1) Space growth in line with demand. Australia has higher population and consumption
growth as well as rational space growth, so is not under pressure from excess supply.
2) Better strategic development, with many new stores in growth corridors with no
hypermarkets. We note, however, that some cannibalisation is inevitable in store roll outs.
3) Reinvestment in the network. Coles and Woolworths have continued to invest in the
existing network through refurbishments and optimising the store network.
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
19
99
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20
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20
13
20
14
UK Space growth
Other
Discounters
Big 4
UK Industry
-2%
0%
2%
4%
6%
8%
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
Growth (%) Trading area (UK) - supply
Retail food volume (UK) - demand
Coles and
Woolworths have a
powerful
incumbency
position in F&L
UK saw challenging
market conditions in
2014 for a number of
reasons:
excess supply;
uncompetitive
prices;
poor capital
allocation and
strategic decision
making
The magnitude of
the UK earnings and
share price
outcomes are
unlikely in Australia
Macquarie Wealth Management Australian Supermarkets
6 February 2015 3
4) Australian margins have expanded due to the significant investment in operating
costs, logistics and supply chain, while more favourable supplier agreements supported
gross margins. We expect margins to be higher than the UK due to the concentrated
market structure (Woolworths and Coles control ~65% of the supermarket industry
compared to 73% grocery market share in the UK shared amongst the top four).
5) Deflationary environment. Discount driven deflation from Coles and Woolworths
reduces price differentials between private label and discounters.
6) Australian Private label strategy learned from UK mistakes and has been successful,
with appropriately priced, high quality private label products, albeit still lagging Aldi.
Fig 2 Australian supermarket deflation slowed down the market share loss to Aldi in Australia…
Fig 3 … UK food inflation above 3% provided an opportunity for discounters between 2009 - 13
Source (for all above): Company Data, ABS, UK Office for National Statistics, Factset, Macquarie Research, February 2015
Domestic competitive environment the focus
As UK and Australian supermarket industries are fundamentally different, the domestic
environment will determine the relative winners and losers. We have identified two key drivers
of relative performance: price perception and private label strategies.
Perceptions trump reality for Price and Quality. With Coles outperforming Woolworths
on comps and now sales per sqm, we analyse the drivers of price perception:
Perception: Coles has a consistent lead in low price perception vs. Woolworths,
however Woolworths has a clear advantage in quality perception over Coles.
Reality: Our MICAWBER index indicates Coles and Woolworths are very close on
price, with Woolworths consistently having slightly lower prices than Coles over the
past nine months.
Aldi impact: Aldi has a material impact on price perception and sales performance. In
the eastern states, price perception of the major supermarkets is lower than in the
west.
Fig 4 Perception: Coles cheaper… Fig 5 … Reality: WOW cheaper
Source (for all above): Roy Morgan Single Source data to Dec-14, Macquarie Research
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5e
FY1
6e
FY1
7e
FY1
8e
FY1
9e
FY2
0e
Growth (%) Trading area (AUS) - supply
Retail food volume (AUS) - demand
ForecastsActual
-4
-2
0
2
4
6
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10
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14
De
c-0
0
De
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1
De
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9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Food InflationAustralia
UK
20%
25%
30%
35%
40%
20%
25%
30%
35%
40%
De
c 0
9
Jun
10
De
c 1
0
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11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that identify supermarket with
"Low Prices" (3m average)
% that identify supermarket with "Low Prices" (3m average)
Coles
Woolworths
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3-Jan
-14
17-Jan
-14
31-Jan
-14
14-F
eb-14
28-F
eb-14
14-M
ar-14
28-M
ar-14
11-A
pr-14
25-A
pr-14
9-M
ay-14
23-M
ay-14
6-Jun
-14
20-Jun
-14
4-Jul-
14
18-Jul-
14
1-A
ug
-14
15-A
ug
-14
29-A
ug
-14
12-S
ep
-14
26-S
ep
-14
10-O
ct-
14
24-O
ct-
14
7-N
ov-14
21-N
ov-14
5-D
ec-14
19-D
ec-14
2-Jan
-15
16-Jan
-15
30-Jan
-15
WOW vs. Coles (%)TOTAL - ex. Liquor and tobacco
Colescheaper
WOW cheaper
Price perception
between Coles and
WOW, underpinned
by private label
offerings, will be key
in Australia
Macquarie Wealth Management Australian Supermarkets
6 February 2015 4
Private label critical to price and value perception. Private label products are a key
weapon for Coles and Woolworths to compete with Aldi for price sensitive customers. The
UK experience highlights not only price but value (which also reflects quality) are critical.
Aldi prices are ~4% below Coles and Woolworths’ basic private label and ~10% - 15%
below the core/mid level private label offerings, when comparing online prices.
EBIT Margins: Are the differentials sustainable?
Woolworths has a ~275bps higher F&L EBIT margin than Coles, with both well above most
global peers. We conclude that WOW’s margin premium is:
Hard earned. WOW has invested for over 15 years in improving the efficiency of the
business through Mercury One, driving supply chain and logistics improvements. Gartner
independently ranks WOW as the 6th most efficient supply chain in Asia Pac (57
th globally),
ahead of all other Australian companies (WES not in top 10 in Asia Pac).
Continuing to invest. WOW is embarking on Mercury Two and is benefiting from their
stake in Quantium in order to drive future benefits through technology.
Defendable. Significant barriers to entry exist for competitors to attempt to generate a
national footprint and compete with Woolworths and Coles. Aldi is only just approaching
7% market share after 14 years in Australia.
Not driven by pricing differentials. While gross margins are not disclosed for either
supermarket, Woolworths is delivering slightly lower prices with a higher margin than
Coles, indicating lower CODB rather than higher GM is driving EBIT margins.
Fig 6 Food and Liquor margins expected to stabilise for Woolworths and Coles
Source: Company data, Macquarie Research February 2015
Valuations favour Woolworths over Wesfarmers
Woolworths’ share price has declined by 8.9% following the 1Q15 results in early November,
underperforming the ASX200 by ~13.5%. This underperformance has been principally driven
by concerns around the F&L business, as 2.1% comps disappointed the market, which many
attributed to Aldi taking share, driving concerns of a UK-type environment in Australia. As we
highlight below, we do not expect this scenario to play out in Australia.
Wesfarmers in comparison has performed well, with the share price rising by 2.8% since its
strong 1Q15 results in late October. While WES has underperformed the ASX200 by ~3.3%,
this is to be expected in the current rally.
Fundamentally, WOW is mispriced at current levels and presents 9.5% share price
upside to our target price. In comparison, WES is performing well but is fully valued. As
sales and space growth performance differentials narrow in FY16 and FY17, while WOW
maintains its 250 – 300bps EBIT margin premium vs. Coles, we expect WOW to re-rate
towards its long term average 15% - 20% premium to the market, which we consider
reasonable given the degree of earnings certainty in the business.
WOW should trade at a ~5% - 10% discount to WES over the medium term in our view,
accounting for business mix, most notably the Masters/Bunnings differential, which outweighs
WOW’s advantage in Liquor and WES’ exposure to Coal prices.
2%
3%
4%
5%
6%
7%
8%
9%
10%
FY
94
FY
95
FY
96
FY
97
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98
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00
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F&L EBIT margin
Woolworths Coles
ForecastActual
WOW’s margin
premium is the
result of many years
of investment…
… Not price
differentials
WOW valuation is
attractive at a
market multiple,
which is factoring in
tail risks
6 February 2015 5
AUSTRALIA
WOW AU Outperform
Price (at 06:58, 05 Feb 2015 GMT) A$32.46
Valuation A$ 34.89-36.24
- Sum of Parts
12-month target A$ 35.57
12-month TSR % +14.1
Volatility Index Low
GICS sector Food & Staples Retailing
Market cap A$m 40,997
30-day avg turnover A$m 123.0
Number shares on issue m 1,263
Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E
Revenue m 60,773 63,212 65,886 68,506 EBIT m 3,775 3,893 4,117 4,368 Reported profit m 2,452 2,532 2,687 2,835 Adjusted profit m 2,452 2,550 2,687 2,835 Gross cashflow m 3,455 3,605 3,801 4,008
CFPS ¢ 275.7 284.3 298.2 312.7 CFPS growth % 3.1 3.1 4.9 4.9 PGCFPS x 11.8 11.4 10.9 10.4 PGCFPS rel x 1.26 1.20 1.24 1.22 EPS adj ¢ 195.7 201.1 210.8 221.2 EPS adj growth % 3.3 2.8 4.8 4.9 PER adj x 16.6 16.1 15.4 14.7 PER rel x 1.01 0.97 0.99 1.00 Total DPS ¢ 137.0 140.9 147.8 155.0 Total div yield % 4.2 4.3 4.6 4.8
Franking % 100 100 100 100 ROA % 16.3 15.8 16.0 16.0 ROE % 25.4 23.7 22.8 22.0
EV/EBITDA x 9.3 9.0 8.6 8.2 Net debt/equity % 32.6 31.3 30.4 28.7 P/BV x 4.0 3.7 3.4 3.1
WOW AU vs ASX 100, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, February 2015
(all figures in AUD unless noted)
6 February 2015 Macquarie Securities (Australia) Limited
Woolworths Delivering at the margin Event
We identify the key implications for Woolworths from our review of the UK
supermarkets and the implications for the Australian supermarket industry.
Impact
Outstanding margin performance over 15 years which is unlikely to be
competed away in the medium term. Following a range of efficiency programs
and significant long term capex investment, WOW has a ~275bps margin gap
over Coles. Woolworths has been recognised by Gartner as having a world
class supply chain and logistics system, ranking 6th in Asia Pac and 57
th
globally last year. While specific F&L metrics are not disclosed, we do not
consider this EBIT margin differential to be a product of relatively higher gross
margins than Coles, as the two supermarkets are likely to receive similar
buying terms.
Investment to continue for WOW as they progress to Mercury Two and
efficiency benefits are gained from insights from Quantium. While Coles is
also investing in efficiency, during the turnaround of the business, much of
this investment has, by necessity, been focussed on refurbishments.
Woolworths supermarket sales per sqm has stabilised, as Coles has
rapidly closed the sales productivity gap. WOW is likely to continue to lag
Coles on this key measure as WOW generates lower comps and higher
space growth.
Space growth expected to moderate from ~4% over the past four years
to ~3% p.a. going forward, broadly in line with Coles (~2%-3%). This space
growth convergence is expected to narrow the comps growth differential as
Coles is likely to see a reduced tailwind from store optimisation and an
increased headwind from newer stores yet to reach maturity
Room for WOW, Coles, and Aldi to grow at healthy rates over the next
five years. Despite our forecasts predicting Aldi to reach ~10% market share
by 2020, we expect WOW to be able to grow supermarket sales by 4.1% p.a.,
above market rates of 4.0% as independents lose share (+1.0% p.a. growth).
WOW is lagging on price perception vs. Coles despite having lower prices
on average over the past twelve months. WOW has retained it’s quality
premium due to relatively high value perception vs. price perception..
Earnings and target price revision
EPS: FY15 -0.7%, FY16 -1.3%, FY17: -3.0%. Target Price: $35.57 (-0.8%)
Price catalyst
12-month price target: A$35.57 based on a Sum of Parts methodology.
Catalyst: 1H15 Result: 27 February
Action and recommendation
Maintain Outperform. WOW is factoring in a degree of structural risk while
trading at a market PER. As a result, WOW is .fundamentally mispriced at
current levels and presents a clear opportunity for a quality business at
discounted levels.
Macquarie Wealth Management Australian Supermarkets
6 February 2015 6
AUSTRALIA
WES AU Underperform
Price (at 05:10, 05 Feb 2015 GMT) A$44.53
Valuation A$ 47.85 - DCF (WACC 7.5%, beta 0.9, ERP 5.0%, RFR 4.5%, TGR 2.5%) 12-month target A$ 44.07
12-month TSR % +3.8
Volatility Index Low
GICS sector Food & Staples Retailing
Market cap A$m 50,041
30-day avg turnover A$m 87.7
Number shares on issue m 1,124
Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E
Revenue m 62,060 63,482 66,984 70,447 EBIT m 3,786 3,717 4,079 4,527 Reported profit m 2,689 2,428 2,636 2,899 Adjusted profit m 2,398 2,428 2,636 2,899 Gross cashflow m 3,521 3,580 3,819 4,110 CFPS ¢ 312.4 318.7 339.9 365.8 CFPS growth % 4.6 2.0 6.7 7.6 PGCFPS x 14.3 14.0 13.1 12.2
PGCFPS rel x 1.53 1.47 1.50 1.43 EPS adj ¢ 212.7 216.1 234.6 258.0 EPS adj growth % 4.7 1.6 8.5 10.0 PER adj x 20.9 20.6 19.0 17.3 PER rel x 1.27 1.24 1.22 1.18 Total DPS ¢ 254.4 306.7 224.7 247.1 Total div yield % 5.7 6.9 5.0 5.5 Franking % 100 100 100 100
ROA % 9.1 9.3 10.0 10.7 ROE % 9.2 9.5 10.5 11.4 EV/EBITDA x 11.0 11.0 10.2 9.3 Net debt/equity % 11.5 21.1 24.5 27.2 P/BV x 1.9 2.0 2.0 2.0
WES AU vs ASX 100, & rec history
Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, February 2015
(all figures in AUD unless noted)
6 February 2015 Macquarie Securities (Australia) Limited
Wesfarmers Winning at the top line Event
We identify the key implications for Wesfarmers from our review of the UK
supermarkets and the implications for the Australian supermarket industry.
Impact
Coles continues to perform well at the top line. Having closed the sales
productivity gap vs. WOW, the Coles turnaround nears completion. We expect
Coles to continue to grow sales/sqm ahead of WOW.
Space growth to increase to 2%-3% p.a. from ~1.3% p.a. in recent years as
store closures of underperforming stores has largely been completed. This
space growth convergence with WOW (~3%p.a.) will likely moderate Coles’
comps growth due to the reduced tailwind from store optimisation and a larger
headwind from newer stores yet to reach maturity.
While continuing to lag WOW on margins. Coles’ 5.3% EBIT margin lags
Woolworths (8.0%), as WOW has invested for many years in supply chain
and logistics. We do not expect material EBIT margin expansion for Coles as
management have guided to reinvest gains in price in order to drive footfall
and other business activities.
Aldi will continue to gain market share, but is unlikely to crowd out
Coles. Despite our forecasts predicting Aldi to reach ~10% market share by
2020, we expect Coles supermarkets to be able to grow sales by 4.5% p.a.,
above market rates of 4.0%, as independents continue to lose share (+1.0%
p.a. growth).
Clear leader on price perception relative to WOW. Despite having
marginally higher prices over the past twelve months, Coles has retained its
long term hold on price perception ahead of WOW. A key risk for Coles is
WOW addressing price perception through effective advertising campaigns
and achieving the right balance within their promotional strategies. We do not
expect either Coles or WOW to cut gross margins materially in order to drive
volumes and gain share.
Earnings and target price revision
EPS: FY15: +1.0%, FY16 +0.2%, FY17 +1.3%, TP +0.4% to $44.07
Price catalyst
12-month price target: A$44.07 based on a Sum of Parts methodology.
Catalyst: 1H15 Result: 19 February
Action and recommendation
WES is performing well but is fully valued, with the current share price in line
with our current price target. As a result, we downgrade to Underperform.
While we do not see material share price risk (relative to the market), little
share price upside remains at a 24% premium to the ASX300 (19.2x PER).
