Wesfarmers About to Share in Woolworths’ Woes

Wesfarmers [ASX:WES] have been performing great this year. At least that was until their disappointing 1H FY16 profits release. Before their results were announced WES shares were up 5.4% for the year. Since then, however, shares are down 10.9% from their high. It was their resource business that hurt them the most.

But they’re definitely doing better than their bitter rivals Woolworths [ASX:WOW]. It’s not that WOW’s shares have dropped more than WES; both are down around 6% for the year. However, WOW’s financial decision is much direr.

WOW lost close to $1 billion, according to the 1H results released just days ago. However, share prices rallied on the news of a strategic turnaround and CEO change. There’s no doubt that the retail industry, and in particular the supermarket sector, is highly competitive.

Not only are margins tight, but both retailing giants have to compete with each other as well as low priced German supermarket, Aldi. Foodland CEO, Con Sciacca, believes other supermarket chains have an advantage over the larger national chains.

He coined the term ‘blast zone’ which is the catchment area within a 10 minute drive of any new Aldi store. Foodland believes they have an advantage over WOW and WES in preventing new Aldi store from opening.

For example, Foodland can cut prices and offer hard special promotions in specific stores. It’s something that the big two retailers just can’t do. Yet this isn’t even the biggest problem for WES and WOW. It is the online retailers that have gotten people nervous.

WES’ managing director, Richard Goyder, says Amazon will ‘eat our breakfasts, lunches and dinners’. Goyder believes the Australian retail industry needs to become more innovative. Tech companies, like Amazon, are pushing into Australia. This is more worrying to Goyder than domestic competition.

We’ve got big competition online and through a physical presence … we are in a disruptive, disrupted world’, Goyder said. Excessive regulation is what’s hindering Australia retailers. While WES and WOW heavily rely on customers walking in the doors, online retailers are open 24/7 all year round.

An example of strict regulation is Sunday trading hours. In Perth some larger retailers can only trade for six hours of the day. Yet Sunday has now become the businesses day of the week in many cities.

Of course, WES already has an online store. It reached online sales of $968 million in 1H FY16. Obviously, in times were people almost live on the internet, more retailers need to get with the program. And Goyder understands this. He believes all retailers need to have an online and social media presence.

Yet he is urging the government to help encourage Australian companies to become globally competitive.

What we need is sound economic management that encourages investment and innovation so businesses can employ more people, take calculated risks and create value for all stakeholders’, Goyder said.

The Federal government’s innovation package, it seems, was not enough for Goyder. Whether more help is given to Aussie retailers remains unknown. But the invasion of online global leaders could push Australia’s two biggest retailers to try new means of creating sales.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Aussie retailer might be doing it tough now, but they could be close to the bottom. Woolworths is already down 36.69% since March last year. A turnaround might not too far off. Woolworths is just one blue chip beaten down by the market. But there are many more out there.

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