DEAKIN UNIVERSITY

MMM365- Strategic Management

Supermarkets and Other Grocery Stores in Australia- G5111

Woolworths Ltd

Group 15

Submitted by

Duong Quang Hai – ID: 900024567

Henry Wee Chung Chong – ID: 210053462

Yin Xue – ID: 600162112

Due date: 17 January 2011

 Word count: 3985 words

Table of contents

Size and Scope of Operation...................................................................................8

5.1 Performance/ Profitability................................................................................11

5.3 Peer Analysis..........................................................................................................................17

1. Executive Summary

The purpose of this report is to provide a strategic analysis of Woolworths in its

Australian retailing and grocery industry. There are some external factors can be affected
to Woolworths strategy. To be analyzed how these factors impact to Woolworths
strategies we would use Porter forces five models as a framework for analysis. They are

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 threats of new entrants and substitute products, rivalry among competing established
competitors, threat of substitutes and bargaining power of Woolworths’ suppliers and
customers.

This report also provides the company situation analysis which will be analyzed the
internal environments of Woolworths. In this analysis, we will use SWOT analysis which
includes the strengths, weaknesses, opportunities, and threats Woolworths possesses.
Woolworths’ scope of operations, size of business is also one of the internal analysis
Woolworths has to analyze in order to grab opportunities and avoid threats. Besides, it is
also given a brief analysis of Woolworths current strategy in order to response their
competitor’s strategies.

This report also provides some recommendations for Woolworths in order for it to stay
competitive in its retailing industry, such as establishing loyalty programs for its
customers and managing its efficiency in order to sustain its core competencies for its
long-term success.

Finally, analyzing the financial performance and stakeholder analysis by using graphs
and quantitative data have been used to support the report. The major finding this analysis
is proving the stable financial conditions of Woolworths as well as the interests of
stakeholders. , It means that Woolworths have a good economy condition based on its
financial position, so it caused to the benefits for its stakeholders.

2. Introduction

The purpose of this report is to define how successful is Woolworths in the their
current respective industry sector - Consumer Goods Retail in Australia; and to predict
and analyze how Woolworths will perform in the future. Only secondary data are used in

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this report as there is very limited primary data in public databases. Various sources are
used to provide analysis from different point of views. These include journals, news
articles, and company annual report, collected from Internet databases, websites and
Woolworths’ official Website.

The report also investigates the fact that the analysis conducted has limitations. Some of
the limitations include:

• Forecasting figures not provided

• Nature and type of company unknown

• Data limitations for current economic conditions due to insufficient

information or details provided i.e. monthly details not known, results based on
past performances

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3. Industry Analysis

In order to succeed in its retailing industry, Woolworths need to analyze and

understand its external industry environment. Understanding enough about the external
environment is very important for the success in competitive advantage of Woolworths.
In this case, analyzing and understanding of Woolworths’ external environments,
matched with the analysis of Woolworths’ internal environment will allow Woolworths
to create and develop its strategic planning and actions to get the best result in market
share battle with other rivals. Finally, external information will also allow Woolworths to
adapt and change accordingly to its surrounding in order to stay competitive.

Porter’s Five Forces Analysis

Michael E. Porter’s five forces analysis can be used as a framework for the industry
environment analysis of Woolworths. It comprises of rivalry among competing
established companies, threat of new entrants, threat of substitute products or services,
bargaining power of suppliers and bargaining power of customers (Hill et al, 2007).

3.1 Threat of new entrants

As the Australian retail industry with Woolworths and only a few other major
players dominate the industry. Therefore, it is seems to be very difficult for new

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companies to compete on the same level. As the result, the threat of new entrants for
Woolworths in the industry is seems to be low.

There are some reasons can be explained for this reason. Firstly, Woolworths
have a high market share in the industry. In addition, its business size is very big which
includes Australian overall market and some other foreign markets. A lot of selling stores
around Australia are good example. Moreover, the expensive start-up costs are another
barrier for new competitors. Finally, the high annual profit of Woolworths is hard for
others to enter the retail and grocery industry in Australia.