Macquarie Wealth Management Australian Supermarkets
Macquarie Wealth Management Australian Supermarkets
6 February 2015 7
Valuation: WOW the standout Woolworths: A rare opportunity at a sub-market multiple
Woolworths’ share price has declined by 8.9% following the 1Q15 results in early November,
underperforming the ASX200 by ~13.5%. This has driven WOW to a market PER multiple.
In our view, this is factoring in a degree of structural risk. The share price
underperformance and PER de-rating has been principally driven by concerns around the
F&L business, as 2.1% comps in 1Q15 disappointed the market, which many attributed to
Aldi taking share, driving concerns of a UK-type environment in Australia. As we highlight
above, we do not expect this scenario to play out in Australia.
Fig 95 WOW trading at a market multiple for the first time in 15 years
Source: Factset, IBES, Macquarie Research, February 2015
Wesfarmers in comparison has performed well, with the share price rising by 2.8% since its
strong 1Q15 results in late October. While WES has underperformed the ASX200 by ~3.3%,
this is to be expected in the current rally. With a further re-rate highly unlikely and earnings
volatility likely to remain modest, the opportunity for share price outperformance is limited.
Fig 96 WES trading near fair value, at a 24% premium to the market ex resources
Source: Factset, IBES, Macquarie Research, February 2015
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ASX300 Ex Resources
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ASX300 Ex Resources
Wesfarmers
WOW share price is
factoring in a degree
of structural risk
With a further re-
rate highly unlikely
and earnings
volatility likely to
remain modest, the
opportunity for
share price
outperformance is
limited
Macquarie Wealth Management Australian Supermarkets
6 February 2015 8
Fundamentally, WOW is mispriced at current levels and presents ~10% share price
upside to our target price. In comparison, WES is performing well but is fully valued.
Catalysts required to narrow the valuation gap:
Space growth performance differentials narrow in FY16 and FY17 as Coles moves
to roll out stores;
Coles increases store roll out while near the end of the underperforming store closures
while moderate comps growth broadly in line with Woolworths at ~2.5% - 3.0%;
WOW maintains its 250 – 300bps EBIT margin premium vs. Coles.
If this occurs as we expect, WOW should re-rate towards its long term average of a 15% -
20% premium to the market, which we consider reasonable given the degree of earnings
certainty in the business.
WOW should trade at a ~9% - 10% discount to WES over the medium term in our view,
accounting for business mix, most notably the Masters/Bunnings differential, which outweighs
WOW’s advantage in Liquor and WES’ exposure to Coal prices.
Fig 97 WOW trading at an 18 % discount to WES, double the long term average
Source: Factset, Macquarie Research, February 2015
0.70
0.80
0.90
1.00
1.10
1.20
1.30
0.70
0.80
0.90
1.00
1.10
1.20
1.30
Jun
-09
Dec
-09
Jun
-10
Dec
-10
Jun
-11
Dec
-11
Jun
-12
Dec
-12
Jun
-13
Dec
-13
Jun
-14
Dec
-14
PERel(Consensus 1yr fwd)
PERel(Consensus 1yr fwd)
WOW valuation is
attractive at a
market multiple,
which is factoring in
tail risks
Macquarie Wealth Management Australian Supermarkets
6 February 2015 9
UK a cautionary tale, not a crystal ball The challenges faced by the four major UK supermarkets (Tesco, Sainsburys, Morrisons and
ASDA) are seen by many as a read through for the Australian experience due to the
oligopolistic nature of the markets, historically attractive margins and the role of discounters in
both markets.
While similarities exist, many of the drivers of the highly challenging UK environment are
not prevalent in Australia (excessive space growth, offshore expansion, etc).
ALDI has been identified by many as a catalyst for a UK type period of margin contraction
and market share loss. We consider the presence of ALDI to be an ongoing headwind to the
revenue and profit growth of the incumbents, rather than driving both sharply lower.
What happened in the UK?
The major UK supermarkets have seen dramatic earnings and share price declines over the
past twelve months as comps have turned negative and margins have compressed. This has
principally occurred due to:
Space growth well ahead of demand across the industry as supply of supermarket space
grew at ~3% to ~5% between FY08 and FY13 as demand growth turned negative. In addition
to this imbalance, several strategic errors were made in development plans, most notably with
hypermarkets (~6000sqm) developed in inconvenient locations.
Fig 7 UK Supply of space expanding at 4% p.a. between FY08 and FY13 as Demand growth turned negative
Source: Company Accounts, UK Office for National Statistics, Macquarie Research, February 2015
Expanding gross margin and EBITDAR margins. As UK companies stopped disclosing
gross margin, many investors focussed on stable EBIT and EBITDA margins, which masked
gross margin expansion which was required to cover operating lease payments on expanding
property portfolios.
Fig 8 Tesco EBITDAR margin expanded from FY10–FY12 as EBIT margin was stable
Source: Company Data, Macquarie Research, February 2015
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
UK Space growth
Other
Discounters
Big 4
UK Industry
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
FY
97
FY
98
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
% Change
UK PopulationVolume per person/mix effectUK Retail Volume - Food
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
6.0%
7.0%
8.0%
9.0%
10.0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
EBIT margin
EBITDAR margin
EBITDAR margin (LHS)
EBIT margin (RHS)
Many of the drivers
of the highly
challenging UK
environment are not
prevalent in
Australia
Macquarie Wealth Management Australian Supermarkets
6 February 2015 10
Capex deployed almost entirely towards new stores rather than refurbishments of the
existing network. As comps declined, cost cutting centred on headcount, reducing service
standards. The combination of low capital and operational investment clearly impacted the
quality of the shopping experience.
Inflationary environment for several years driven by limited discounting which enabled
discounters to gain a foothold in a challenging employment and income growth environment
Fig 9 Australian supermarket deflation slowed down the market share loss to Aldi in Australia…
Fig 10 … UK food inflation above 3% provided an opportunity for discounters between 2009 - 13
Source (for all above): Kantar Worldpanel, Macquarie Research, February 2015
Poorly managed private label strategy by major supermarkets in response to discount
supermarkets – product quality of basic private label below discounters’ initially impacted
customer perception in ‘comparable’ private label products.
Aldi and Lidl have taken 2-3ppts of market share directly from the big four supermarkets
over the past three years, with other established UK supermarkets (Co-op, Waitrose, etc)
broadly stable.
The Australian independent supermarket operators have a much larger share (~29%)
than in the UK (~4%). As a result, market share loss to Aldi in Australia is likely to be shared
across both the majors and the independents.
Fig 11 ALDI and Lidl UK growth and market share Fig 12 UK Big 4 growth and market share
Source (for all above): Kantar Worldpanel, Macquarie Research, February 2015
2.0%
4.6%
-0.5%
-2.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Sep
-04
Mar-
05
Sep
-05
Mar-
06
Sep
-06
Mar-
07
Sep
-07
Mar-
08
Sep
-08
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
% Change
ABS Food Inf lation
WOW food Inf lation (standard shelf price)
Coles food & Liquor Inf lation (avg. prices)
WOW food & liquor Inf lation (avg. prices)
-4
-2
0
2
4
6
8
10
12
14
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Food InflationAustralia
UK
4%
5%
5%
6%
6%
7%
7%
8%
8%
9%
9%
0%
5%
10%
15%
20%
25%
30%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Market ShareSales growth
Aldi & Lidl sales growth
ALDI & Lidl market share
70%
71%
72%
73%
74%
75%
76%
77%
78%
79%
80%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Market ShareSales growth
Big 4 sales growth
Big 4 Market Share
Capex deployed
towards new stores
rather than
refurbishments of
the existing network
Aldi and Lidl have
taken 2-3ppts of
market share
directly from UK big
four supermarkets
Macquarie Wealth Management Australian Supermarkets
6 February 2015 11
UK analyst and investor response to industry challenges
UK supermarket consensus earnings forecasts have been downgraded by 40% to 70% over
the past 14 months. Unprecedented earnings volatility for what have historically been very
stable businesses.
Fig 13 Consensus forecasts have been downgraded by 40% to 60% in twelve months
Fig 14 Tesco EPSg had been consistent until heavy downgrades over the past 12m
Fig 15 Sainsburys’ EPS has been more cyclical Fig 16 Morrisons has been heavily downgraded
Source (for all above): Factset, Macquarie Research, February 2015
Interestingly, despite the earnings downgrades highlighted above, the relative PER
multiple did not fall materially. UK Investors have responded positively to the recent Tesco
update, looking through the earnings challenges being faced in the next twelve months.
Fig 17 UK PERs have re-rated following Tesco’s market update in early January
Source: Company Data, Macquarie Research, February 2015
-65%
-40%
-52%
-66%
-43%
-52%
-61%
-40%-45%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Tesco Sainsbury Morrisons
Consensus EPS downgrades
(Dec-13 - Dec - 14)FY15 FY16 FY17
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
Dec
-94
Dec
-95
De
c-9
6
De
c-9
7
Dec
-98
Dec
-99
Dec
-00
De
c-0
1
Dec
-02
Dec
-03
Dec
-04
De
c-0
5
Dec
-06
Dec
-07
Dec
-08
De
c-0
9
Dec
-10
Dec
-11
Dec
-12
De
c-1
3
Dec
-14
EPS Forecasts (p)EPS forecasts (p)Tesco EPS forecasts by financial year
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
De
c-94
De
c-95
De
c-96
De
c-97
De
c-98
De
c-99
De
c-00
De
c-01
De
c-02
De
c-03
De
c-04
De
c-05
De
c-06
De
c-07
De
c-08
De
c-09
De
c-10
De
c-11
De
c-12
De
c-13
De
c-14
EPS Forecasts (p)EPS forecasts (p)Sainsbury EPS forecasts by financial year
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
De
c-98
De
c-99
De
c-00
De
c-01
De
c-02
De
c-03
De
c-04
De
c-05
De
c-06
De
c-07
De
c-08
De
c-09
De
c-10
De
c-11
De
c-12
De
c-13
De
c-14
EPS Forecasts (p)EPS forecasts (p) WM Morrison EPS forecasts by financial year
4
6
8
10
12
14
16
18
20
22
24
26
4
6
8
10
12
14
16
18
20
22
24
26
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
PER (Consensus 1yr fwd)
PER (Consensus 1yr fwd)
FTSE 100
Sainsbury
Morrisons
Tesco
UK Investors have responded positively to the recent Tesco update, looking through the earnings challenges
Macquarie Wealth Management Australian Supermarkets
6 February 2015 12
The 40% - 70% earnings downgrades over the past 14 months have been driven by both
large revenue and margins downgrades. The consensus one year forward revenue growth
and margin forecasts for each UK supermarket is highlighted below, with the following
trends clear:
Revenue growth has turned negative for all three major listed supermarkets
(ASDA is owned by Wal-Mart) after consistent long term top line growth of +4% to
+10% for Tesco (boosted by offshore expansion) and +3% to +6% for Sainsburys
and Morrison. This is a function of 1) price deflation, underpinned by aggressive
discounting; 2) negative comps growth as market share has been lost to
discounters; 3) recalibration of space growth back towards sustainable levels.
Margins have been compressed following over a decade of stability. This is
partly driven by declining top line growth over a large fixed cost base but also
resulting from lack of focus on costs, with supply chain efficiencies not being
generated.
Fig 18 Tesco’s consensus 1yr fwd revenue growth and EBITDA margin forecasts have collapsed after 15 years of remarkable stability
Fig 19 Sainsburys revenue growth has disappeared while margin contraction is less pronounced.
Fig 20 Morrison margin forecasts have begun to increase with negative revenue growth
Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
De
c-9
8
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Tesco
Revenue growth (Consensus 1yr fwd) EBITDA Margin (Consensus 1yr fwd)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Sainsbury
Revenue growth (Consensus 1yr fwd)
EBITDA Margin (Consensus 1yr fwd)-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
WM Morrison
Revenue growth (Consensus 1yr fwd)
EBITDA Margin (Consensus 1yr fwd)
40% - 70% earnings
downgrades have
been driven by both
large revenue and
margins
downgrades
Macquarie Wealth Management Australian Supermarkets
6 February 2015 13
Key differences between UK and Australia While many of the issues facing the UK which we have highlighted above are familiar to the
Australian supermarket industry, we consider the magnitude of the UK earnings and share
price outcomes to be unlikely in Australia. This is due to:
The duopolistic market structure in Australia naturally results in less competition.
The major UK supermarkets experience a more competitive environment within the top 4,
while also under pressure from a further five scale operators. In Australia, Woolworths and
Coles control ~65% of the market, competing with only two scale operators, one of which
(IGA) is under a franchise model which does not experience the same scale benefits as
Woolworths, Coles and Aldi.
While Aldi already has a larger market share in Australia than the UK, the Australian
market is further differentiated by a large independent supermarket network, which is
under greater pressure than larger operators in the current deflationary environment.
Fig 21 Consolidated Australian supermarket industry, independents holding a large share
Fig 22 … UK grocery market is relatively fragmented with independents holding little market share
Source: ABS, Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
Australian supply of supermarket space has been in line with demand, unlike the
UK. Higher population growth and rational space growth have not put the productivity and
profitability of the Australian supermarket industry under pressure from excess supply.
In the UK, the major supermarkets saw supply growth accelerate above 6% from FY10 –
FY12. At the same time, demand for supermarket space was flat to negative due to: 1) low
population growth (~0.6%) and 2) a recession putting pressure on food volume per person.
As this supply/demand imbalance was maintained for several years, the productivity of
new space fell materially while opex and capex required to service additional space
increased, heavily impacting profitability.
Fig 23 Australian demand for supermarkets generally in line with supply…
Fig 24 … while UK supermarket supply well ahead of demand…
Source: ABS, Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
22.4%
6.3% 6.4%
28.6%
36.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Oth
er
su
pe
rma
rke
ts
IGA
Ald
i
Cole
s
Wo
olw
ort
hs
Market share Incumbents 64.8%
4.4%2.2%
3.5%4.8% 5.1% 5.9%
11.3%
16.8% 16.9%
29.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Oth
er
Ice
lan
d
Lid
l
Ald
i
Wai
tro
se
Co
-op
Mo
rris
on
s
Asd
a
Sain
sbu
ry's
Tesc
o
Market ShareIncumbents: 74.1%
Discounters: 10.5%
-2%
0%
2%
4%
6%
8%
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
Growth (%) Trading area (AUS) - supply
Retail food volume (AUS) - demand
-2%
0%
2%
4%
6%
8%
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
Growth (%) Trading area (UK) - supply
Retail food volume (UK) - demand
The major UK
supermarkets
experience a more
competitive
environment within
the top 4
Macquarie Wealth Management Australian Supermarkets
6 February 2015 14
Reinvestment in the network. Coles and Woolworths have continued to invest in the
existing network through refurbishments while also progressively closing underperforming
stores.
Deflationary environment. Falling food prices in the major Australian supermarkets in
addition to discounting by Coles and Woolworths moderate the price differentials between
discounters and the major supermarkets. We analyse the pricing differential between the
discounters and private label ranges in detail on pg 31.
We consider the deflationary environment is likely to moderate over the next two to three
years as several drivers of lower supermarket prices have reversed/moderated, including:
1) High Australian dollar decreasing the cost of imported items;
2) Wesfarmers’ acquisition of Coles in 2007 increased price competition as one lever
Wesfarmers used to turn around operational performance;
3) The end of the eight year Millennium drought in 2009 increased supply of fresh
food;
4) Cyclone Yasi drove fruit prices sharply higher in 2011, which provided a tailwind to
deflation through 2012.
