The Facts About
Grocery Retailing
at Woolworths
Autumn 2008
At Woolworths, we’re committed to providing
our customers with the best shopping
experience possible. That’s why we offer the
finest quality fresh foods at the best value.
Woolworths opened its doors 80 years ago.
We have operated fresh food stores for 60
of those years after refrigeration technology
revolutionised transport and storage.
We take our lead from our customers –
we continually change to meet what the
consumer wants. Woolworths has changed
a lot since we opened our first store in 1924
in Pitt Street, Sydney. However, there is
something that hasn’t changed: we still
work hard to make our customers happy.
Contents
1 Did You Know?
2 How Competitive is Australian Food Retailing?
3 How People Choose Where to Shop
4 How People Shop for Groceries
5 Where do People Shop for Fruit & Vegetables?
6 How we Buy Fresh Food
7 Our Share of Total Domestic Production
8 Where Our Suppliers Come From
10 How We Manage Quality
11 Where Your Beef Comes From
12 How Much Profit we Make
14 How Global Factors Are Affecting Food Prices
16 The Facts About Food Inflation
Did You Know?
3,176
suppliers large and small
work with Woolworths.
107,000 100 %
employees in Australian
supermarkets.
95 %
of our fresh fruit
and vegetables are
grown and farmed
in Australia.
of our fresh meat is sourced
from Australian producers.
90 %
of Woolworths’
Homebrand
range is sourced
in Australia.
+80 %
of our fresh food
suppliers have been
our partners for
more than 10 years.
1
How Competitive is Australian Food Retailing?
Woolworths is a strong supporter of competition. Competition
helps to keep prices low for customers and challenges retailers
to deliver the best possible service. The Australian food retail
sector is highly competitive which is great news for customers.
With a variety of new market entrants plus a growing
independent and specialist food sector, there has never been
more choice about where to shop.
Woolworths 31.0%
All Other Retailers
Selling Food1 24.0%
Mass Merchants2 1.5%
Franklins 1.0%
Aldi 2.5%
Metcash/IGA3 17.0%
Coles/Bi-Lo 23.0%
Notes
1. E xcludes take-aways outlets and cafes/restaurants but includes fresh food specialties and fresh food markets.
2. Mass merchants are department stores and discount department stores.
3. Includes smaller foodstores and independent stores supplied by Metcash as well as larger supermarkets (IGA and Foodworks).
Source: Pitney Bowes MapInfo based on company reports and ABS sources including Household Expenditure, Australia National Accounts
and Australia Retail Trade Services
2
How People Choose Where to Shop
Customers shop at different stores at different times for
different reasons. Price is only one of many factors that
influence our shopping decisions. Each year a major
research company asks thousands of shoppers to name the
factors that are important to them. Here’s how they rate:
1
2
3
4
5
6
7
8
9
10
High standards of food safety
Store close to home
Clean and tidy store
Convenient trading hours
Good value
Hygienically prepared food
Easy parking
Low prices
Good quality fresh fruit and vegetables
Good range of fruit and vegetables
Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
3
How People Shop for Groceries
Very few shoppers are loyal to just one store,
instead buying from different outlets depending
on convenience or preference.
Did you know?
The average customer
shops at food retail outlets
2.51 times a week, with
Woolworths customers
spending about $35
a visit on a basket
of 10 items.2
Notes
1. Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
2. Source: Woolworths Limited. Excluding GST.
4
Where do People Shop for Fruit & Vegetables?
We know that most Woolworths shoppers also shop
at other stores. Woolworths shoppers were asked
where they bought fresh fruit and vegetables during
the week. Here is where they spent their money:
Other Supermarkets 6%
Other Stores 6%
Independent Supermarkets 6%
Coles 16%
71% of Woolworths’
customers weekly
fruit and vegetable
spend is spent outside
of Woolworths.
Fruit Shops / Markets 37%
Woolworths 29%
29% of Woolworths’
customers weekly
fruit and vegetable
spend is spent at
Woolworths.
Source: Roy Morgan Supermarket Monitor (Jan – Dec 2007).
5
How we Buy Fresh Food
Fresh food is our business and we’ve made it our
mission to partner with the very best farmers and
growers in Australia. We have hundreds of direct
trading relationships with fruit, vegetable and
meat suppliers.
Our preference is to have direct, long
term trading relationships. The benefits
of working this way are better quality
management, improved planning and
forecasting and greater consistency and
sustainability of supply.