3.2 Rivalry among established companies

The Australian retail and grocery industry has a high level of concentration ratio
because the available of some major competitors competing in the industry such as
Woolworths Ltd, Myer or Coles (Beaumont, 2004). It means Woolworths have a high
concentration of market share in the Australian retail and grocery industry. In addition,
the intensity of those strong competitors is boosting Woolworths Ltd have been
continuously creating a competitive advantage. Using effective strategy such as low
price, selling fresh food, and 24 hour delivery service, Woolworths Ltd and its
subsidiaries such as Safeway, Dicksmith and so on are continuously competing with other
rivals for a strong position in the industry (Porter, 1979).

3.3 Bargaining powers of buyers

Woolworth’s customers have a highly powerful bargaining power. The reason is

most of Woolworths selling goods are from individual customers. They can easily change
to other major competitors that offer similar product but with cheaper price. According to
Miranda, Konya & Avila (2005), it was found that customers are drawn towards price

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 and convenience as special attributes of making a purchase at a store. Price is strongly
connected with customers’ relationship and the store. In addition, there are a lot of
substitutes to Woolworths’s goods and products, so customers of Woolworths posses a
strong bargaining power.

3.4 Bargaining power of suppliers

Safeway Supermarket’s suppliers have a weak bargaining power. According to

Porter (cited in Hill et al, 2007), one of the characteristics of strong and powerful
suppliers is that if the buyer in the industry is not an important customer to suppliers. As
in the retail and grocery industry, Woolworths’s business like Safeway Supermarket
holds a big size of market share, so it is an important customer to its suppliers. Safeway
Supermarket is also a dominant player in the retail industry, which means that supplying
goods to Safeway Supermarket is one of the suppliers’ important earnings. Therefore, the
suppliers of Safeway Supermarket do not have a strong bargaining power.

3.5 Threat of substitute products or services

There is a high threat of substitute products for Woolworths Ltd’s businesses like
Safeway supermarket or Dicksmith. Let’s make an example with Safeway in supermarket
industry. All of the major supermarkets in Australia offer substitute products. Therefore,
Safeway need to create effective strategies to keep their customers and build brand loyalty.
According to Hill et al. (2007), the most important thing in the supermarket industry is
price competition. In order to maximize the profits, Safeway have been buying goods from
its suppliers and selling to customers. As the result, substitute products of Safeway will
have less attention or attractiveness from its customers (Porter, 1979). For example, the
product is supplying at Safeway are food which can be bought easily at other competitors

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In addition, Safeway’s rivals can be applied low price strategies in order to response with
Safeway pricing strategy For instance, Alde offers imported brands at very low prices

4. Company Situation Analysis

Size and Scope of Operation

Woolworths limited is the second largest retailer in Australia which have primary
activities in Supermarkets and Liquor. Grocery represents 85.6 percent of Woolworth’s
business. Woolworths Ltd has annual sales of $38 billion. Woolworths’s major brands
are as follows: Woolworth’s supermarket, Safeway, Metro, Big W, Dick Smiths
Electronics and Dan Murphy’s. Besides, supermarkets are also operated in New Zealand

4.1 Objective and Strategy

Woolworth’s main strategies are to increase efficiency and be cost effective. To

achieve this Woolworths has been using an every-day low price strategy

Woolworths' strategy is to offer customers very low prices all the time, not just sale
specials. The every-day low prices strategy addresses this, and attempts to offer
customers everyday lower prices through price reductions on all products. For
Woolworths Every-day lower prices strategy to deliver as it promises to customer, while
also making a substantial profit from price cutting, an everyday lower cost strategy must
be in place.

4.2 SWOT analysis

4.3.1 Strengths

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 Woolworths has the advantage of having the largest percent of market share in the
Australian retail and fresh food grocery industry. Woolworths is a powerful retail brand
and has a reputation of low prices, convenience, quality of service, wide range of
products as well as fresh food

According to the Woolworths 2010 annual report, Woolworths has over 3000 stores
supermarkets and serve million customers in Australia and New Zealand. Woolworths is
available in almost every major metropolitan shopping centre in Australia. In addition, a
huge number of supermarkets create a mobility, convenience and accessibility for
customers.

4.3.2 Weaknesses

Woolworths Ltd is very popular in Australia and New Zealand. It creates a high
competitive advantage for Woolworths when compared with other competitors in
Australian and New Zealand market (Datamonitor, 2007, p. 15). If Woolworths want to
have more success, they have to open more stores in other new markets like Asian
countries. However, this is one of Woolworths’ weaknesses. When compared
Woolworths with other powerful international competitors such as Wal-Mart, which are
available in Asia, Europe, US, Canada and so on, Woolworths does not have any chance
to compete unless it also expand internationally.