Fig 25 Australian food inflation below the UK for most of the past three years…
Fig 26 … As Australian comps outperform the UK which have seen greater pressure from discounters
Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
Tesco specific issues accelerated the challenges facing the business. Tesco
aggressively expanded offshore and had a major accounting scandal where earnings
were overstated, reducing management credibility.
-4
-2
0
2
4
6
8
10
12
14
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Food InflationAustralia
UK
-6%
-4%
-2%
0%
2%
4%
6%
8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
Average Comps Growth
Average Comps growth
Australian Average
UK Average
The deflationary
environment is
likely to moderate
over the next two to
three years
Macquarie Wealth Management Australian Supermarkets
6 February 2015 15
Macro environment. The Australian economic environment has been much more
favourable for the incumbents relative to the discounters. This compares to a very
challenging economic period in the UK from 2009 to 2012, which enabled the discounters
to capitalise on low wage growth and confidence levels.
Fig 27 Australian income growth ahead of the UK… Fig 28 … with lower Australian unemployment…
Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
Fig 29 … UK consumer confidence significantly lagged Aust from 2009 – 2013…
Fig 30 … resulting in sluggish UK food sales growth since 2012…
Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
Population density in Australia is materially lower than the UK, creating supply chain and
distribution challenges for new entrants. The UK is 5% smaller than the state of Victoria
with population density of 298 people per square km vs. 9 in NSW and 22 in VIC.
Fig 31 Sydney vs. London population density
Source: ABS, Macquarie Research, February 2015
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Jun
-01
Jun
-02
Jun
-03
Jun
-04
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Australia wage growth
UK wage growth
0
1
2
3
4
5
6
7
8
9
10
De
c-9
4
De
c-9
5
De
c-9
6
De
c-9
7
De
c-9
8
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Unemployment rate
Australian Unemployment
UK Unemployment
-3
-2
-1
0
1
2
3
-3
-2
-1
0
1
2
3
1-Ja
n-94
1-Ja
n-95
1-Ja
n-96
1-Ja
n-97
1-Ja
n-98
1-Ja
n-99
1-Ja
n-00
1-Ja
n-01
1-Ja
n-02
1-Ja
n-03
1-Ja
n-04
1-Ja
n-05
1-Ja
n-06
1-Ja
n-07
1-Ja
n-08
1-Ja
n-09
1-Ja
n-10
1-Ja
n-11
1-Ja
n-12
1-Ja
n-13
1-Ja
n-14
1-Ja
n-15
Consumer confidence (st dev
from average)
Consumer
confidence (st dev from average)
UK Consumer Confidence
Australian Consumer Confidence
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
De
c-9
6
De
c-9
7
De
c-9
8
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
Retail sales
growth (12m MAT)
Australia Food retail sales growth
UK Food retail sales growth
Population density
in Australia is
materially lower
than the UK creating
distribution
challenges
Macquarie Wealth Management Australian Supermarkets
6 February 2015 16
Focus on UK space growth UK an oversupplied market: UK space growth ran well ahead of demand for a number of
years. This differential persisted for a number of years (2008 – 2014). As with any industry,
an oversupply of products or capital creates a very challenging environment for the
incumbents, typically taking several years to normalise, particularly when this oversupply
involves fixed assets (rather than portable capital such as financial services). Soft demand
environments tend to have shorter impacts on the industry as stimulus can be directly
applied.
Fig 32 UK Supply of supermarket space growing at ~4% p.a. from 2008 – 2013
Source: Company websites, Macquarie Research January 2015
Supply of UK Supermarket space grew at ~3% to ~5% across the industry between FY08
and FY13. This growth was underpinned by the big four but also saw material growth from
discounters.
Demand for UK supermarket space is estimated as the combination of population growth
and volume of consumption per person.
UK population growth is relatively low, consistently around ~0.8%.
UK consumption per person has been declining post financial crisis due to the highly
challenging economic environment, particularly outside of London.
Fig 33 UK Supply of space expanding at 4% p.a. between FY08 and FY13 as Demand growth turned negative
Source: Company Accounts, UK Office for National Statistics, Macquarie Research, February 2015
-2%
0%
2%
4%
6%
8%
FY9
9
FY0
0
FY0
1
FY0
2
FY0
3
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
Growth (%) Trading area (UK) - supply
Retail food volume (UK) - demand
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
UK Space growth
Other
Discounters
Big 4
UK Industry
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
FY9
7
FY9
8
FY9
9
FY0
0
FY0
1
FY0
2
FY0
3
FY0
4
FY0
5
FY0
6
FY
07
FY
08
FY
09
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
% Change
UK PopulationVolume per person/mix effectUK Retail Volume - Food
UK space growth
ran well ahead of
demand for a
number of years
Macquarie Wealth Management Australian Supermarkets
6 February 2015 17
Nature of space growth a major issue: While overall supermarket supply growth in the UK
was clearly too high for the level of demand growth, the nature of the space growth was
another major issue as the construction of hypermarkets drove growth.
Tesco led the charge: The UK supermarket sector, led by Tesco (Tesco Extra), saw a shift
in the type of supermarkets being built. As highlighted in the charts below, Tesco was
aggressively opening an average of 18 hypermarket stores per year (hypermarkets are very
large stores which are effectively a combination of supermarkets and discount department
stores) averaging ~6,500sqm each from 2001 – 2012. By 2012, 42% of Tesco’s space was in
Tesco Extra stores, as the network was transformed from a traditional structure, similar to
Woolworths and Coles, to a hybrid supermarket/hypermarket network similar to Wal-Mart in
the US.
Fig 34 Tesco store mix has shifted towards larger supermarkets (~6500sqm)…
Fig 35 … Space growth was underpinned by large supermarkets and convenience stores for many years
Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
Lower sales intensity and inconvenient locations: Tesco Extra typically offers (in addition
to food): clothing, electronics, banking services, petrol, pharmacy, and restaurants. As non-
food categories are less sales intensive and large sites were required, in order for store roll
out to appear economic, several of the ~250 Tesco Extra stores were built in lower cost, and
inconvenient locations, resulting in significant declines in sales density. Tesco now faces
significant impairment risk on their store network.
Fig 36 Tesco sales intensity and profitability has declined materially over the past 3yrs
Source: Company websites, Macquarie Research January 2015
Australian hypermarket experience very limited: Hypermarkets have not taken hold in
Australia. Coles Myer unsuccessfully attempted the format between 1982 and 1989. Super
Kmart stores (effectively merged Kmart and Coles stores) were split into separate Coles and
Kmart stores in May 1989. Both Woolworths and Coles have learnt from the recent UK
experience with large format stores and hypermarkets, resulting in the largest new stores
being limited to ~3500 to 4000sqm with very limited space dedicated to non-food items.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Tesco UK
Supermarket space (million
sqm)
Tesco UK Supermarket space (million
sqm) Tesco Convenience (~250sqm)
Tesco Small Format (~1000sqm)
Tesco Supermarkets (~2500sqm)
Tesco Hypermarkets (~6500sqm)
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Tesco UK sqm growth
Tesco UK
sqm growth
Tesco Convenience (~250sqm)
Tesco Small Format (~1000sqm)
Tesco Supermarkets (~2500sqm)
Tesco Hypermarkets (~6500sqm)
Total Supermarket space growth
-
100
200
300
400
500
600
700
800
900
1,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
1H08
2H08
1H09
2H09
1H10
2H10
1H11
2H11
1H12
2H12
1H13
2H13
1H14
2H14
1H15
Profit per sqm
Revenue per sqm Revenue per sqm
Profit per sqm
Construction of
hypermarkets drove
UK space growth
Coles Myer
unsuccessfully
attempted
hypermarkets
between 1982 - 1989
Hypermarkets
negatively impacted
Tesco sales
productivity
Macquarie Wealth Management Australian Supermarkets
6 February 2015 18
Australia space growth to remain rational Australian space growth has been rationally deployed over the past decade, with ~2.5%
space growth broadly in line with the ~2.4% demand growth, on a CAGR basis, since 2005.
Fig 37 Australian supply of space consistently in line with demand growth.
Source: Company websites, Macquarie Research February 2015
The key drivers of both supply and demand are highlighted below.
Supply growth (supermarket trade area) has historically been relatively stable, as
Woolworths and ALDI have expanded store networks and space consistently over the past
decade, growing at a combined ~5.0% p.a. and contributing 1.8ppts to 2.5% national
space growth. This has been offset by Coles and independents growing much more
modestly. We forecast supply growth of ~2.5% p.a. over the next five years.
Fig 38 Australian supply historically growing at ~2.5%...
Source: Company websites, Macquarie Research February 2015
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
e
FY
16
e
FY
17
e
FY
18
e
FY
19
e
FY
20
e
Growth (%) Trading area (AUS) - supply
Retail food volume (AUS) - demand
ForecastsActual
1.7%
3.7%
2.4%
3.4%
1.0%
1.9%
3.1% 3.0%2.1% 2.5%2.5% 2.5% 2.5% 2.3% 2.3%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
e
FY
16
e
FY
17
e
FY
18
e
FY
19
e
FY
20
e
Space growth (%)
Domestic independents International competitors
Domestic majors Trading area (AUS) - supply
ForecastsActual
Space growth and
demand in line both
historically and
inbuilt into our
forecasts
We forecast supply
growth of ~2.5% p.a.
over the next five
years
Macquarie Wealth Management Australian Supermarkets
6 February 2015 19
Demand growth (food retail volume) is underpinned by population growth, which has
been relatively strong at a 1.7% CAGR since 2005, much higher than other developed
economies with large incumbent supermarkets. In addition, the quantity/mix of food
consumed per person is a key driver of demand. This tends to be cyclical, with a better
economic environment resulting in greater food consumption, which has expanded at a
rate of ~0.8% p.a. since 2005. We forecast demand growth of ~2.6% p.a. over the next
five years.
Fig 39 ... in line with Australian demand at ~2.5% - 3.0%
Source: Company websites, Macquarie Research February 2015
Woolworths have been increasing trading space of their supermarket network at a
CAGR of ~4.0% per year over the last decade1. This rate of growth is materially above the
rest of the market (~2%). We do not consider this to be a risk to Woolworths’ profitability due
to:
Moderate market-wide space growth resulting in the market not being oversupplied in
aggregate. Coles is a major contributor to this moderate growth as management has (to
date) focussed on refurbishments and replacement stores rather than net new store roll-
out post acquisition.
Woolworths have acted defensively by building sites potentially earlier than required to
crowd out competitors entering the same catchment. Although additional stores carry the
risk of cannibalisation of the existing Woolworths network, many of the target catchments
are sufficiently capable of supporting additional planned supermarkets, as discussed in
detail: Woolworths / Wesfarmers - Bigger, more people and less cannibalisation.
1 Due to the difference in disclosure by Woolworths and Wesfarmers we have estimated the attributable space
to Woolworths supermarkets.
-4%
-2%
0%
2%
4%
6%
8%
Se
p-8
4
Se
p-8
6
Se
p-8
8
Se
p-9
0
Se
p-9
2
Se
p-9
4
Se
p-9
6
Se
p-9
8
Se
p-0
0
Se
p-0
2
Se
p-0
4
Se
p-0
6
Se
p-0
8
Se
p-1
0
Se
p-1
2
Se
p-1
4
Se
p-1
6
Se
p-1
8
% Change Population
Volume per person/mix effect
Retail Volume - FoodActual Forecast
We forecast demand
growth of ~2.6% p.a.
over the next five
years
Macquarie Wealth Management Australian Supermarkets
6 February 2015 20
Coles vs. WOW key in absence of tail risks As we highlight in the preceding analysis, UK style structural risks are considered unlikely in
Australia. Nevertheless, the Australian supermarket industry is not without risk. Operating
performance will vary, with relative winners and losers determined by the strategies
undertaken. We compare the key operating metrics between Coles and Woolworths below,
and construct scenarios around Aldi’s progress towards its long term goals for market share
and sales growth.
Sales productivity gap has closed, Coles to overtake Woolworths
Aggressive store rollout has affected Woolworths’ productivity. Woolworths’
supermarkets sales intensity has remained relatively flat over the past 5 years as space
growth accelerated. This is to be expected as Woolworths has defensively grown its network
in order to secure sites in particular locations ahead of Coles. Several of the more recent
stores being rolled out are done so opportunistically in what it considers to be growth
corridors to provide benefit once the catchments mature.
Fig 40 Coles supermarket sales/sqm has overtaken Woolworths supermarkets...
Fig 41 ... however Coles’ productivity growth is moderating
Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015
Focus on store network optimisation has driven Coles’ sales intensity above
Woolworths. The productivity of Coles’ supermarkets has improved from a ~17% discount to
Woolworths in FY08 to a ~1% premium in FY14. This is a remarkable turnaround off a low
base for Coles to date and with the focus of Coles’ management on sales rather than EBIT
expansion going forward, the productivity premium to Woolworths will likely increase.
Coles should see productivity growth moderate as they begin to roll out net new
stores... Coles has focussed on refurbishments and replacement stores rather than net
network expansion, shrinking its total store network by 1 store (on a net basis) since June
2009 (although trading area has increased ~6% since June 2009 due to smaller unprofitable
stores being closed as larger stores are opened). This strategy has proven to be highly
effective in increasing productivity, especially when coming from an inefficient starting point
as Coles were in 2008.
5,000
7,000
9,000
11,000
13,000
15,000
17,000
19,000
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Sales/sqm ($)
WOW sales/sqm
Coles sales/sqm
ForecastActual
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%F
Y05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Sales/sqm growth
WOW sales/sqm growth
Coles sales/sqm growth
ForecastActual
Coles sales/sqm
has overtaken
Woolworths
Coles should see
productivity growth
moderate as they
begin to roll out net
new stores
Macquarie Wealth Management Australian Supermarkets
6 February 2015 21
Coles’ low hanging fruit has been picked. With the network optimisation and refurbishment
program largely complete, Coles is shifting gears in FY15. As Coles rolls out new stores at
naturally lower initial productivity levels, while at the same time having fewer underperforming
stores left to close, Coles’ net sales productivity growth is likely to moderate.
... but expect further divergence of sales productivity from Woolworths over the next 5
years as the differential between total sales growth and space growth at Woolworths (~3.7%
& 3.0%) exceeds that of Coles (~4.0% & 2.4%).
Fig 42 Comparable growth gap in F&L forecast to converge in the long term
Source: Company data, Macquarie Research February 2015
Difference in comp growth a major factor in divergence of productivity. The long run
comp growth differential assumption of +0.5% in favour of Coles (WOW: +2.5% vs. Coles:
+3.0%) will drive further differential in the productivity between the two supermarkets.
Fig 43 WOW long term F&L growth forecast to be +3.8% with comp sales of +2.5% ...
Fig 44 ... while Coles are forecast to experience F&L growth of +4.2%, driven by 3.0% comp growth
Source: Company Data, Macquarie Research, February 2015 Source: ABS, Macquarie Research, February 2015
0%
1%
2%
3%
4%
5%
6%
7%
8%F
Y05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Comp sales growth
WOW - F&L Comp sales growth
Coles - F&L Comp sales growth
ForecastActual
0%
2%
4%
6%
8%
10%
12%
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Growth WOW - F&L Comp sales growthWOW - F&L New space sales growthWOW - F&L Total sales growth (Reported)
ForecastActual
0%
2%
4%
6%
8%
10%
12%
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Growth Coles - F&L Comp sales growthColes - F&L New space sales growthColes - F&L Total sales growth (Reported)
ForecastActual
With the network
optimisation and
refurbishment
program largely
complete, Coles is
shifting gears in
FY15
Macquarie Wealth Management Australian Supermarkets
6 February 2015 22
Space race converging
Woolworths have a long term space growth target of ~3%, which in our view is rational
based on the expected ~2.6% demand growth in Australia, underpinned by ~1.8% population
growth. Further, new Woolworths stores being rolled out are increasing in size with the
average size of a Woolworths supermarket ~2,300sqm, growing by ~0.5%p.a, driving space
growth of 3.0% consistently ahead of store number growth (2.5%).