We are very proud of the relationships
that we have with our suppliers and
many of them have been able to grow
their business thanks to the surety of a
long term partnership with Woolworths.
More than 80% of suppliers have been
partners for more than 10 years.
Sometimes we do buy small
quantities of produce in the wholesale
markets so we can pass on special offers
to our customers. By working this way,
we can find great specials for customers
and help suppliers to clear their stock.
Different Prices,
Different Places
– Why?
No national retailer in Australia has a
truly national pricing system. There will
always be slight regional variations,
particularly for locally sourced fresh
food, including milk and bakery
products. However, Woolworths does
ensure that the majority of private
label products are the same price,
regardless of where you shop – that’s
well over a thousand everyday items.
For branded products, we aim to
ensure that prices are the same at
stores within each state.
6
Our Share of Total Domestic Production
Australian farmers produce food for export to other
countries, as well as for Australian retailers, wholesalers,
manufacturers and food service businesses. When you
take all this into account, Woolworths’ share of total
production is relatively small.
12% of Australia’s fruit and veg is sold fresh at Woolworths
6% of Australia’s beef is sold fresh at Woolworths
15% of Australia’s lamb is sold fresh at Woolworths
Sources: Meat & Livestock Australia; ABS; Pitney Bowes MapInfo; Department of Agriculture, Fisheries & Forestry Foodmap 2007.
7
Where Our Suppliers Come From
Did you know that 95% of our fresh fruit and
vegetables are grown in Australia? Our fresh fruit,
vegetables and meat come from hundreds
of suppliers across the country.
Fresh fruit and vegetables
Darwin
Katherine
Kununurra
Mareeba
Atherton
Innisfail
Tully
Bowen
Ti Tree
Bundaberg
Mundubbera
Carnarvon
Sunshine Coast
Chinchilla
Lockyer Valley
St George
Bourke
Dorrigo
Perth
Donnybrook
Manjimup
Pemberton
Renmark
Sunraysia
Swan Hill
Bendigo
Werribee
Orange
Sydney
Hillston
Griffith
Young
Batlow
Cobram
Shepparton
Yarra Valley
Gembrook
Thorpdale
Fruit Growing Regions
Vegetable Growing Regions
Hard Produce Growing Regions
(e.g. nuts, pumpkins, watermelons etc.)
Maps not to scale.
8
Coffs Harbour
Menindee
Virginia
Adelaide Hills
Riverland
Gatton
Warwick
Stanthorpe
Launceston
Huon Valley
How We Work with Suppliers
Right across our business, we abide by voluntary
codes of conduct in relation to supplier trading
relationships. We were an inaugural member
of the Produce and Grocery Industry Code of
Conduct which is a voluntary code aimed at
promoting fair trading practices and building
better business relationships.
The Code also provides access to a simple and
accessible dispute resolution procedure for any
individuals or groups in the event of a dispute.
Meat
Lamb Regions
Beef Regions
Pork Regions
Distribution Centres
Maps not to scale.
9
How We Manage Quality
Quality is extremely important to Woolworths.
Our aim is to provide the best possible quality
across all of our stores. If customers experience
inconsistent quality levels when they eat our
food, then they are less likely to buy it again.
Apples and Apples
When it comes to produce,
it’s important to compare
apples with apples. No
two batches of apples are
the same, which is why
quality specifications are so
important when you make
comparisons. Fruit and
vegetables are graded by
growers according to size,
appearance, colour, variety
and a whole range of other
factors that help determine
their value. So if an apple at
one retail outlet costs 40c
and an apple at another retail
outlet costs 50c, there’s
every chance that there’s
a quality difference too.
10
When we buy fresh food, particularly produce
and meat, we work to strict quality specifications.
These specifications are developed with our
suppliers and are regularly reviewed. Essentially,
they are based on our customers’ expectations
of quality. Of course Mother Nature occasionally
intervenes with climatic conditions affecting the
quality, size or shape of certain crops.
Our quality specifications for fruit and
vegetables are publicly available at
www.woolworths.com.au/vendors.
The Woolworths Quality Assurance program
is a rigorous quality standard system that applies
to all fresh food and private label suppliers.
The system examines product specifications,
manufacturing processes, cleaning procedures,
product labelling and other relevant food safety
matters. All Woolworths fresh food suppliers
are accredited and regular external audits
are conducted.
Where Your Beef Comes From
There are many steps involved in putting beef
on the shelf and naturally, costs are incurred at
every point in the process. Take beef for example.