With the rapid growth of technology, especially is the Internet, Woolworths have
introduced the Woolworths’s Internet store, (e-business). However, it immediately caused
to the decline of sales in stores, especially at Christmas.

Besides, Woolworths offers many similar products under one roof which may make
it harder for Woolworths to differentiate its “fresh” or “select” brands. Woolworth’s size
may present potential weaknesses due to the huge span of control.

4.3.3 Opportunities

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 Woolworths is growing rapidly in the Australian retail and grocery industry. They
are moving into new markets segments within Australia as well as international markets
such as New Zealand and Asia. Woolworths are always looking at merging or forming
alliances with other global organizations for example wow joint venture with the Tata
group in India (Datamonitor, 2007, p. 16).

4.4.4 Threats

Woolworths experiences ongoing competition threats from other major retailers such as
Myer or Coles. In order to response to Woolworths‘s everyday low price strategy, Coles
have introduced the price rewind strategy. In addition, with the objective to expand its
business to other new markets like India, Woolworths will be faced with the high
competition with already growing competitors such as Wal-Mart (Datamonitor, 2007, p.
17).

Selling goods widely using the Internet have a high competition. Woolworths have an
online store, but it doesn't sell everything in the shops. In addition, the products are quite
expensive and postage and packaging is far higher priced over other stores. Therefore,
customers prefer to purchase at other cheaper stores.

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5. Financial analysis

5.1 Performance/ Profitability

Profitability ratios measure the efficiency in which the company its resources to generate
profit (Hill et al, 2007). The following uses the profitability ratios of Gross profit margin,
Net profit margin, Return on Assets and Return on Equity as indicators on the measures
of the company’s profitability capabilities.

This table shows the various annual profit ratios of Woolworth Limited
2010 2009 2008 2007 2006
Profitability
(%)
Gross Profit 25.9 25.6 25.3 25.3 25.03
Margin 1 6 0 2
Net Profit 3.89 3.69 3.44 3.04 2.68
Margin
Return on 11.9 11.8 11.5 10.4 9.16
Asset 9 8 9 2
Return on 26.6 26.9 27.1 24.5 25.19
Equity 9 5 5 2

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 Gross profit margin shows us the percentage of sales to cover general expenses
and operating costs (Hill et al, 2007). According to this chart, the Gross Profit Margin of
Woolworth Limited holds an increase trend. With slight decrease between 2007 and
2008, this could be the result of many factors. Such as the Global Financial Crisis (GFC)
that was in motion since 2007 and finally erupted in late 2008. However, worry not, as
the following years showed Woolworth Limited adjusted to the GFC and steadily grew
into an increase trend. This suggests that Woolworth limited recuperated from the GFC to
maintain a strong market share and strengthen their defenses against the GFC.

Net profit margin shows us the percentage of which profits are earned through sales
(Hill et al, 2007). Similar to the Gross profit margin ratio, we see that the profitability
performance in relation to this ratio also on an increase. A worthy mention is that the
increase is very smooth and very stable. From this we can see that Woolworth Limited is
able to maintain a very steady growth rate even throughout the Global Financial Crisis.
Various factors on how Woolworth limited can achieve such feat can be that their Budget
management is incredibly accurate. Only with a plausible forecast can a company that big
to maintain their posture throughout the GFC.

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 Return on assets measures the profit generated before tax by the available assets to
the company (Hill et al, 2007). According to this chart we see another increase in trend.
Nothing really stood out in this ROA chart, just very steady growth of profit generated as
well as remained in a positive growth trend

Return on equity measures the percentage of profit earned using the shareholder’s
equity in the company (Hill et al, 2007). According to this chart, the recent three years
spike compared to the earlier years shows that more is returned to the shareholders. That

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the investors were able to receive better returns for the years 2008 to 2010. And this show
that Woolworth Limited is able to be more efficient and able to improve on their earlier
years on productivity levels.

Overall the company’s profit generating capabilities have increased not only
smoothly but also dramatically. Especially during the last few financial years, Woolworth
limited really recuperated from the GFC to still show signs of growth injected with
confidence to expand further.