Fig 45 Woolworths’ store rollout and space growth Fig 46 Woolworths’ average store size
Source: Company Data, Macquarie Research, February 2015 Source: ABS, Macquarie Research, February 2015
Coles have been increasing supermarket trading space at a rate of ~1.3% p.a. since
FY09. The relatively low level of space growth across Coles is a reflection of Wesfarmers
management focusing on refurbishing the current store network and closing underperforming
stores. Since FY09 Coles total supermarket stores have decreased by 1 while Woolworths
have added 140 net new stores.
However, as underperforming stores have closed they have been replaced by larger stores
which have driven Coles’ ~1.3% p.a. space growth (average store size ~2,200sqm). Coles
expect to accelerate total supermarket space growth to ~2-3% over the next few years, a
similar level to WOW (~3%) through new stores rather than replacing existing stores.
Fig 47 Coles’ store rollout and space growth Fig 48 Coles’ average store size
Source: Company Data, Macquarie Research, February 2015 Source: ABS, Macquarie Research, February 2015
ALDI continues to gain traction in Australia
ALDI offers a highly competitive supermarket offering in all markets around the world and is a
formidable competitor to Woolworths and Coles in Australia. While market share estimates
vary, based on ABS data, ALDI has a ~7% share of the ~$93bn Australian supermarket
industry. In a recent interview (January 2104) Aldi stated that they believe their share of the
East Coast grocery market to be ~11% and have a long term target of ~15%.
Aldi have averaged ~27 new stores per year over the last decade. To date the Aldi
supermarket rollout has been only on the East Coast of Australia (QLD, NSW, VIC), however
with the near completion of distribution centres in both SA and WA, Aldi expect to begin
rolling out stores across the respective states from FY16.
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
200
400
600
800
1,000
1,200
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Trade area (sqm) growth
# of supermarkets
WOW - Supermarkets
WOW - Supermarket trading area growth
ForecastActual
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
GrowthSupermarket size (sqm)
WOW - Avg. Supermarket size
WOW - Avg. supermarket size growth
ForecastActual
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
200
400
600
800
1,000
1,200
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Trade area (sqm) growth
# of supermarkets
Coles - Supermarkets
Coles - Supermarket trading area growth
ForecastActual
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
GrowthSupermarket size (sqm)
Coles - Avg. supermarket size
Coles - Avg. supermarket size growth
Actual Forecast
Aldi have averaged
~27 new stores per
year over the last
decade
Macquarie Wealth Management Australian Supermarkets
6 February 2015 23
Aldi have long term expectations of 70-80 stores in WA and 40-50 stores in SA. On the
East Coast Aldi believe there is potential for 500-600 stores, with expectations of ~100 East
coast stores opening over the next 5 years. As of January Aldi had 367 stores.
As Aldi store sizes are ~40% smaller than Coles and Woolworths (Aldi: ~1,300-1,600sqm
vs. major supermarkets: ~2,200-2,500sqm) the aggressive growth in store numbers is less
pronounced when considering the contribution to market-wide space growth. In considering
this, Aldi’s aggressive store rollout is unlikely to lead the market into an oversupplied position
as the additional stores are likely to put more pressure on existing independents, particularly
in WA and SA where independents have larger market share in less competitive regions.
Fig 49 Aldi store rollout and space growth Fig 50 Aldi store rollout by state
Source: Company Data, Macquarie Research, February 2015 Source: Industry sources, Macquarie Research, February 2015
The key elements of ALDI’s strategy, which differentiate ALDI from Woolworths and Coles,
and that have underpinned their success to date, include:
A sophisticated private label offering which is priced in line with or below the basic
Woolworths and Coles private label offering but is not packaged and marketed as private
label. Advertising directly compares the ALDI private label product to the leading brands in
each category. This results in consumer perceptions of brand equity, which drive greater
volumes for Aldi.
Strong relationships with suppliers driven by simple and fair supplier agreements and
limited ranges (Aldi stocks ~1500 SKUs vs. ~20,000-30,000 SKUs at a typical Coles or
Woolworths), which when combined with strong comp sales growth and store roll outs, is a
powerful combination for suppliers. This compares to recent ACCC rulings against Coles
and accusations made against Woolworths with regards to the treatment towards their
suppliers.
Quality offering across fresh and grocery is achieved through limiting SKUs and
incentivising suppliers. Sales momentum drives improved stock turns and supply chain
efficiencies, improving the quality of the fresh offer.
A measured store roll out program which has been well executed to date with smaller
format stores (~1,300-1,600sqm vs. major supermarkets at ~2,200-2,500sqm) in
convenient locations. The next phase of the store rollout into SA and WA will be a greater
logistical challenge for ALDI, resulting in higher prices than the Eastern seaboard.
Special buys drive foot traffic with highly seasonal, rapidly changing range of non-
grocery items. These are typically priced at very attractive levels and include electronics,
apparel, kitchenware, garden supplies, furniture, etc.
Liquor offering in-store is a key differentiator as Coles and Woolworths typically offer
Liquor in an attached format, rather than in the supermarket, as ALDI currently does. The
low price point, mix of private label and brands, combined with the relative high quality of
Aldi wines in what is a convenient offering has been successful.
Progression from basic grocery items to premium products (Avocado oil, organic
quinoa, black chia seeds, etc) in order to capture higher average product values and
basket sizes.
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Trade area (sqm) growth
# of supermarkets
Aldi - SupermarktsAldi - Supermarket trading area growth
ForecastActual
0
100
200
300
400
500
600
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
# of supermarkets
NSW & ACT
VIC
QLD
WA
SA
Expansion into SA and WA from FY16
ForecastActual
Aldi plan to have
70-80 stores in WA
& 40-50 stores in SA
Aldi believe there is
potential for 500-600
stores on the East
coast; expect ~100
new stores over
next 5 years
Macquarie Wealth Management Australian Supermarkets
6 February 2015 24
Scenarios for the Australian supermarkets ALDI a headwind, not a game changer. In considering population growth, per unit price
growth and volume per person/mix we expect a CAGR for supermarkets of ~4% over the long
term. If ALDI achieves its publicly stated store rollout targets on both the eastern seaboard
and in SA and WA, it will grow sqm at a CAGR of ~8.0% and estimated sales at ~12% p.a. for
the 6 years until 2020.
In our base case we expect ALDI to reach ~10% total supermarket industry market
share in five years (from ~6% currently), with majority of market share taken from the
independents. This scenario implies independents will experience below market growth at a
+1.0% CAGR, while Woolworths and Coles (food only) will grow above the market at +4.1%
and +4.5%, respectively.
Fig 51 Base case: WOW and Coles with sales growth roughly in line with market growth, Aldi market share at the expense of independents
Sales
Market share
BASE CASE FY14 FY20
BASE CASE 2014 2020 Change Sales CAGR
Supermarket sales (abs) $m 93,042 117,728
Woolworths 36.3% 36.5% 0.2% 4.1%
Market CAGR %
4.0%
Coles 28.6% 29.4% 0.8% 4.5%
Aldi 6.4% 10.0% 3.6% 11.9%
Woolworths supermarket sales $m 33,771 42,976
Independents 28.7% 24.1% -4.6% 1.0%
Woolworths market share % 36.3% 36.5%
Total 100% 100% 0% 4.0%
Implied CAGR % 4.1%
Coles supermarket sales $m 26,567 34,558 Coles market share % 28.6% 29.4% Implied CAGR % 4.5%
Aldi sales $m 6,000 11,773 Aldi market share % 6.4% 10.0% Implied CAGR % 11.9%
Independent sales $m 26,705 28,421 Independent market share % 28.7% 24.1% Implied CAGR % 1.0%
Source: Company data, Macquarie Research January 2015
Fig 52 Bear case Fig 53 Bull case
Market share
BEAR CASE 2014 2020 Change Sales
CAGR
Woolworths 36.3% 34.4% -1.9% 3.1%
Coles 28.6% 27.7% -0.9% 3.5%
Aldi 6.4% 10.0% 3.6% 11.9%
Independents 28.7% 27.9% -0.8% 3.5%
Total 100% 100% 0% 4.0%
Market share
BULL CASE 2014 2020 Change Sales
CAGR
Woolworths 36.3% 38.6% 2.3% 5.1%
Coles 28.6% 31.1% 2.5% 5.5%
Aldi 6.4% 10.0% 3.6% 11.9%
Independents 28.7% 20.3% -8.4% -1.8%
Total 100% 100% 0% 4.0%
Source: Company Data, Macquarie Research, February 2015 Source: ABS, Macquarie Research, February 2015
Coles and Woolworths have managed Aldi’s expansion well to date, leveraging their
scale to increase efficiency; competing on price; and developing their respective private label
offerings to minimise market share loss.
There is little evidence that the Australian industry will follow the UK. While it will act as
a thorn in the side of Woolworths and Coles for the foreseeable future, Aldi is unlikely to drive
a dramatic shift in sales growth and margins as:
The demand environment continues to grow in line with space growth;
Price competition has been more aggressive for many years with consistent deflation for
both Woolworths and Coles;
Several lessons have been learned from the UK experience, most notably, maintaining a
focus on the existing supermarket network (capex, service levels, etc) and core markets
(no offshore expansion or hypermarket developments)
While Aldi will act as
a thorn in the side of
Woolworths and
Coles for the
foreseeable future,
Aldi is unlikely to
drive a dramatic
shift in sales growth
and margins
Our base case
expects ALDI to
reach ~10% market
share in five years
Macquarie Wealth Management Australian Supermarkets
6 February 2015 25
Are EBIT margin differentials sustainable? The EBIT margin differentials present in the Australian supermarket industry results in a
degree of scepticism around margin sustainability. This is due to the divergence between:
The Australian supermarkets (5% - 8%) vs. global peers (3% - 5%)
Woolworths (8%) vs. Coles (5.3%).
Fig 54 Food and Liquor margins expected to stabilise for Woolworths and Coles
Source: Company data, Macquarie Research February 2015
EBIT margins have continued to expand during the low productivity growth period. Food
and liquor margins have experienced strong expansions in recent years with Woolworths’
margins reaching 8.0% vs. Coles’ 5.3%. This has occurred in conjunction with deflation,
indicating the Australian supermarkets have been able to reduce CODB ahead of Gross
Margin pressure.
Coles expects to maintain current margins in the medium term as potential margin
expansion generated from operating leverage and efficiencies are expected to be
reinvested in price and continue to generate sales momentum.
There is a large differential between the performances of the respective liquor departments
that impacts the EBIT margins of the F&L division.
In addition, the ACCC review into fuel discounts has effectively shifted margin from the
Convenience business into F&L as discounting must now be funded by the convenience
stores, not the supermarkets.
Drivers of margin differentials: We consider the key drivers and sustainability of the above
margin differentials to be:
Woolworths’ investment in its supply chain and logistics over the past ten years;
Consolidated Australian supermarket industry results in significant market power;
Barriers to entry presented by significant geographic and population density challenges.
2%
3%
4%
5%
6%
7%
8%
9%
10%
FY
94
FY
95
FY
96
FY
97
FY
98
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
F&L EBIT margin
Woolworths Coles
ForecastActual
WOW F&L margin at
a 275bps premium
to Coles
Macquarie Wealth Management Australian Supermarkets
6 February 2015 26
WOW historical supply chain investment drives efficiency
Woolworths have invested in supply chain and overall efficiency of the business for
many years to build an 8% F&L EBIT margin. Both Woolworths and Coles are sophisticated
logistics businesses with significant scale. They have a materially lower operating cost base
than competitors which has been leveraged effectively to date in order to protect share.
WOW delivered on a major efficiency program from 2000 – 2007, which underpinned the
margin expansion seen throughout the 00’s.
Investment to continue: Woolworths are at the early stages of their Mercury 2 investment
aimed at further supply chain improvements, particularly the logistics of online retail and
delivery.
Fig 55 WOW’s Project Refresh generated savings equivalent to ~470bps of sales
Source: Company presentation, February 2015
The strength of the supply chain has been independently assessed by Gartner, which
last year ranked the WOW supply chain as the 6th most efficient in Asia-Pac, behind only tech
and motor manufacturers (Samsung, Lenovo, Toyota, Hyundai and Huawei) and ahead of
Honda, Flextronics, LG and Sony. WOW was 57th globally across all industrial businesses.
Wal-Mart was the highest ranked retailer at 14th.
Neither Wesfarmers, nor any other Australian companies or retailers, are featured in the top
10 in Asia-Pac. The Gartner rankings are a combination of quantitative and qualitative factors
with over 170 supply chain experts contributing to the qualitative component. Gartner made
the following comments on WOW:
Unlike many other Asia/Pacific retailers that are still developing strategies, Woolworths
has already embarked on its supply chain transformation journey.
Efficiencies gained from historical initiatives like "Mercury One" — that touched
almost every aspect of the supply chain, including procurement, distribution, order
consolidation, inventory management, merchandizing and in-store stock availability —
have helped integrate and mature the organization's supply chain capabilities, and are
proving a competitive advantage in an otherwise challenged market sector.
With an eye toward the future of online retailing, the "Mercury Two" initiative looks to
couple its already capable network with advanced analytics and deeper direct selling
expertise to drive the future of retail, and define the evolution of its network.
The 2013 investment in Quantium delivered advanced demand-sensing capabilities,
positioning Woolworths to better comprehend the rapidly changing consumer
environment and make informed trade-off decisions to optimize the flow of goods in
and out of its network.
WOW delivered
savings equivalent
to ~470bps of sales
through the 00’s
which underpinned
margin expansion
Gartner ranked
WOW supply chain
the 6th most
efficient in Asia-Pac,
and 57th globally
Macquarie Wealth Management Australian Supermarkets
6 February 2015 27
Key risks to industry margins
In our view, there are limited external threats to major supermarkets margins. However,
Coles and Woolworths may elect to sacrifice gross margin to drive footfall and comps.
Price Investment: While price investment is used as a lever to drive growth, the current
Coles and Woolworths price structure is justifiable relative to Aldi given the differentiated
offering, indicating limited need to sacrifice margin with the current level of competition.
While gross margins are not easily identified due to disclosure, price differentials between
WOW, Coles and Aldi are a potential indicator of gross margin.
We expect WOW and Coles have similar gross margins due to very small price
differentials (see chart on the following page) and similar buying power with suppliers.
Woolworths may choose to cut gross margins and invest in price in order to drive sales
productivity growth. We do not think this is required as the potential payoff from materially
lower prices (improved comps and sales/sqm) is unlikely to offset the operational leverage.
ACCC continue to highlight strained supplier relationships, however to date the financial
impact has been immaterial to the supermarkets.
Aldi will gain market share from current 6% levels, however we expect sub-scale
independents (~28% of the industry) to be disproportionately impacted by Aldi, particularly as
they roll out into the SA and WA markets, where independents have a larger presence. Aldi
growing share does not require Coles and WOW to lose material market share or margin.
The key risk to
Coles and WOW
margins is that they
may elect to
sacrifice gross
margin to drive
footfall and comps
Macquarie Wealth Management Australian Supermarkets
6 February 2015 28
Supermarket price perception vs. reality Pricing differentials very small in reality and virtually undetectable for consumers.
