Deutsche backs Woolworths against rivals

Deutsche has backed Woolworths against its rivals, saying the latest loyalty rewards tweaks will boost performance.

Deutsche noted Woolworths share was still being lost to the Wesfarmers-owned Coles, but this may not be the case for much longer. Picture: Adam Yip/ The Australian.

Woolworths’ recovery is about to gather real momentum, Deutsche Bank analysts have declared, as they upgraded their view on the retailer’s stock while lowering ratings on supermarket sector rivals Wesfarmers and Metcash.

The commentary comes after a week in which Woolworths was mired in controversy surrounding its heavily spruiked, but uncertain fruit deal with SPC Ardmona, which eventually led the retailer to confirm a three-year deal with the Victorian cannery.

Ahead of the swift resolution of that issue, Deutsche had noted signs of improved perceptions of the supermarket chain.

The investment bank regularly conducts surveys of Australian shoppers, with its latest research of over 2000 consumers finding Woolworths’ large price and store investments starting to pay dividends.

“Woolworths’ shoppers report improvements in price and execution and are buying more groceries,” analysts Michael Simotas and Daniel Wan wrote in a note.

“While cross shoppers do not reflect this, we think once they too take notice, Woolworths’ recovery will begin in earnest.”

Deutsche noted share was still being lost to the Wesfarmers-owned Coles, but this may not be the case for much longer.

It comes after Woolworths closed the gap on Coles through the September quarter in terms of comparable sales growth.

Woolworths showed an increase of 0.7 per cent, while its main rival logged a 1.8 per cent rise.

The 29th straight quarter of outperformance did not conceal a narrowing of the gap that has seen the differential move from six percentage points to 1.1 in just two quarters.

Mr Simotas and Mr Wan noted Woolworths’ mistake in a change to its loyalty program last year could be quickly erased by the latest improvements to the scheme, with a headwind fast becoming a tailwind.

“When analysing the data from our survey, by far and away the standout theme for us was just how important loyalty rewards programs are to customers and the extent to which Woolworths disenfranchised its customers by changing its programme to exclude Qantas Frequent Flyer points,” they said.

“The program has now been simplified and provides the option of cash discounts or Frequent Flyer points. Industry feedback and the recent Woolworths sales results suggest this revision is resonating well with consumers.”

The realisations of more positive consumer perceptions forced Deutsche Bank to upgrade its rating on Woolworths to ‘buy’, with its price target jumping 12.5 per cent to $27.

“The combination of our survey data, recent sales results and our supplier channel checks provide us with comfort that Woolworths is heading in the right direction and will continue to improve its sales trajectory,” Deutsche concluded.

In contrast, Wesfarmers and Metcash were both trimmed to ‘sell’ ratings, with Metcash’s target slashed 17.5 per cent to $1.65 and Wesfarmers’ left at $38.

As a result, Woolworths clearly outperformed its rivals through a challenging day for the broader market, with stocks off 0.5 per cent overall.

At 12.10pm (AEDT), Woolworths had dipped 0.1 per cent to $23.23, while Wesfarmers slid 1.8 per cent to $40.42 and Metcash weakened 1.1 per cent to $1.835.

The downgrade on Wesfarmers was entirely driven by the rising confidence in Woolworths, with the market not growing fast enough for Woolworths to rebound at the same time as Coles and Metcash hold momentum and Aldi and Costco expand.

“We expect Coles’ sales growth to come under pressure from a Woolworths recovery, particularly in the context of a market constrained by food deflation,” Mr Simotas and Mr Wan said.

“This could break Coles’ efficiency-driven customer value model which puts margins at risk in our view.”

For Metcash specifically, its steady showing of late has also been pinned on Woolworths’ uninspiring performance.

“We believe the recent period of sales stabilisation has been enabled by Woolworths’ market share loss,” the Deutsche note read.

“Accordingly, as Woolworths’ sales trajectory improves, we expect independent supermarkets and Metcash to come under increasing pressure.”