5.2 Liquidity and Capital Structure (Leverage)

Liquidity ratios measure a company’s ability to meet short-term obligations such as
debt. Liquidity is determined by how easily an asset is able to be converted into cash (Hill
et al, 2007).

201 200 200 200 2006

0 9 8 7
Liquidity
Current 0.73 0.76 0.70 0.76 0.85
Ratio
Quick 0.25 0.24 0.23 0.26 0.37
Ratio

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 The current ratio measures the extent in which the short-term are covered by
liquidated assets (Hill et al, 2007). Unlike Quick Ratio only measures the liquid assets,
Current ratio includes all the current company assets. According to this chart the Current
Ratio mostly at 0.7 to 0.8, the bench mark in Australia is at 2.0. Therefore, it is seen that
these company current assets cannot cover their current debt. Also if any sudden
downturn in the company investment sector such as a failed business venture then the
company will be plunged into bankruptcy.

Quick ratio is similar to current ratio. It is the liquid asset that can be
immediately converted for cash on a short order. The current benchmark for quick
ratio among Australian companies is at 1. With that in mind, the quick ratio of
Woolworth Limited show that dramatically below the benchmark. This means that
at the best it is only at 0.85 and the worst period is at 0.23. Woolworth Limited’s
ability to quickly repay is very poor. And at the slightest downturn investment will
face bankruptcy.

Overall, Woolworth Limited does not seem to show a strong liquidity ratio to
efficiently cover their debt if the worse came to the worst.

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Leverage
A company is said to be highly leverage if it uses more debt than equity. (Hill et. al,
2007)

201 200 200 200 2006

0 9 8 7
Leverage
Debt to 0.58 0.59 0.60 0.62 0.68
Asset
Debt to 1.36 1.42 1.51 1.61 2.14
Equity

Debt-to-Assets ratio measures the extent to which borrowed funds hav been used to
finance a company’s investments (Hill et al, 2007). According to this chart, the debt to
asset ratio declines annuanlly meaning that Woolworth Limited’s debts is getting less
ever year.

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 Taking into account the previously mentioned profitability ratios, we can determine
that the company has a heavy reliance on outside funding such as lenders, creditors and
loans to finance and generate company sales and profits. As previously mentioned, the
company’s profitability ratio percentages have decreased over the last few financial
years, which can be said to be contributed to the increase in the amount of expenses
within the company.

5.3 Peer Analysis

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 Woolworth Limited compared to other industry leaders through peer analysis result
in a healthy and prospect able future. After comparing Return on Equity of Woolworth
average to the industry average; Woolworth limited is by far the leader in returning profit
to their shareholders and investors alike. At 11.99 percent Woolworth Limited has truly
lead the pack with an average of only 4.96 percent. Further on with Return of assets, the
industry average is at 1.23 percent compared to the Woolworth limited 0.73 percent low.
This reflects on Woolworth’s commitment to better utilize their assets better and more
efficiently in the future. And urge a better resource management movement for
Woolworth limited. As seen previously regarding an extremely low current ratio with
Woolworth limited is also seen averaged throughout the industry with an average of 7.34
percent suggest that low liquidity is universal in this industry. Lastly, through peer
analysis we focused on Woolworth Limited’s imminent rival in Australia Wesfarmers
Limited to finalize this summary.

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 This chart shows the difference between industry leaders Woolworth and
Westfarmers Limited compared to the industry average. This proves that Woolworth
Limited is indeed leading the industry with strong investor return and above average
utilization of assets. However, need to improve on ability to liquidate assets to cash. But
that seems to be a universal industry hazardous zone.

6. Stakeholder analysis

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 Hanson (2010) defines Stakeholders as ‘the individuals and groups who can affect
and are affected by the strategic outcomes achieved and who have enforceable claims on
firms’ performance.’ Primary Stakeholders (Refer Appendix 1) are employees,
customers, investors, and shareholders, whose continuous affiliation are essential to the
firm’s survival (Ferrell, Fraedrich & Ferrell 2009). All news articles are dated within
financial year 2010, to reflect better analysis of the stakeholder satisfaction with the
company consistent with their Corporate Responsibility Report 2010 (Refer Appendix 2).