Despite differences in price perception between Coles and Woolworths, our MICAWBER
index (100+ products) illustrates that the overall price differential between the major
supermarkets is small on a weighted basis (±2%) and varies from week to week with
promotional activity. We have used our MICAWBER index (100+ products) to track the price
of a typical basket over the past 12 months.
Woolworths has been consistently cheaper for the past nine months:
Woolworths has on average been 0.7% cheaper than Coles since Mid-April.
Woolworths has been cheaper than Coles for 33 of the past 41 weeks.
Fig 56 WOW vs. Coles: Long run price differential negligible on a weighted basis
Source: Company websites, Macquarie Research January 2015
On average there were ~17.6% of the 110+ products tracked from Woolworths were on
promotion and ~13.8% at Coles. Both supermarkets saw a slight decline as the year
progressed in terms of the proportion of products on promotion.
Fig 57 Woolworths on average have a greater number of products on promotion (17.6% vs. 13.8% at Coles)
Source: Macquarie Research, February 2015
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3-J
an
-14
17-J
an
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an
-14
14-F
eb-1
4
28-F
eb-1
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ay-1
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WOW vs. Coles (%)TOTAL - ex. Liquor and tobacco
Colescheaper
WOW cheaper
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
31
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% of basket under promotion (4-week average)
% of products - WOW % of products - Coles
Linear (% of products - WOW) Linear (% of products - Coles)
MICAWBER index
illustrates that the
price differential
between the major
supermarkets is
negligible (~0.7%)
~17.6% of the 110+
products tracked
from Woolworths
were on promotion
and ~13.8% at Coles
Macquarie Wealth Management Australian Supermarkets
6 February 2015 29
In terms of promotional depth, Coles has a greater absolute depth across products with an
average depth of 35% vs. 28% at Woolworths. However, when we consider the weightings in
line with the ABS in terms of the money actually spent on particular products the promotional
difference between the two supermarkets is practically nil (4.4% at Woolworths vs. 4.3% at
Coles). This means although Coles may have deeper promotions, when considering what
customers actually spend their money on there is a negligible difference.
Fig 58 Coles promotions nominally deeper but equivalent when considered on a weighted basis at ~4%
Source: Macquarie Research, February 2015
With very small actual price differentials between Woolworths and Coles, and Woolworths
prices consistently lower than Coles over the past nine months, we analyse the impact on
Price perception.
Coles retain the low price perception title despite Woolworths pricing being marginally
more attractive. As we highlight over the following three pages, Coles have effectively
positioned themselves as lower priced than Woolworths in the minds of consumers, largely
due to:
Marketing strategy – The highly successful, long running marketing campaign ‘Down
Down’ has clearly influenced customer perceptions;
EDLP strategy – Greater focus on maintaining low prices across KVIs rather than high-low
promotional activity, creating an element of ‘pricing trust’ with the customer; and
Private label strategy – Focused more on value of core range as opposed to Woolworths’
tiered strategy promoting private label products of varying quality.
In response to customer price perceptions, Woolworths recently launched their new “Cheap
Cheap” marketing campaign which has a strong resemblance to Coles’ successful “Down
Down” campaign. At this early stage, trading to date suggests the “Cheap Cheap” campaign
is yet to have a material impact on sales growth.
In order to accurately gauge price perception, we analyse in detail a national supermarket
attitudes survey conducted monthly by Roy Morgan across ~1,200 – 2,000 grocery buyers
each month2, with data up to December 2014. This survey covers Coles (including Bi-Lo),
Woolworths (including Safeway), Aldi and IGA (including Foodland).
Critically, the survey clearly highlights that Coles has been the leader on consumer
perception of low supermarket prices for the past four years, with Coles having an average
1.1ppt lead over Woolworths throughout this period.
2 We take three month rolling averages in order to smooth sampling volatility and aid graphical presentation.
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
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01
4
Weighted avg. depth of promos (4-week average)
WOW promotional depth Coles promotional depthLinear (WOW promotional depth) Linear (Coles promotional depth)
Through effective
marketing Coles has
retained the low
price perception
among consumers
Weighted
promotional depth
between the major
supermarkets is in
line with each other
Macquarie Wealth Management Australian Supermarkets
6 February 2015 30
Despite Coles having the perception of lower prices, Woolworths has historically been
perceived as better value, reflecting of the quality of the offering. Interestingly, over the
past three months, Coles has had a clear lead on value perception as the gap on price
perception has widened.
Fig 59 Coles the clear leader on price perception across Australia…
Fig 60 … Yet value perception similar between Coles and Woolworths and better than price perception
Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14 Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14
We further analyse the long term perception differentials between the majors below, where it
is clear that Woolworths has seen:
Price perception deteriorate towards the bottom end of the historical range.
Maintained its quality premium at ~2ppts. This is implied through the spread between
price and value differentials over time. Given value is a combination of price and quality, if
a product is viewed as similar value but at a higher price, it is inherently thought of as
better quality. Therefore, as Coles’ “Down Down” marketing strategy has influenced price
perception, Woolworth’s “Fresh Food People” campaign still resonates for consumers in
quality perceptions.
Fig 61 Woolworths’ relative value perception consistently better than relative price perception…
Fig 62 … creating a consistent 2.2ppt WOW quality premium inherent in consumer perceptions
Source: Roy Morgan Single Source, Macquarie, data to Dec-14 Source: Roy Morgan Single Source, Macquarie, data to Dec-14
20%
25%
30%
35%
40%
20%
25%
30%
35%
40%
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Dec
12
Jun
13
Dec
13
Jun
14
Dec
14
% that identify supermarket with
"Low Prices" (3m average)
% that identify supermarket with "Low Prices" (3m average)
Coles
Woolworths
20%
25%
30%
35%
40%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Dec
12
Jun
13
Dec
13
Jun
14
Dec
14
% that identify supermarket with
"Good Value"
(3m average)
% that identify supermarket with "Good Value" (3m average)
Coles
Woolworths
-6%
-4%
-2%
0%
2%
4%
6%
-6%
-4%
-2%
0%
2%
4%
6%
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Dec
12
Jun
13
Dec
13
Jun
14
Dec
14
ppt differential(3m average)
ppt differential (3m average) Low price differential (Woolworths - Coles)
Value differential (Woolworths - Coles)
-6%
-4%
-2%
0%
2%
4%
6%
-6%
-4%
-2%
0%
2%
4%
6%
Dec
09
Jun
10
Dec
10
Jun
11
Dec
11
Jun
12
Dec
12
Jun
13
Dec
13
Jun
14
Dec
14
ppt differential between Value and Price (3m average)
ppt differential between Valiue and Price (3m average) Quality premium (Woolworths - Coles)
Woolworths
maintains implied
quality perception
amongst consumers
Macquarie Wealth Management Australian Supermarkets
6 February 2015 31
Fuel price declines to benefit supermarkets
With the unleaded petrol price declining by 26% over the past three months, supermarkets
are, in our view, the major beneficiaries due to:
As petrol prices are a regular weekly purchase, similar to grocery shopping, and a key
component of the household budget, we consider a value transfer of ~$20 per week in
petrol savings to be more likely to be directed towards a non-discretionary variable cost
such as grocery than to a discretionary retail spend such as clothing or electronics.
The triangular relationship between grocery, petrol and liquor, linked by rewards cards and
shopping frequency, provides an opportunity for both Coles and Woolworths to cross-
promote and incentivise greater spending within the network.
Fig 63 Declining petrol prices to alleviate household budgetary pressure, reducing deflationary pressure in supermarkets
Source: Australian Institute of Petroleum, Macquarie Research January 2015
Woolworths the relative winner as disposable incomes expand. Given the inherent high
quality perception still present for Woolworths (relative to a low price perception at Coles), we
consider Woolworths to be the relative winner from greater household budget flexibility on
grocery items as consumers may ‘trade up’ from Aldi/Coles to Woolworths if Woolworths
continues to deliver on value perception.
In addition to lower petrol prices, consumers are also seeing budgetary relief from:
Electricity and Gas prices in NSW and QLD post carbon-tax which are declining by 5% -
10% p.a. in both 2015 and 2016.
Lower CPI seen in 4Q14, with headline CPI rising 0.2% QoQ, to be up 1.7%YoY
Potential for lower mortgage rates as the RBA has moved to an easing bias.
80
90
100
110
120
130
140
150
160
170
De
c 0
3
De
c 0
4
De
c 0
5
De
c 0
6
De
c 0
7
De
c 0
8
De
c 0
9
De
c 1
0
De
c 1
1
De
c 1
2
De
c 1
3
De
c 1
4
Unleaded Petrol price
(cents per litre)
Supermarkets
expected to be a
main beneficiary of
the 26% decline in
petrol prices
Woolworths
expected to gain
more from higher
levels of disposable
income
Macquarie Wealth Management Australian Supermarkets
6 February 2015 32
ALDI to impact price perception in WA and SA
ALDI clearly considered cheaper than Woolworths and Coles on the eastern seaboard.
Currently, 51% of shoppers believe Aldi has low prices, compared to 27% and 29% for
Woolworths and Coles. In the highly competitive eastern states, Coles has achieved lower
price perception over the past five years, on average 1.2ppts ahead of Woolworths.
The frontier markets for Aldi (SA and WA) have materially better price perception than
the eastern states (NSW, QLD and VIC), where Woolworths and Coles have, on average, a
low price perception of 32% over the past five years, well ahead of the east (25%). In our
view, this reflects:
Less competition, with a larger independent supermarket sector; and
No discount supermarket presence highlighting the price differential to Coles and
Woolworths.
Fig 64 Aldi clearly perceived as cheaper where it is established in the eastern states (NSW/VIC/QLD)…
Fig 65 ... while WA and SA shoppers consider incumbent supermarkets to have lower prices
Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14 Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14
Value perception is also stronger in the SA and WA markets, with IGA/Foodland broadly
comparable to Coles and Woolworths on this metric. For Coles and Woolworths in isolation,
they see a ~4ppt uplift in value perception in SA and WA relative to the eastern seaboard. As
with price perception above, we believe this is due to a less competitive market and the
absence of Aldi highlighting price differentials.
Fig 66 Aldi is considered better value, the gap is narrower than price in the eastern states…
Fig 67 ... while also considered better value, the gap has narrowed in the eastern states (NSW/VIC/QLD)
Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14 Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Low Prices" (3m average)
% that identify supermarket with "Low Prices" (3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Low Prices" (3m average)
% that identify supermarket with "Low Prices" (3m average)
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value" (3m average)
% that identify supermarket with "Good Value" (3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value" (3m average)
% that identify supermarket with "Good Value" (3m average)
Coles
Woolworths
IGA
Aldi clearly
recognised as
cheaper on the East
coast; gap
significantly smaller
in WA and SA
Macquarie Wealth Management Australian Supermarkets
6 February 2015 33
ALDI States: To date, Aldi has rolled out 367 stores only across the eastern states (NSW,
VIC and QLD). Aldi is consistently considered cheaper than Coles, Woolworths and IGA, with
the only major variance in QLD. We note Aldi does not have stores north of Bundaberg. As a
result, residents in northern Queensland are unlikely to nominate Aldi as good value or having
low prices, as there aren’t any Aldi’s in the region. This reduces the likely gap between Aldi
and the major supermarkets.
Fig 68 NSW: Wide price perception differentials between Aldi and Coles/WOW
Fig 69 NSW: Price perception translates into value perception for Aldi
Fig 70 VIC: Aldi the clear price leader as Coles marginally ahead of Woolworths
Fig 71 VIC: Smaller differential in value perceptions between WOW and Coles, Aldi still well ahead
Fig 72 QLD: Price gap narrower than NSW & VIC Fig 73 QLD: Value similar for WOW, Coles and Aldi
Source(for all above): Roy Morgan Single Source, Macquarie Research, data to Dec-14
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify
supermarket with "Low Prices"
(3m average)
% that identify
supermarket with "Low Prices"
(3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value"
(3m average)
% that identify
supermarket with "Good Value"
(3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify
supermarket with "Low Prices"
(3m average)
% that identify
supermarket with "Low Prices"
(3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value"
(3m average)
% that identify
supermarket with "Good Value"
(3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify
supermarket with "Low Prices"
(3m average)
% that identify
supermarket with "Low Prices"
(3m average)
ALDI
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value"
(3m average)
% that identify
supermarket with "Good Value"
(3m average)
ALDI
Coles
Woolworths
IGA
Macquarie Wealth Management Australian Supermarkets
6 February 2015 34
Non-Aldi States: Aldi plans to roll out 110 - 130 stores across SA and WA from 2016. This
market is characterised by a large presence of independents and a third major supermarket
which is competitive on price (IGA/Foodland). Particularly in SA, Foodland is considered on
par with Coles and Woolworths for both low price and good value.
Price and value perception may shift lower post the entry of Aldi. We consider the SA
and WA markets to be less competitive than the NSW/VIC/QLD markets.
Fig 74 SA: Price perception differentials are small Fig 75 SA: While Foodland has led on value
Fig 76 WA: Low Price perception stable above 30% Fig 77 WA: Value also remains high vs. NSW/VIC
Source(for all above): Roy Morgan Single Source, Macquarie Research, data to Dec-14
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify
supermarket with "Low Prices"
(3m average)
% that identify
supermarket with "Low Prices"
(3m average)
Coles
Woolworths
Foodland
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value"
(3m average)
% that identify
supermarket with "Good Value"
(3m average)
Coles
Woolworths
Foodland
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify
supermarket with "Low Prices"
(3m average)
% that identify
supermarket with "Low Prices"
(3m average)
Coles
Woolworths
IGA
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
De
c 0
9
Jun
10
De
c 1
0
Jun
11
De
c 1
1
Jun
12
De
c 1
2
Jun
13
De
c 1
3
Jun
14
De
c 1
4
% that dentify supermarket with
"Good Value"
(3m average)
% that identify
supermarket with "Good Value"
(3m average)
Coles
Woolworths
IGA
Macquarie Wealth Management Australian Supermarkets
6 February 2015 35
Private label battleground Shift to private label in Australia being accelerated by ALDI. Woolworths and Coles’
private label product development is continuing to evolve. This ongoing evolution is
necessitated by the increased relevance of discount supermarket ALDI, which appeals to
customers in part through low cost private label products. In order to compete with the
discounter’s offering the major supermarkets have invested in the range, quality and
marketing of their private label products.
International private label more developed than Australia. The chart below shows that the
overall proportion of grocery spending on private label products in Australia (~21%) still
significantly lags that of the UK (~41%) and other European nations. However, it is interesting
to note that Australia is slightly higher than both the US (18%) and Canada (~18%).
Fig 78 Australia’s private label offering low when compared internationally
Source: Nielson, Macquarie Research, February 2015
Opportunity to increase private label exists across multiple categories. Private label
share varies across categories with the relatively easily replicated products (milk, water, bags,
foils etc.) having a higher level of private label penetration. However, the charts below show
that there is still significant opportunity in categories which have strong brand positions (Coca
Cola in soft drinks, Kellogg’s in breakfast cereals, Arnott’s in biscuits etc.), where private label
is a relatively small contributor.
Fig 79 Drinks & dairy products vary in private label penetration...