Nearly two thirds of the cost of beef is spent
before it reaches our stores.
A customer
purchases
a cut of meat
for $10
Animal is purchased from
feedlots or direct from farm
Animal is slaughtered
and boned
Waste*
$3.80
$0.90
$1.53
*Waste occurs at several
points in the supply chain
when we have to discard
non-saleable products
Delivery to processing plant, storage and aging, delivery to stores
$0.15
Our margin on
beef is around
15% or $1.50
on a $10.00 cut.
In-store butchers
prepare the cuts
and package them
Waste*
Cut goes
on sale for
$1.40
$0.72
$10.00
This is before we account
for the costs associated
with running a supermarket
such as general store wages,
rent, lighting, tax and marketing
among other things.
11
How Much Profit we Make
As a listed company, Woolworths Limited releases
fully audited and publicly available accounts. Our
sales, profit and gross margin are calculated every six
months and can be viewed in our Annual and Interim
Reports which are available on our website.
As a group, Woolworths Limited makes about five cents
in the dollar before we then pay interest and tax. Our
Net Operating Profit is about three cents in the dollar.
Notes
1. Includes paying staff, running stores, energy, rent, IT etc.
2. Earnings Before Interest and Tax.
Source: Woolworths Limited Annual Reports (2003–2007).
Our supermarkets are
high volume, low margin
businesses. We make
our profits by selling large
amounts of grocery items
at low prices.
Cost of goods sold 76.59%
Cost of doing business1 18.25%
What Woolworths gets before
we pay interest and tax2 5.16%
12
How Can You
Increase Your
Profits AND
Absorb Cost?
Woolworths
Gross Margin
2003–2007
Gross Margin refers to
how much Woolworths
earns taking into
consideration the
cost of goods sold.
This is expressed as a
percentage of revenue.
Whilst Woolworths does
not apply a standard
margin to every product
sold, there are several
factors that can influence
the average figure that
have nothing to do with
prices or costs.
Woolworths’ profit has continued to grow
in recent years, and many people mistakenly
assume that we must either be raising prices
at the checkout or reducing the amount
we pay our suppliers.
We are able to increase profit in the face
of rising food prices because we have become
even more efficient. When you’re in the business
of selling high volumes of product at very low
margins, being efficient is important. Lots of
tiny changes can add up to significant gains.
Since 1999, Woolworths has thoroughly
revolutionised its supply chain, including stock
and transport management systems. This has
saved a massive $7.3 billion. A large proportion
of these savings is then ploughed back into
the business in three ways – lowering prices,
absorbing cost increases and improving stores.
2003
24.39%
2004
24.11%
2005
23.30%
2006
23.01%
2007
1
Reducing waste
(or shrinkage as we call it)
When we have to throw
away product that
we’ve already paid for,
it reduces our margin.
This can happen for a
number of reasons such
as theft, mishandling
and refrigeration issues.
By developing better
handling practices,
storage practices, security
precautions and quality
assurance, we can reduce
the amount of stock that
we lose.
23.41%
2
3
When we engage in major
promotions, such as our
recent Rollback price
reduction program, sales
of those products are
boosted. When the mix
of products that we sell
changes, it can cause the
gross margin to change.
Own brand labels such
as Homebrand and Select
are more profitable for
supermarkets because
they don’t carry the same
costs associated with
marketing as branded
products. In the last two
years Woolworths has
increased the volume
of private label products
sold, which increases
the average gross margin
across the business.
Promotional campaigns
Success of private label
4
Improvements in
buying practices
With our direct buying
practice we can
consistently source
the best products.
We get improved quality
and efficiency, plus we
can pass on lower prices.
This hard work means our
stores are more profitable.
Source: Woolworths Limited Annual Reports (2003–2007).
13
How Global Factors Are Affecting Food Prices
Higher fuel costs? Increased rent? Paying more for
insurance, energy, health and transport? The rising
cost of living affects businesses and individuals in a
similar way. These higher prices are also occurring
in countries right around the world, mainly because
world prices of key commodities like grain, oil and
metals have increased significantly.
14
This affects food prices in Australia because
we operate in a global market. Australian food
producers export to other countries and our
farmers and manufacturers rely on imported
commodities like grain not only to make a vast
range of food like bread, biscuits and cakes but
also to feed cattle and poultry. So while you
may not think that Australian food prices have
anything to do with food prices in Mexico or
Italy, they are actually intrinsically connected.