In 2010, Woolworths conducted market research studies (including in-store,

helpline and website feedbacks), customer focus groups and customer immersion
programs to better understand the needs of customers. The outcome identified interest of
Customers in quality, choice, good service, value for money and healthy options.
Sensory Kitchen (Refer Appendix 3) was also created in bid of further satisfying
customer’s quality expectations. Woolworths also reported in the Green Shopper Survey
that 84% of consumers are environment-conscious with shopping decisions (Woolworths
Limited, 2010). It was reported that Woolworths no longer provide plastic bags for
purchases of three items or less to reduce impact on the environment (Fineran, 2010).
However, a market research conducted by Colmar Brunton reported that
Woolworths(12%) is behind other supermarkets such as Aldi(9%) and Coles(9%) in
terms of customer satisfaction but customers were generally satisfied with pre-packed
fresh food and store access (Burton, 2010).

Investors for Woolworths are interested in competitive returns, governance,

transparency and long-term business sustainability. Woolworths responded with quarterly
investor briefings and AGM for all shareholders and participated in the Carbon
Disclosure Project for transparency. The company also provides call center service,
written contact with senior management and email contact with the Investor Center to
reassure investors of their governance (Woolworths, 2010). As for returns, NamNews
reported a 5.5% share rise late February 2010, recording the biggest share rise in 15
months with a A$1.1bn net profit in 6 months prior 3 January 2010 (NamNews, 2010).
However, looking deeper, it was also found that this is mostly due to governmental

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support and investors are worried about the company’s financial performance without
governmental help (Hyam & Janda, 2010).

Woolworths found that employees desired job security, training, safe and healthy
working environment, and leadership for engagement (Woolworths, 2010). Although the
company claims to take work safety seriously, a recently settled compensation case with
a butcher who had back injury in 2003 raised doubts of the validity of that statement
(Hurst, 2009). Employees also wish to contribute to the environment and the community
during work, in which the company responded with Eco Ambassadors where training is
provided and pay rise with active engagement (Woolworths, 2010; Oglivy, 2008).
Woolworths also reported engagement average levels over the Australian CLC
benchmark, covering discretionary effort, rational commitment and emotional
commitment along with introduction of leadership qualities for improved team
performance (Woolworths, 2010).

Woolworths’ Suppliers expected fair treatment and long-term relationship

opportunities. As to such, Woolworths drew up Annual Shared Objective plans for main
suppliers, hold supplier briefings, and provide quarterly newsletters and vendor website
for information access. They also hold annual awards dinners to acknowledge innovation
and supplier relationships with a $100,000 Fresh Food Grant for companies with
sustainable practices (Woolworths, 2010). However, several news articles reported
dissatisfaction from suppliers on ethical audits early 2010, finding them imposing and
their interest is in obtaining higher margins and less in ethical outcomes (Ockenden,
2010; Hall, 2010). Early 2010 also saw Woolworths receiving investigation on
allegations for coffee and tea supply corruption with the sacking of their national coffee
buyer (Speedy, 2010). Woolworths’ decision to no longer source milk from National
Food but from Parmalat and Murray Gouldburn raises questions with regards to long-
term relationship opportunities seeing as National Food has been their sole supplier since
2002 (NamNews, 2010). Business Spectator also reported rumors of Woolworths
sourcing liquor from Independent Liquor to move away from Foster’s Group Ltd and
Lion Nathan Ltd (Business Spectator, 2010).

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 As for Community, it is expected that Woolworths contribute to the community and
take into consideration the needs of the community in terms of new stores and existing
store changes (Woolworths, 2010). Woolworths had continued to expand its online
supermarkets in Northern Queensland and in South Australia (Adelaide) to serve more
households (business.newsarticles.au; insideretailing.com 2010). The company’s Dan
Murphy’s liquor label was also finally brought online to facilitate easier shopping
(Stafford, 2010). Also, Woolworths announced it will now expand into the highly
lucrative $24 billion hardware sector by making a takeover bid for listed hardware chain
Danks Holdings (Refer Appendix 4), the second biggest hardware distributor in Australia,
providing a larger range of products for the community (Business.com.au 2009).
Moreover, with the program launching by Woolworths Gungahlin to convert surplus food
from the store into meals for the needy, Woolworths is lending a helping hand with the
social problem situation in Australia (katelundy.com.au, 2010).