Fig 80 ... while noticeable opportunity still exists for a number of grocery related products
Source: Retail World, Macquarie Research, February 2015 Source: Retail World, Macquarie Research, February 2015
Private label strategies are increasing in importance across the Australian
supermarket industry. In terms of the major supermarkets, we estimate that private label
sales represent ~15-17% of grocery sales (including perishables such as dairy) with this
number expected to increase ~1-1.5ppt over the next few years. The inevitable increase in
private label sales has a number of important implications, including:
41%
21%18% 18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Swit
zerl
and
Spai
n
UK
Ge
rman
y
Po
rtu
gal
Be
lgiu
m
Au
stri
a
Fran
ce
Ne
the
rlan
ds
De
nm
ark
Swe
de
n
Hu
nga
ry
Po
lan
d
Cze
ch R
ep
ub
lic
Fin
lan
d
Slo
vaki
a
Au
stra
lia
No
rway
Can
ada
Sou
th A
fric
a
USA
Ire
lan
d
Ital
y
Gre
ece
Co
lum
bia
Private label market share
Soft drinks
Fruit juices & drinks
Chilled juice Milk
Cheese
Chilled dairy
Butter & blends
Still waterIce-cream
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
-10% 0% 10% 20% 30% 40% 50%
Private label discount
Private label share
Biscuits
Breakfast cereals
Canned fish
Toilet tissue
Bags, wraps & foils
Nutritional snacks
-60%
-50%
-40%
-30%
-20%
-10%
0%
0% 10% 20% 30% 40%
Private label discount
Private label share
Private label market
share in Australia
(~21%) is
significantly less
than internationals
(UK ~41%)
Categories with
strong branded
products possess
the most significant
opportunity for
private label
Macquarie Wealth Management Australian Supermarkets
6 February 2015 36
Price deflation as consumers substitute higher unit price branded products for lower unit
price private label products;
Greater GP margin control as the supermarket has the opportunity to control input costs
for private label products more effectively;
Managing shelf space and positioning brands and private label products to
maximise sales and EBIT per sqm. Woolworths and Coles must showcase branded
products as a key differentiator from ALDI and to keep the full-service supermarket appeal.
Management of Supplier relationships is a key consideration for supermarkets,
particularly in consolidated categories where the leading brand has considerable market
power (Coca-Cola, Kellogg’s, Johnson & Johnson, etc.) in a category where supermarkets
are attempting to grow private label.
ALDI Australia cheaper than Coles and WOW private label for an average basket of
products. Based on our research of >50 comparable products across the major supermarket
categories from Aldi, Woolworths and Coles, a typical $100 weekly shop at ALDI would cost:
~18% more at Coles or Woolworths if only basic private label products are bought; and
~23% and 30% more at Coles and Woolworths respectively for mid-level private label
products.
Fig 81 $100 at Aldi will get you ~$118 in value at the major supermarkets
Fig 82 Grocery differential much less pronounced against supermarkets basic private label products
Source: Macquarie Research, February 2015 Source: Macquarie Research, February 2015
Fruit and Veg driving price differential. Fruit and vegetables are the key drivers of the price
differential between Aldi and the major supermarkets with the weighted average difference to
ALDI prices for Fruit and Vegetables standing at 11.8% and 8.7% for Woolworths and Coles,
respectively3. At the product level, the following were considered to be the major contributors
to the weighted price differential shown above in the fruit and vegetable category: Potatoes
(WOW +3.2%; Coles +3.2%), Apples (WOW +2.4%; Coles +2.4%).
Grocery differential less pronounced. Excluding fruit, vegetables and meat; Woolworths
and Coles’ basic private label prices are generally in line and are ~4.0% more expensive
than ALDI. At the mid level, Woolworths private label products are ~6% more expensive than
Coles, with both major supermarkets materially above ALDI (15.0% and 9.5% respectively)
which in part reflects Woolworths’ tiered private label strategy approach as it positions its mid-
level range at a generally higher price point from the basic level products as a point of
differentiation and implied greater level of quality.
Below we have considered the relative cost difference between a $100 shop at Aldi and the
comparable baskets (basic and mid) at the major supermarkets when considering the
weighted average price differentials.
3 Note that the analysis above considers the fruit, vegetables and meat categories to be the same for both the basic and mid-
level ranges. Further, it should be noted that this is a static view and that fruit and vegetable prices are quite variable due to short term supply and demand factors and tend to have prices applied according to particular geographical regions
100.0
118.7 117.6123.0
129.7
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
Aldi WOW - Basic Coles - Basic Coles - Mid-range
WOW - Mid-range
Weekly shop ($)
Total basket
100.0104.0 104.1
109.5
115.0
90.0
95.0
100.0
105.0
110.0
115.0
120.0
Aldi WOW - Basic Coles - Basic Coles - Mid-range
WOW - Mid-range
Weekly shop ($)
Total basket - excluding Fruit, Vegetables and Meat
Aldi ~4.0% cheaper
than major
supermarkets’ basic
private label
Coles core private
label range cheaper
than WOW;
reflecting pricing
strategies
Macquarie Wealth Management Australian Supermarkets
6 February 2015 37
At a department level, after fruit and vegetables and meat the largest differential came Other
Food4, which for basic private label products, Woolworths and Coles are ~2% more
expensive than ALDI on a weighted basket basis. At the mid level, Woolworths were +8.6%
more expensive and Coles were +5.1% more expensive than ALDI.
Fig 83 Differential less pronounced across basic range
Fig 84 ’Other food’ major contributor across mid range
Source: Macquarie Research, February 2015 Source: Macquarie Research, February 2015
Consumers capturing brand equity. ALDI private label is priced broadly in line with the
basic private label products at Coles and Woolworths, but is marketed and packaged like a
branded product. When combined with a quality product, this is a powerful offering as the
consumer effectively captures the brand equity as savings, rather having this go to the brand
owner in the form of a price premium.
4 Other Food includes eggs, jams, spreads, oils, condiments etc.
0.3%
11.8%
2.9%
0.0%
1.8%1.3%
-0.2%0.5%
8.7%
4.8%
0.7%
2.2%0.9%
-0.2%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Bre
ad a
nd
Ce
real
P
rod
uct
s
Fru
it a
nd
Ve
geta
ble
s
Me
at
Dai
ry a
nd
Re
late
d
pro
du
cts
Oth
er
Foo
d
No
n-a
lco
ho
lic
Be
vera
ges
No
n d
ura
ble
ho
use
ho
ld
pro
du
cts
Basic products (vs. Aldi)WOW vs. Aldi
Coles vs. Aldi
3.1%
11.8%
2.9%1.5%
8.6%
1.8%
0.0%
1.7%
8.7%
4.8%
1.5%
5.1%
2.0%
0.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Bre
ad a
nd
Ce
real
P
rod
uct
s
Fru
it a
nd
Ve
geta
ble
s
Me
at
Dai
ry a
nd
Re
late
d
pro
du
cts
Oth
er
Foo
d
No
n-a
lco
ho
lic
Be
vera
ges
No
n d
ura
ble
ho
use
ho
ld
pro
du
cts
Mid-level products (vs. Aldi)WOW vs. Aldi
Coles vs. Aldi
Macquarie Wealth Management Australian Supermarkets
6 February 2015 38
UK Private label pricing analysis
Big 4 still c14% more expensive than ALDI brands on key items
Our UK retail analysts have tracked a basket of Big 4 products against ALDI over the last 12
months. The analysis below highlights the Big 4 having gradually decreased the pricing gap
vs. ALDI from January 2014 to January 2015. ASDA private label products are now just 7%
more expensive than ALDI on our analysis. TSCO and MRW look to have made large
progress in reducing the gap to 13% and 15% each (from 27% and 25%, respectively). SBRY
was still c20% more expensive than ALDI on our basket of 30 products.
Fig 85 Big 4 have slightly reduced core PL gap... Fig 86 ... but almost closed price gap on brands
Source: Big 4 Grocery websites, MySupermarket.com [ALDI], Macquarie Research, February 2015
On branded goods, TSCO has sharply reduced the price gap to just 3% in January from 16%
a year ago. This is slightly sharper than even ASDA which is at a 4% gap followed by MRW at
10% and SBRY at 11%. Clearly, these gaps have all come down over the past year.
We note in Fig 87 below that Big 4 Entry Level pricing has stayed c30% cheaper than ALDI
brand products, but has improved vs ALDI Essentials products (Fig 88).
Fig 87 Entry Level consistently c30% below ALDI Fig 88 Entry level now lower than ALDI Essentials
Source: Big 4 Grocery websites, MySupermarket.com [ALDI], Macquarie Research, February 2015
ASDA MRW SBRY TSCO
Jan-14 17% 25% 33% 27%
Jun-14 14% 20% 43% 26%
Nov-14 12% 17% 30% 18%
Jan-15 7% 15% 20% 13%
Core Private Label vs ALDI
0%
10%
20%
30%
40%
50%
ASDA MRW SBRY TSCO
Jan-14 Jun-14 Nov-14 Jan-15
ASDA MRW SBRY TSCO
Jan-14 15% 19% 19% 16%
Jun-14 5% 16% 23% 15%
Nov-14 -1% 4% 7% 6%
Jan-15 4% 10% 11% 3%
National brands vs ALDI
-10%
0%
10%
20%
30%
ASDA MRW SBRY TSCO
Jan-14 Jun-14 Nov-14 Jan-15
ASDA MRW SBRY TSCO
Jan-14 -33% -32% -28% -33%
Jun-14 -32% -33% -23% -32%
Nov-14 -32% -32% -23% -32%
Jan-15 -33% -29% -26% -37%
Entry Level vs ALDI Brands
-40%
-30%
-20%
-10%
0%
ASDA MRW SBRY TSCO
Jan-14 Jun-14 Nov-14 Jan-15
ASDA MRW SBRY TSCO
Jan-14 6% 8% 14% 8%
Jun-14 5% 4% 24% 6%
Nov-14 -2% -3% 9% -7%
Jan-15 -2% -2% 5% -15%
Entry Level vs ALDI "Essentials"
-20%
-10%
0%
10%
20%
30%
ASDA MRW SBRY TSCO
Jan-14 Jun-14 Nov-14 Jan-15
Macquarie Wealth Management Australian Supermarkets
6 February 2015 39
Private Label EDLP pricing strategy
EDLP driving price perception. When considering pricing/promotional strategies
supermarkets generally use a combination of EDLP (Every Day Low Prices) and high-low
pricing strategies (“specials”). In our opinion, it is the EDLP that is the key driver of price
perception between supermarkets with the consistency in low prices creating trust with the
consumer. The EDLP strategies have been aggressively marketed through Coles’ “Down
Down” and its newly updated “Down Down Every Day” campaigns, as well as Woolworths’
newly introduced “Cheap Cheap” campaign.
Coles prevails as EDLP leader. Our research indicated that Coles had 43.6% of products
under the promotional strategy vs. 25.6% at Woolworths, clearly highlighting Coles’
preference to be seen as a more sustained low price supermarket. Note this analysis is based
on 39 comparable private label grocery items from both Coles and Woolworths (across both
basic and mid-range categories). Interestingly, these trends vary by the level of private label,
highlighting Coles’ emphasis on their core mid-level range:
Basic: Woolworths have a higher proportion of basic level products under promotion
(38.9% vs. 17.6% Coles);
Mid-range: Coles have a higher proportion of mid range products under promotion (63.6%
vs. 14.3% at Woolworths).
Fig 89 Of the 39 private label products at each supermarket (basic and mid-range)...
Fig 90 ... Coles has 43.6% under the EDLP promotional strategy, with Woolworths at 25.6%.
Source: Macquarie Research, February 2015 Source: Macquarie Research, February 2015
1821
39
17
22
39
0
5
10
15
20
25
30
35
40
45
Basic Mid-range Total
# of private label products
WOW Coles
38.9%
14.3%
25.6%
17.6%
63.6%
43.6%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Basic Mid-range Total
% EDLP promotion
WOW Coles
Coles had 43.6% of
products under the
promotional
strategy vs. 25.6%
at Woolworths
Macquarie Wealth Management Australian Supermarkets
6 February 2015 40
Branded products: Are you just paying for packaging?
Brands at a premium. Following the relative pricing differential between the private label
products available at Coles and Woolworths and those found at Aldi, we have also looked at
9 leading branded products available at both Coles and Woolworths across various
categories to determine the price differential against key branded products and their
comparable private label products.
Each branded product is materially more expensive than their private label
counterparts. This is particularly evident in soft drinks where branded Coca-Cola is ~3x
more expensive than the various private label alternatives across each of the supermarkets.
Fig 91 Price differential of branded and private label products to Aldi prices...
Fig 92 ... Coles and Woolworths’ branded prices generally in line with each other
Source: Macquarie Research, February 2015 Source: Macquarie Research, February 2015
Promotions a feature of branded products. The significantly higher shelf price of branded
products relative to private label products results in a high frequency and depth of
promotional activity to drive foot traffic and volumes. The below charts outline the frequency
and depth of promotions across the 9 branded products selected. Across the selected
products Woolworths on average had a higher frequency of promotions while Coles had a
higher depth of promotions.
Fig 93 Peanut butter at Woolworths the most frequently promoted (36%)...
Fig 94 ... while personal care products at Coles had the deepest promotions (42%).
Source: Macquarie Research, February 2015 Source: Macquarie Research, February 2015
Coles’ price perception leadership driven by marketing of EDLP strategy, not
promotional pricing. We have measured the promotional activity of the supermarkets
using our MICAWBER data5 ( Woolworths - The MICAWBER). Based on this data,
Woolworths has a similar absolute basket price, more products on promotion and a similar
weighted average depth of promotion. Despite this relative price parity, Woolworths has seen
comps lag Coles materially, as the volume payoff from discounting has disappointed vs.
Coles, in a deflationary environment.