In fact, a United Nations report released in
February 2008 said that global food prices
had increased by 40% in a year and in many
developing countries, food is becoming scarcer.
Drought
Weather
Grain
Australia has experienced the
worst drought in one hundred years.
With over 70% of Australia currently
drought declared, the agricultural
sector is still feeling the pinch.
This leads to failed crops and a
reduction of supply.
Other major weather-related events
can also have a big impact on prices.
Fruit prices rose 64% in the year to
June 2006, mainly due to a 330%
increase in banana prices following
Cyclone Larry, which devastated
crops in far north Queensland.
Source: Bureau of Rural Sciences.
Source: Australian Bureau
of Statistics / Woolworths.
There is a global shortage of grain
and its price has increased over
the past few years. One reason for
the shortage is that many farmers
in North America’s wheatbelt are
diverting grain from food production
to biofuel production. Grain is not
only the main ingredient in staple
foods such as bread, pasta and
cereals, it is also the main source
of animal feed.
Source: ABARE, Australian
Commodities, March 2008.
Transport
Export Markets
Metals
High world oil prices affect our
transport costs in Australia. As
recorded by the CPI, the cost
of automotive fuel has risen by
more than 60% over the decade,
and by more than 40% over the
last five years. For such a large,
geographically diverse country,
road transport is the only way to
move food to remote areas and
we are heavily reliant on freight
and therefore fuel.
Prices for Australian farm sector
products are strongly integrated
with global commodity price
movements as it is estimated that
around two-thirds of Australian
farm output is exported each year.
The world price of tin has increased
significantly in recent times and
has reached a 19 year high. Tin is
an essential packaging commodity
for many food items.
Source: Department of Agriculture,
Fisheries and Forestry (2005);
Australian Agriculture and Food
Sector Stocktake.
Source: London Metal Exchange.
Source: Australian Bureau
of Statistics.
What This Means at the Checkout
These factors impact on prices in different
ways. Most major retailers work on long term
contracts with suppliers so any cost changes
midway through a contract must be negotiated.
If we are asked to pay a higher price the supplier
must justify it. In the last few months, more and
more suppliers have presented well documented
evidence to support their requests for cost increases
– many of which have been substantial.
Of course, just because the retailer pays more,
it doesn’t automatically mean that the consumer
pays the same increase at the checkout.
What usually happens is that some of the cost
increases will flow through to the customer over
time. Woolworths has invested tens of millions
of dollars in order to absorb rising costs.
15
The Facts About Food Inflation
Each month, Woolworths calculates its own inflation
rate on a whole supermarket-sized basket of goods.
This measures the degree to which our customers’
shopping basket has increased in price, taking into
account the changing mix of goods our customers
buy. We provide these figures to the Reserve Bank
of Australia.
Inflation – When you compare Woolworths
inflation rate on food items to the Consumer
Price Index for food, you can see that our figures
track well below the CPI rate. The reason for
this marked difference is that Woolworths
Food Index is expenditure based, reflecting
what customers actually buy in our stores at
our prices. The CPI measures a fixed basket
of goods over time
Index value
130
125
Australian Food CPI
120
115
Woolworths Food Index
110
105
100
2003
2004
2005
2006
2007
Above: Mapping the Woolworths Food Index against the ABS Australian Food CPI shows that the Woolworths
price trend, while increasing, is significantly lower than the ABS Australian Food CPI and much less volatile.
Source: Australian Bureau of Statistics Data / Concept Economics.
16
Many other aspects of the CPI have increased in
recent years, with several sectors experiencing
increases that far outstrip price increases for food.
The costs of education and health are increasing
at a faster rate than food.
Index value
300
Education
250
Alcohol and tobacco
Health
200
Food
Transportation
All groups
150
Housing
Recreation
Household contents and services
Communication
Clothing and footwear
100
2003
2004
2005
Source: Australian Bureau of Statistics Data / Concept Economics.
2006
2007
precinct.com.au
We hope you’ve found this guide useful in gaining
a better understanding of the complex and
challenging issues involved in grocery retailing in
Australia. As a major food retailer in this country,
Woolworths realises that it has a responsibility to
inform its customers and the broader community of
what’s happening to their weekly shopping spend.
If you would like any more information,
please visit our website:
www.woolworthslimited.com.au
or write to us at:
Woolworths Supermarkets
PO Box 8000
Baulkham Hills NSW 2153
or email us at:
[email protected]
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