The Government’s interest in Woolworths is that they are law and regulation abiding
and active participation in providing valuable opinions in public policy discussions. To
that, Woolworths reported that they consult government and regulatory bodies for advice
before policy implementation (Woolworths, 2010). Yet, in late 2009 the Government was
reported to threaten to take action against Woolworths and Coles for the fast-rising
grocery prices, worried that the duopoly may cause consumers to lose out (Ja & Godfrey,
2009). Woolworths CRR also reported their engagement in Australian Government’s
Food and Health Dialogue where it was agreed that salt levels in breakfast cereals and
breads will be reduced (Woolworths, 2010; Ausfoodnews.com.au, 2010).

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7. Summary and conclusion

The report is an analysis about the factors creating success for Woolworths in the Australia
retail and grocery industry. It shows that Woolworths is one of the top brand names in the
Australia, and now is more popular in other countries. The first parts of report are given a brief
analysis about the competitive situation of Woolworths in the industry. Using Porter’s five forces
model as the framework of the analysis have showed that Woolworths have more competitive
advantages than other competitors in the industry. Another section is coming with the current
situation analysis of Woolworths. By applying the SWOT analysis, we can see that Woolworths
have more internal strengths and weaknesses to face. Woolworths is proud that they have been
giving to the customers more quality products at the lowest price it. Applying the everyday
lowest price strategy has made Woolworths or its subsidiaries like Safeway have more
competitive advantage to compete with other major competitors. Besides, in the analysis, it is
also given the opportunities and threats of Woolworths in the new markets when compared with
other powerful international competitors like Wal-Mart. Woolworths still need more effective
strategies to win the completion with these strong competitors. Next, coming to financial
analysis, the report specifically examine and analyze the current financial situation analysis of
Woolworths based profitability ratio, capital structure and liquidity, and peer analysis when
compared to other competitors such as West farmers. It showed that Woolworth Ltd is indeed
leading the industry with strong investor return and get more financial advantages than others in
order to obtain a good reputation. Finally, ending with stakeholder analysis is given to us what
the stakeholder elements such as customers, investors or suppliers need and want from
Woolworths Ltd. Although they have different positions, but there are some common values that
they can get from the Woolworths. They are all desires for more benefits which raising their
values.

In short, facing with more challenges from other competitors in the industry, Woolworths
should continue with the current store image as it meets the current customer’s trend. It should
continue to supply more quality goods with the best price in order to create more customers
attractiveness. In addition, innovation and development of store structure should be focused.
Besides, understanding of competitor’s strategies and anticipate moves of retaliation in order to
response their strategies is very important for Woolworths.

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8. References

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9. Appendixes

Appendix 1

Profitability
Gross Profit Margin = Gross Profit / Net Sales
Net Profit Margin = EBIT / Net Sales
Return on Assets = EBIT / Total Assets
Return on Equity = EAIT / Contributed Equity

Liquidity
Current Ratio = Current Assets / Current Liability
Quick Ratio = (Current Assets – Inventory) / Current Liability

Leverage
Debt to Assets Ratio = Total Liability / Total Assets

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 Debt to Equity = Total Liability / Owner’s Equity

Appendix 2

(Taken from Ferrell, OC, Fraedrich, J & Ferrell, L 2009, ‘Business Ethics: Ethical Decision
Making and Cases’, Cengage Learning, viewed on 2 January 2011, Google Books.)

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Appendix 3

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(Taken from Woolworths Limited, 2010, ‘Corporate Responsibility Report 2010’, viewed on 28
December 2010, < http://thomson.mobular.net/thomson/7/3022/4370/>)

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Appendix 4 (Sensory Kitchen)

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(Taken from Woolworths Quality Assurance Report – Update Number 118, July 2010)

Accessed 10 January 2010 from

http://www.wowlink.com.au/cmgt/wcm/connect/e6baad80433d39de8af79aa521a80a40/WW+Q
A+Update+Number+118.pdf?MOD=AJPERES

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Appendix 5

(Taken from Stafford, P 2010, ‘Woolworths to launch Dan Murphy’s online retail site’,
industry, retrieved 5 January 2010, <http://www.smartcompany.com.au/information-
technology/20101213-woolworths-to-launch-dan-murphy-s-online-retail-site.html>)

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