5The MICAWBER is an index tracking +110 products (majority branded) at both Woolworths and Coles
315%
21%
81% 82%
144% 152%
104%
336%
87%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
Packaged Bread
Breakfast cereals
Milk Ice Cream Peantnut Butter
Jams Food additives
and condiments
Soft drinks Personal care
products
Aldi differential (%)
Brand (WOW) Woolworths Select Woolworths Homebrand Aldi
315%
21%
71%82%
150% 155%
97%
347%
92%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
Packaged Bread
Breakfast cereals
Milk Ice Cream Peantnut Butter
Jams Food additives
and condiments
Soft drinks Personal care
products
Aldi differential (%)
Brand (Coles) Coles Brand Coles Smart Buy Aldi
12.8%
2.1%0.0% 0.0%
36.2%
23.4% 23.4%
14.9%
8.5%
4.3%
0.0% 0.0% 0.0%
21.3%
10.6%
19.1%
31.9%
23.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Packaged Bread
Breakfast cereals
Milk Ice Cream Peantnut Butter
Jams Food additives
and
condiments
Soft drinks Personal care
products
Frequency over last 10 months
Frequency (WOW)
Frequency (Coles)
-26.4%
-10.5%
0.0% 0.0%
-20.2%
-24.9%-27.8%
-24.9%
-32.6%-31.4%
0.0% 0.0% 0.0%
-28.3%
-42.0%
-35.1% -34.9%
-44.4%-50.0%
-45.0%
-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
Packaged Bread
Breakfast cereals Milk Ice Cream
Peantnut Butter Jams
Food additives
and
condiments Soft drinks
Personal care
products
Average depth of
promotion over last 10 months
Average Depth (WOW)Average Depth (Coles)
Macquarie Wealth Management Australian Supermarkets
6 February 2015 41
Fig 98 Woolworths Financial Summary
Source: Company Data, Macquarie Research, February 2015
Woolworths Limited Price: $32.46Group P&L FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Revenue A$m 57,063 59,564 61,195 33,150 30,479 63,629 34,463 31,845 66,309 68,927
Cost of Sales A$m -42,602 -43,781 -45,175 -24,453 -22,537 -46,991 -25,381 -23,546 -48,927 -50,793
Gross Profit A$m 14,461 15,783 16,020 8,697 7,941 16,638 9,082 8,300 17,382 18,133
CODB A$m -10,226 -11,164 -11,248 -6,081 -5,614 -11,695 -6,328 -5,836 -12,164 -12,616
EBITDA A$m 4,236 4,619 4,772 2,616 2,327 4,943 2,754 2,464 5,218 5,517
D&A A$m -884 -966 -996 -525 -525 -1,051 -551 -550 -1,101 -1,149
EBIT A$m 3,352 3,653 3,775 2,091 1,802 3,893 2,203 1,914 4,117 4,368
Interest expense A$m -284 -380 -260 -127 -117 -244 -130 -129 -260 -284
Minorities A$m -1 -5 -7 -8 4 -4 -12 -1 -13 -25
Tax A$m -885 -914 -1,057 -589 -505 -1,095 -622 -535 -1,157 -1,225
Underlying NPAT A$m 2,183 2,354 2,452 1,367 1,183 2,550 1,439 1,248 2,687 2,835
Non-recurring items (after tax) A$m -366 -95 0 -18 0 -18 0 0 0 0
Reported NPAT A$m 1,817 2,259 2,452 1,349 1,183 2,532 1,439 1,248 2,687 2,835
Key ratios FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Adjusted EPS cps 177.7 189.4 195.6 108.0 93.2 201.1 113.0 97.8 210.8 221.1
DPS cps 126.0 133.0 137.0 66.4 74.5 140.9 69.6 78.2 147.8 155.0
FCFPS cps 171.7 152.8 210.2 77.3 92.7 169.8 123.0 98.4 221.1 232.7
PER x 18.3 17.1 16.6 15.0 17.4 16.1 14.4 16.6 15.4 14.7
EV/EBITDA x 8.5 8.0 7.8 7.2 8.1 7.6 6.9 7.6 7.2 6.8
EV/EBIT x 10.7 10.1 9.9 9.0 10.4 9.6 8.6 9.8 9.1 8.6
EV/Sales x 0.65 0.63 0.61 0.57 0.62 0.59 0.55 0.59 0.57 0.55
Dividend Yield % 3.9 4.1 4.2 4.1 4.6 4.3 4.3 4.8 4.6 4.8
Payout ratio % 70.9 70.2 70.0 61.6 80.0 70.1 61.6 80.0 70.1 70.1
Sales grow th % 4.7 4.4 2.7 3.4 4.6 4.0 4.0 4.5 4.2 3.9
EBITDA grow th % 2.5 9.0 3.3 1.8 5.8 3.6 5.3 5.9 5.6 5.7
Underlying NPAT grow th % 2.8 7.8 4.2 3.4 4.7 4.0 5.3 5.5 5.4 5.5
EPS grow th % 2.4 6.5 3.3 2.2 3.5 2.8 4.7 4.9 4.8 4.9
Cost of Sales / Revenue % 74.7 73.5 73.8 73.8 73.9 73.9 73.6 73.9 73.8 73.7
CODB / Revenue % 17.9 18.7 18.4 18.3 18.4 18.4 18.4 18.3 18.3 18.3
Gross Profit Margin % 25.3 26.5 26.2 26.2 26.1 26.1 26.4 26.1 26.2 26.3
EBITDA margin % 7.4 7.8 7.8 7.9 7.6 7.8 8.0 7.7 7.9 8.0
EBIT margin % 5.9 6.1 6.2 6.3 5.9 6.1 6.4 6.0 6.2 6.3
NPAT margin % 3.8 4.0 4.0 4.1 3.9 4.0 4.2 3.9 4.1 4.1
ROA % 13.7 16.1 16.0 17.1 14.6 15.8 17.3 14.6 15.9 15.9
ROE % 26.7 26.8 24.6 25.3 20.9 23.1 24.3 20.2 22.2 21.4
Australian Food and Liquor FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Supermarket sales A$m 30,949 32,831 33,771 18,093 16,873 34,966 18,730 17,470 36,200 37,474
Liquor sales A$m 6,600 7,200 7,400 4,200 3,570 7,770 4,410 3,749 8,159 8,566
Revenue A$m 37,549 40,031 41,171 22,293 20,443 42,736 23,140 21,219 44,358 46,041
EBITDA A$m 3,339 3,604 3,827 2,103 1,950 4,053 2,195 2,035 4,231 4,438
D&A A$m -521 -542 -548 -283 -283 -566 -294 -294 -588 -612
EBIT A$m 2,817 3,062 3,279 1,820 1,667 3,488 1,901 1,741 3,642 3,826
F&L Price grow th % -4.4 -2.9 -3.1 -1.8 -1.6 -1.7 -1.3 -1.1 -1.2 -0.7
F&L Volume grow th (ex space grow th)% 5.5 5.6 6.1 4.3 4.1 4.2 3.8 3.6 3.7 3.2
F&L Comp growth % 1.1 2.7 3.0 2.5 2.5 2.5 2.5 2.5 2.5 2.5
F&L Contribution from Space grow th% 2.7 2.0 1.7 1.3 1.3 1.3 1.3 1.3 1.3 1.3
F&L Sales growth % 3.8 4.7 4.7 3.8 3.8 3.8 3.8 3.8 3.8 3.8
EBITDA margin % 8.9 9.0 9.3 9.4 9.5 9.5 9.5 9.6 9.5 9.6
EBIT margin % 7.5 7.6 8.0 8.2 8.2 8.2 8.2 8.2 8.2 8.3
Supermarket sqm (est) sqm 2,034,506 2,110,932 2,206,361 2,237,443 2,272,552 2,272,552 2,304,567 2,340,728 2,340,728 2,410,950
Supermarkets (number) # 883 908 942 954 966 966 979 991 991 1,016
sqm per supermarket sqm 2,304 2,325 2,342 2,345 2,353 2,353 2,355 2,362 2,362 2,373
Supermarket sales per sqm A$ 15,212 15,553 15,306 8,086 7,425 15,386 8,127 7,464 15,465 15,543
Supermarket space grow th % 4.7 3.8 4.5 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Supermarket productivity grow th % -2.3 2.2 -1.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Liquor sqm (est) sqm 354,023 374,352 390,582 394,048 401,726 401,726 405,133 412,869 412,869 424,013
Liquor stores (number) # 1,313 1,355 1,402 1,422 1,442 1,442 1,462 1,482 1,482 1,522
sqm per Liquor store sqm 270 276 279 277 279 279 277 279 279 279
Liquor sales per sqm A$ 18,643 19,233 18,946 10,659 8,887 19,342 10,885 9,079 19,760 20,203
Liquor space grow th % 8.4 5.7 4.3 2.9 2.9 2.9 2.8 2.8 2.8 2.7
Liquor productivity grow th % 3.2 3.2 -1.5 2.0 2.1 2.1 2.1 2.2 2.2 2.2
Convenience FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Revenue A$m 6,714 6,794 7,065 3,598 3,479 7,076 3,780 3,655 7,435 7,804
EBITDA A$m 159 171 121 50 32 82 52 33 86 89
EBIT A$m 127 138 89 33 16 49 35 16 52 54
NZ Supermarkets (AUD) FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Revenue A$m 4,302 4,600 5,186 2,872 2,701 5,573 2,913 2,763 5,676 5,635
EBITDA A$m 309 322 368 205 196 402 209 200 409 406
EBIT A$m 225 236 271 154 145 298 156 148 304 302
Home Improvement FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Masters Revenue A$m 146 529 752 584 655 1240 733 927 1660 2080
Danks Revenue A$m 682 710 775 420 420 839 439 439 878 918
Total Revenue A$m 828 1239 1527 1004 1075 2079 1172 1366 2538 2998
EBITDA A$m -80 -99 -111 -20 -23 -43 14 12 26 103
EBIT A$m -97 -139 -169 -69 -71 -141 -45 -48 -93 -39
BIG W FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Revenue A$m 4,180 4,383 4,352 2,378 1,889 4,267 2,435 1,935 4,370 4,476
EBITDA A$m 261 285 247 129 82 211 140 95 235 247
EBIT A$m 178 191 153 81 34 115 89 45 134 143
Cash Flow FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Operating Cashflow AU$m 2,873.8 2,719.9 3,472.7 1,417.5 1,601.8 3,019.3 2,024.6 1,701.3 3,725.9 3,929.0
Investing Cashflow AU$m -2,080.3 -1,201.7 -2,031.4 -523.0 -1,133.6 -1,656.6 -1,164.5 -1,172.4 -2,337.0 -2,354.6
Financing Cashflow AU$m -1,469.2 -1,520.4 -1,371.9 -894.4 -468.2 -1,362.6 -860.1 -528.9 -1,388.9 -1,574.4
Net increase/ (decrease) in cash heldAU$m -675.7 -2.2 69.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Balance sheet FY12A FY13A FY14A FY15E FY16E FY17E Valuation
Assets SOTP FY15 FY16
Cash and cash equivalents AU$m 833 849 923 923 923 923 Australian Food & Liquor 40,319 42,083
Trade and other receivables AU$m 870 969 926 1,044 1,123 1,204 New Zealand Supermarkets 3,717 3,784
Inventories AU$m 3,698 4,205 4,693 4,696 4,902 5,104 Big W 1,896 2,114
Property, plant and equipment AU$m 9,589 9,246 9,601 10,293 11,634 12,944 Home Improvement 0 187
Intangibles AU$m 5,282 5,784 6,335 6,312 6,289 6,265 Hotels 2,733 2,694
Other Assets AU$m 1,309 1,197 1,728 1,728 1,728 1,728 Other -872 -891
Total Assets AU$m 21,581 22,250 24,205 24,996 26,598 28,168 Enterprise Value 47,794 49,972
Liabilities - Net Debt -3,610 -3,832
Trade Creditors AU$m 5,242 5,390 6,006 5,578 5,822 6,062 Equity Value 44,184 46,140
Debt AU$m 4,750 4,452 4,356 4,532 4,754 4,879 Equity Value per Share 34.89 36.24
Other Liabilities AU$m 5,282 5,784 6,335 6,312 6,289 6,265 Target price
Total Liabilities AU$m 13,135 12,950 13,680 13,474 13,986 14,396 Capital return
Equity Dividend yield
Share Capital AU$m 4,337 4,523 4,850 5,057 5,273 5,501 Total Return
Retained Earnings AU$m 4,163 4,661 5,423 6,209 7,069 7,976 EV/EBITDA at target
Other AU$m -54 117 252 256 269 294 PER at target price
Total Equity AU$m 8,446 9,301 10,525 11,522 12,611 13,772 Div Yield at Target Price
35.57
16.4
4.5
9.4
9.57
4.44
14.01
Macquarie Wealth Management Australian Supermarkets
6 February 2015 42
Fig 99 Wesfarmers Financial Summary
Source: Company Data, Macquarie Research, February 2015
Wesfarmers Limited Price: $44.71Group P&L FY12 FY13 FY14 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E
Revenue AU$m 58,079 59,832 62,348 32,255 31,227 63,482 34,110 32,874 66,984 70,447
Total Divisional EBITDA AU$m 4,544 4,729 4,909 2,653 2,216 4,869 2,866 2,396 5,262 5,739
Depreciation and Amortisation AU$m -995 -1,071 -1,123 -576 -576 -1,152 -592 -592 -1,183 -1,211
Adj. Equity accounted associates & non recurring itemsAU$m 40 -22 -65 -30 -35 -65 -30 -35 -65 -65
Adj. Equity accounted associates AU$m -16 48 65 30 35 65 30 35 65 65
EBIT from continuing opertaions AU$m 3,573 3,684 3,786 2,077 1,641 3,717 2,274 1,805 4,079 4,527
Non-recurring items AU$m -24 -26 364 0 0 0 0 0 0 0
Group EBIT AU$m 3,549 3,658 4,150 2,077 1,641 3,717 2,274 1,805 4,079 4,527
Net Interest Expense AU$m -505 -432 -363 -109 -139 -248 -149 -165 -314 -386
Tax Expense AU$m -918 -965 -1,098 -590 -450 -1,041 -638 -492 -1,130 -1,242
Minorities AU$m 0 0 0 0 0 0 0 0 0 0
Reported NPAT AU$m 2,126 2,261 2,689 1,378 1,051 2,428 1,488 1,148 2,636 2,899
Non-recurring Items (post tax) AU$m 17 18 -291 0 0 0 0 0 0 0
Adjusted NPAT AU$m 2,143 2,279 2,398 1,378 1,051 2,428 1,488 1,148 2,636 2,899
Key ratios FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Adjusted EPS cps 185.4 197.2 209.0 122.6 93.5 216.1 132.4 102.2 234.6 258.0
DPS (ex capital return) cps 165.0 180.0 200.0 88.0 118.7 206.7 95.1 129.6 224.7 247.1
FCFPS cps 244.9 264.9 205.6 113.9 117.7 231.6 127.9 127.5 255.4 279.2
PER x 24.1 22.7 21.4 36.5 47.8 20.7 33.8 43.8 19.1 17.3
Dividend Yield % 3.7 4.0 4.5 2.0 2.7 4.6 2.1 2.9 5.0 5.5
Payout ratio % 89.0 91.3 95.7 71.8 126.9 95.6 71.8 126.9 95.8 95.8
Sales grow th % 5.8 3.0 4.2 1.3 2.4 1.8 5.8 5.3 5.5 5.2
EBITDA grow th % 9.4 4.1 3.8 -2.1 0.8 -0.8 8.0 8.1 8.1 9.1
Underlying NPAT grow th % 11.1 6.4 5.2 1.1 1.5 1.3 8.0 9.2 8.5 10.0
EPS grow th % 11.1 6.4 6.0 3.6 3.2 3.4 8.0 9.2 8.5 10.0
EBITDA margin % 7.8 7.9 7.9 8.2 7.1 7.7 8.4 7.3 7.9 8.1
EBIT margin % 6.1 6.1 6.7 6.4 5.3 5.9 6.7 5.5 6.1 6.4
NPAT margin % 3.7 3.8 3.8 4.3 3.4 3.8 4.4 3.5 3.9 4.1
ROA % 8.5 8.5 9.8 10.3 8.1 9.3 11.0 8.6 9.9 10.6
ROE % 8.4 8.8 9.3 10.8 8.4 9.6 11.9 9.1 10.5 11.4
Coles Food and Liquor FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Revenue AU$m 26,561 27,933 29,220 15,542 15,147 30,690 16,261 15,847 32,108 33,464
EBIT AU$m 1,232 1,368 1,536 831 854 1,686 878 902 1,780 1,872
F&L Comp growth % 3.7 4.3 3.7 4.1 3.7 3.9 3.4 3.4 3.4 3.0
F&L Contribution from Space grow th % 0.9 1.2 1.0 1.2 1.2 1.2 1.2 1.2 1.2 1.2
F&L Sales growth % 4.6 5.5 4.7 5.3 4.9 5.1 4.6 4.6 4.6 4.2
EBIT margin % 4.6 4.9 5.3 5.3 5.6 5.5 5.4 5.7 5.5 5.6
Supermarket sqm sqm 1,630,168 1,656,520 1,692,642 1,720,783 1,734,958 1,734,958 1,763,803 1,778,332 1,778,332 1,822,790
Supermarkets (number) # 749 756 762 776 776 776 789 789 789 804
sqm per supermarket sqm 2,176 2,191 2,221 2,219 2,237 2,237 2,234 2,253 2,253 2,268
Supermarket space grow th 1.9 1.6 2.2 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Liquor sqm 190,247 199,178 205,179 208,538 209,283 209,283 212,709 213,468 213,468 217,738
Liquor stores (number) 792 810 831 840 848 848 857 865 865 882
sqm per Liquor store 240 246 247 248 247 247 248 247 247 247
Liquor space grow th 203 205 203 202 202 202 202 202 202 202
Coles Convenience FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales $m 7,556 7,847 8,171 4,193 4,256 8,449 4,377 4,443 8,821 9,297
EBIT $m 124 165 136 65 59 124 70 77 147 173
Sales Grow th % 11.3 3.9 4.1 0.4 6.5 3.4 4.4 4.4 4.4 5.4
Bunnings FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales (ex-property) $m 7152 7653 8533 4950 4649 9599 5570 5205 10775 11936
EBITDA (ex-property) $m 957 1028 1106 703 548 1251 796 619 1416 1581
EBIT (ex-property) $m 832 896 966 633 479 1113 722 545 1267 1427
Comparable grow th % 3.9 4.4 8.4 8.0 8.0 8.0 6.0 5.0 5.5 5.0
Contribution from space grow th % 2.0 2.8 3.3 3.8 5.2 4.5 6.5 7.0 6.7 5.8
Sales Growth % 5.9 7.2 11.7 11.8 13.2 12.5 12.5 12.0 12.2 10.8
Office Supplies FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales $m 1481 1506 1575 795 891 1686 818 917 1734 1784
EBITDA $m 108 117 124 56 76 132 59 80 139 147
EBIT $m 85 93 103 46 65 111 49 69 118 126
Kmart FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales $m 4055 4167 4209 2411 2006 4417 2547 2099 4646 4846
EBITDA $m 332 415 448 311 158 469 328 166 494 515
