Woolies ambition optimistic

Eli Greenblat
December 6, 2011
The Age

Ben Gilbert estimates Woolworths generates more than $5.5 billion in sales from generic labels, about 18 per cent of its supermarket sales.
A UBS report has cast doubt on Woolworths boss Grant O’Brien’s ambition to double the supermarket group’s sale of ”private label” foods in the near term.
In the report, retail analyst Ben Gilbert says the nation’s biggest retailer is likely to achieve only a 50 per cent increase in five years to still lag behind its international peers.

He said the penetration of the generic food category in Australia remained below the global average, and less than half that of France, Germany and Britain, according to research group Datamonitor.

Mr Gilbert said given the efforts by Woolworths and Coles to drive more sales from their generic labels, penetration would increase from about 18 per cent now to roughly 24 per cent by 2014-15 – an annual growth of 1.3 per cent and $5.6 billion in incremental sales between 2011-2015.
But Mr Gilbert believes Woolworths’ target, as stated last month at its investor briefing, to double its generic label sales could be too optimistic.
He estimates Woolworths generates more than $5.5 billion in sales from generic labels, about 18 per cent of its supermarket sales. Of this 8 per cent or $2.5 billion comes from Woolworths’ in-house brands, Select, Macro and Home Brand.

He said when Woolworths stated its intention to double penetration he interpreted this to be the doubling of those brands.
A doubling of penetration would take it to roughly 16 per cent. Consultation with the private label industry suggests this target may prove optimistic based on overseas experience, and as such we have based our analysis on a [rough] 50 per cent increase in penetration.
Mr Gilbert said a 50 per cent increase in penetration of these Woolworths in-house brands would drive a 57-basis-point increase in earnings before interest and tax margins over five years.

”The growth aspirations put forward by Woolworths, while realistic, are ambitious in our view and would require significant growth from the Select and Macro brands,” he said.
But offshore experience suggested such targets were achievable.

Mr Gilbert said the relatively low level of generic label penetration in Australia reflected the more concentrated nature of the Australian grocery business.
”With the exception of the US we have found that markets with higher levels of concentration have lower levels of private label penetration,” he said.
”More concentrated markets such as Australia have placed a lower emphasis on private label until competition has increased, as in [German discount supermarket] Aldi’s entrance in 2001.”

High levels of concentration also meant suppliers were increasingly reliant on fewer retailers. This gave Coles and Woolworths increased market power with suppliers, meaning that generic label business was not required as a profit driver.”

Read the full article here

Posted in

Subscribe to our free mailing list and always be the first to receive the latest news and updates.