EBIT $m 268 344 366 267 114 381 283 121 403 422
Target FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales $m 3738 3658 3501 1949 1490 3440 1946 1483 3429 3395
EBITDA $m 317 216 167 122 60 182 141 74 215 247
EBIT $m 244 136 86 80 18 97 98 31 130 161
Resources FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Revenue $m 2132 1539 1544 673 684 1357 688 711 1399 1538
EBITDA $m 589 299 290 68 78 145 57 79 136 222
EBIT $m 439 148 130 -18 -8 -27 -28 -6 -34 53
Chemicals, Energy & Fertilisers FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales $m 1786 1805 1812 829 1087 1916 881 1130 2011 2086
EBITDA $m 348 348 314 195 84 278 214 90 305 331
EBIT $m 258 249 221 144 33 177 162 39 201 225
Industrial and Safety FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Sales $m 1690 1647 1621 904 1009 1914 1014 1030 2044 2085
EBITDA $m 217 192 161 93 84 177 104 85 190 194
EBIT $m 190 165 131 77 68 145 88 69 158 161
Cash Flow FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17
Operating Cashflow AU$m 3,641 3,931 3,226 1,746 1,753 3,499 1,917 1,875 3,792 4,081
Investing Cashflow AU$m -2,169 -1,760 952 -1,254 -1,072 -2,327 -1,143 -1,141 -2,283 -2,203
Financing Cashflow AU$m -1,242 -1,965 -3,444 -1,492 -680 -2,172 -775 -734 -1,509 -1,878
Net Increase/(decrease) in cash held AU$m 230 206 734 -1,000 0 -1,000 0 0 0 0
Balance sheet FY12 FY13 FY14 FY15E FY16E FY17E Valuation
Assets SOTP FY15 FY16
Cash and trade receivables AU$m 3,511 3,674 3,651 2,686 2,771 2,858 Coles 23,802 25,176
Inventories AU$m 5,006 5,047 5,336 5,469 5,745 6,021 Bunnings 17,106 19,326
Property Plant and Equipment AU$m 9,463 10,164 9,952 11,174 12,361 13,440 Office Supplies 1,055 1,114
Goodw ill and other intangibles AU$m 16,097 16,151 14,510 14,550 14,550 14,550 Kmart 4,221 4,444
Intangibles 4,393 4,459 4,446 4,378 4,310 4,242 Target 1,635 1,939
Other Assets AU$m 3,842 3,660 1,832 1,832 1,832 1,832 Resources 1,211 1,211
Total Assets AU$m 42,312 43,155 39,727 40,089 41,570 42,943 Chemicals, Energy & Fertilisers 2,225 2,437
Liabilities Industrial & Safety 1,590 1,708
Trade Creditors AU$m 5,420 5,999 5,417 5,552 5,833 6,112 Other -873 -887
Short & Long Term Debt AU$m 5,502 5,779 5,065 6,340 7,233 7,987 Enterprise Value 51,973 56,468
Other Liabilities AU$m 5,763 5,355 3,258 3,229 3,302 3,374 - Net Debt -4,141 -5,273
Total liabilities AU$m 16,685 17,133 13,740 15,121 16,367 17,474 Equity Value 47,832 51,195
Equity Equity Value per Share 42.6 45.6
Share Capital AU$m 23,286 23,290 22,708 21,565 21,565 21,565 Target price
Retained Earnings & Other Equity AU$m 2,103 2,375 2,901 3,026 3,260 3,526 Capital return
Otehr Equity 238 357 378 378 378 378 Dividend yield
Total Equity AU$m 25,627 26,022 25,987 24,968 25,202 25,469 Total Return 3.4
44.07
-1.4
4.8
Macquarie Wealth Management Australian Supermarkets
6 February 2015 43
Appendix 1: MICAWBER Methodology We have assessed a basket of Coles and Woolworths’ private label products against
what we consider to be their private label counterpart available at Aldi. Comparisons are
made against the major supermarkets’ private label products across their basic range
(Woolworths Homebrand, Coles Smart buy) and the mid-level range (Woolworths Select,
Coles brand)6.
To provide the most accurate reflection of the impact of price differences on households
each segment is weighted according to the most recent ABS expenditure survey (2011),
which provides the average weekly expenditure across each product category. The
individual products within each category are then weighted according to our assumptions
on relative sales volume and dollar contribution.
Fig 100 Segments weights adopted
Source: ABS, Macquarie Research, February 2015
Our private label analysis considers ~50 Aldi products which have been compiled to
represent each category present in a ‘standard basket’ of goods. Comparable private
label products were then compiled from both Woolworths and Coles across both the
basic and mid level product ranges. In instances were comparable products to the Aldi
private label product were unavailable at the major supermarkets; the products across all
3 supermarkets were removed from our analysis.
Our prices for the supermarkets were all sourced from the online websites of the
respective supermarkets. It is important to consider that it is advised that the products
available at the Woolworths online store are on average 2-3% more expensive than in
store, while Coles, without providing any percentages, align prices of catalogue items
and key promotional items (multi-buy, EDLP etc) with in store prices; however, regular
grocery and Fresh items are priced differently online.
Fig 101 Fruit, Vegetables and Meat are key price difference drivers
Weighting Basic
WOW vs. Aldi Basic
Coles vs. Aldi Mid
WOW vs. Aldi Mid
Coles vs. Aldi Basic
WOW vs. Coles Mid
WOW vs. Coles
Bread and Cereal Products 14.3% 0.3% 0.5% 3.1% 1.7% -0.2% 1.5%
Fruit and Vegetables 28.2% 11.8% 8.7% 11.8% 8.7% 3.7% 3.7%
Meat 18.3% 2.9% 4.8% 2.9% 4.8% -1.5% -1.5%
Dairy and Related products 11.0% 0.0% 0.7% 1.5% 1.5% -0.6% 0.0%
Other Food 16.3% 2.6% 2.2% 8.6% 5.1% 0.5% 1.2%
Non-alcoholic Beverages 10.9% 1.3% 0.9% 1.8% 1.2% -0.3% 0.3%
Non durable household products 1.1% -0.2% -0.2% 0.0% 0.0% 0.0% 0.1%
Total 100.0% 18.7% 17.6% 29.7% 23.0% 1.6% 5.3%
Total - Excluding Fruit Vegetables & Meat 53.6% 4.0% 4.1% 15.0% 9.5% -0.6% 3.2%
Source: Macquarie Research, February 2015
6 In providing this analysis we make no claim in terms of the quality of individual products and note that each
supermarket has made various claims with regards to the quality and strategic intentions of each product range.
Meat and seafood, 20.6%
Bread and cereal products,
15.3%
Other foods, 15.3%
Fruits, 14.4%
Vegetables, 12.1%
Dairy and related
products, 10.3%
Non-alcoholic drinks, 10.2%
Household goods, 1.9%
Macquarie Wealth Management Australian Supermarkets
6 February 2015 44
Macquarie Quant View
The quant model currently holds a reasonably positive view on Woolworths. The
strongest style exposure is Quality, indicating this stock is likely to have a
superior and more stable underlying earnings stream. The weakest style
exposure is Price Momentum, indicating this stock has had weak medium to long
term returns which often persist into the future.
Displays where the
company’s ranked based
on the fundamental
consensus Price Target
and Macquarie’s
Quantitative Alpha model.
The rankings are
displayed relative to the
sector and country.
20/95 Global Alpha Model
Sector Rank
% of BUY recommendations 44% (7/16)
Number of Price Target downgrades 1
Number of Price Target upgrades 0
Macquarie Alpha Model ranking Factors driving the Alpha Model
A list of comparable companies and their Macquarie Alpha model score
(higher is better).
For the comparable firms this chart shows the key underlying styles and their
contribution to the current overall Alpha score.
Macquarie Earnings Sentiment Indicator Drivers of Stock Return
The Macquarie Sentiment Indicator is an enhanced earnings revisions
signal that favours analysts who have more timely and higher conviction
revisions. Current score shown below.
Breakdown of 1 year total return (local currency) into returns from dividends, changes
in forward earnings estimates and the resulting change in earnings multiple.
What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s
returns over the last 5 years.
A more granular view of the underlying style scores that drive the alpha (higher is
better) and the percentile rank relative to the sector and country
For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie
Global Quantitative/Custom Products Group ([email protected])
Fu
nd
am
en
tals
Quant
Rank within Country Rank within Sector
Attractive
-1.8
-1.1
-0.7
0.1
0.4
0.8
1.1
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
Valuations Growth Profitability Earnings
Momentum
Price
Momentum
Quality
-0.6
-0.4
-0.5
-0.6
0.5
-0.9
-0.6
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
-70% -50% -30% -10% 10% 30% 50% 70%
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return
-27%
-26%
-25%
-23%
24%
25%
26%
27%
-30% -20% -10% 0% 10% 20% 30%
⇐ Negatives Positives ⇒
Profit Margin FY1
Working Capital Inc.
FCF Yield FY0
Merton Score
Price to Sales LTM
Price to Book FY1
Incremental Capex
Price to Book NTM
0 1
Technicals & TradingRisk
LiquidityCapital & Funding
QualityPrice Momentum
Earnings MomentumProfitability
Growth
ValuationAlpha Model Score
-0.34 0.25
1.61 0.05
0.34-0.44
-0.23 0.29-0.11
0.04 0.80
0 1
Normalized
Score
0 50 100
Percentile relative
to sector(/95)
0 50 100
Percentile relative
to country(/240)
Macquarie Wealth Management Australian Supermarkets
6 February 2015 45
Macquarie Quant View
The quant model currently holds a strong positive view on Wesfarmers. The
strongest style exposure is Quality, indicating this stock is likely to have a
superior and more stable underlying earnings stream. The weakest style
exposure is Profitability, indicating this stock is not efficiently converting its
investments to earnings as proxied by ratios such as ROE, ROA etc.
Displays where the
company’s ranked based
on the fundamental
consensus Price Target
and Macquarie’s
Quantitative Alpha model.
The rankings are
displayed relative to the
sector and country.
14/95 Global Alpha Model
Sector Rank
% of BUY recommendations 29% (4/14)
Number of Price Target downgrades 5
Number of Price Target upgrades 0
Macquarie Alpha Model ranking Factors driving the Alpha Model
A list of comparable companies and their Macquarie Alpha model score
(higher is better).
For the comparable firms this chart shows the key underlying styles and their
contribution to the current overall Alpha score.
Macquarie Earnings Sentiment Indicator Drivers of Stock Return
The Macquarie Sentiment Indicator is an enhanced earnings revisions
signal that favours analysts who have more timely and higher conviction
revisions. Current score shown below.
Breakdown of 1 year total return (local currency) into returns from dividends, changes
in forward earnings estimates and the resulting change in earnings multiple.
What drove this Company in the last 5 years How it looks on the Alpha model
Which factor score has had the greatest correlation with the company’s
returns over the last 5 years.
A more granular view of the underlying style scores that drive the alpha (higher is
better) and the percentile rank relative to the sector and country
For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie
Global Quantitative/Custom Products Group ([email protected])
Fu
nd
am
en
tals
Quant
Rank within Country Rank within Sector
Attractive
-1.8
-1.1
-0.7
0.1
0.4
0.8
1.1
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
Valuations Growth Profitability Earnings
Momentum
Price
Momentum
Quality
-0.6
-0.4
-0.5
-0.6
0.5
-0.9
-0.6
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
-70% -50% -30% -10% 10% 30% 50% 70%
Tesco
J Sainsbury
Metcash
Coca-Cola Amatil
Treasury Wine Estates
Woolworths
Wesfarmers
Dividend Return Multiple Return Earnings Outlook 1Yr Total Return
-22%
-22%
-19%
-18%
24%
24%
27%
37%
-40% -20% 0% 20% 40%
⇐ Negatives Positives ⇒
Momentum 3 Month
EPS Growth FY1
CPS Growth FY1
Net Income Margin NTM
EV/EBITDA LTM
Dividend Yield LTM
Price to Earnings FY0
Price to Earnings LTM
0 1
Technicals & TradingRisk
LiquidityCapital & Funding
QualityPrice Momentum
Earnings MomentumProfitability
Growth
ValuationAlpha Model Score
0.12 0.46
1.49 0.05
0.21-0.07
-0.14-0.32-0.17
-0.02 1.10
0 1
Normalized
Score
0 50 100
Percentile relative
to sector(/95)
0 50 100
Percentile relative
to country(/240)
Macquarie Wealth Management Australian Supermarkets
6 February 2015 46
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return
Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only
Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 December 2014
AU/NZ Asia RSA USA CA EUR
Outperform 51.80% 58.06% 45.07% 44.42% 60.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients)
Neutral 31.80% 27.37% 30.99% 50.10% 35.37% 33.51% (for US coverage by MCUSA, 3.08% of stocks followed are investment banking clients)
Underperform 16.39% 14.57% 23.94% 5.48% 4.08% 19.68% (for US coverage by MCUSA, 0.44% of stocks followed are investment banking clients)
WOW AU vs ASX 100, & rec history
(all figures in AUD currency unless noted)
WES AU vs ASX 100, & rec history
(all figures in AUD currency unless noted)
Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, February 2015
12-month target price methodology
WOW AU: A$35.57 based on a Sum of Parts methodology
WES AU: A$44.07 based on a Sum of Parts methodology
Company-specific disclosures: WOW AU: Macquarie Group Limited or one of its affiliates is currently providing non securities services to Woolworths Ltd for which it expects to receive or intends to seek compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Woolworths Limited's equity securities. WES AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided Wesfarmers Ltd with investment advisory services in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Wesfarmers Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.
Target price risk disclosures: WOW AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. WES AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.
Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited
Macquarie Wealth Management Australian Supermarkets
6 February 2015 47
(ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.