Woolies boss Brad Banducci to put pressure on price

Brad Banducci’s game plan is simple: cut margins to put pressure on price and lift sales and market share.

Woolworths chief executive Brad Banducci. Illustration: Sturt Krygsman.

Eighteen months ago, then Woolworths supermarket boss Brad Banducci was tasked with cutting profit margins to invest more in price to boost the company’s sales performance.

Yesterday that campaign seemed to have begun in earnest with the now six-month-old chief executive unveiling a slashing of margins from 7.3 per cent to 4.47 per cent.

This is the first time since Wesfarmers bought Coles in 2008 that its margins at 4.7 per cent have been higher than Woolies.

Supermarket margins have a central role in the fortunes of the two companies and ex-Woolies boss Michael Luscombe famously rejected pleas from his food boss Greg Foran to slash margins to run Wesfarmers out of town.

Luscombe had other ideas. He wanted the excessive super­market margins to help fund a competing hardware business that was going to strangle Wesfarmers’ Bunnings business.

History shows Greg Foran, now battling to revive Wal-Mart in the US, was correct and Luscombe was wrong on both counts at the cost of $3 billion and more.

For the past seven straight years, Coles has outperformed Woolworths and Luscombe inadvertently opened the door to let Coles revive itself while Woolies was taking excess profits.

It is worth noting that at 4.5 per cent the Woolies margin is well ahead of that earned by British retailers who have cut their own margins to 3 per cent-plus in the face of the onslaught from Aldi and Lidl.

Granted, the Australian market is a different beast with the big two controlling about 75 per cent of the market compared with ­Britain, where there are more competitors.

Banducci plans to maintain the pressure on price and yesterday was able to unveil a 0.3 per cent increase in food sales in the first eight weeks of this quarter.

He said he was “cautiously optimistic” that momentum would be maintained and you can be sure John Durkan at Coles won’t be sitting on his hands.

There were other symbolic moves from Banducci that offered signs of hope, like the fact his management came to the city to deliver the results, rather than demand the market come to them in the Sydney boondocks at Bella Vista. Banducci knows he has to make the effort while in the past the Woolworths arrogance demanded people come to it.

Yesterday’s stockmarket reaction would have you believe the green shoots have turned into tree trunks, with the stock up 3.9 per cent at $25.17. Then again Wesfarmers rebounded to be up 2.4 per cent at $43.66 after its disappointing result earlier in the week.

Over the past three months Woolworths has outperformed the market by 5.5 per cent, but over 12 months it has underperformed by 15.9 per cent before yesterday’s trade.

Perpetual’s Paul Skamvougerous, who has a $1.7bn bet on a turnaround at Woolies, might have smiled a little yesterday.

Banducci is doing his best to simplify the business and has put the liquor division into a separate arm known as Endeavour to make future comparisons easier. Plans to float the 75 per cent-owned ALH pub group appear to have been put on ice, in part because of confusion over just how it may affect the 80 Dan Murphy’s and 470 BWS retail liquor stores on its books. But the separate liquor group may yet be spun out, along with the other parts of the empire deemed portfolio investments.

The $2.4bn in retail sales were included in Endeavour’s $7.6bn sales figures for last year and about $1.6bn was left with ALH as pub and gaming revenues.

Before he took the top job, chairman Gordon Cairns made the call to close the Masters group and this week company secretary Richard Dammery finally put ­effect to the plan, boosted by a $500 million exit from the store inventory. Lowe’s boss Robert ­Niblock is yet to approve the David Di Pilla $750m property play, but as far as Woolies is concerned it’s history.

Banducci argues the biggest difference in his first six months as boss is message consistency. Staff and customers are finally getting to hear the same tune from Banducci’s strategy house. This starts with solid foundations of retailing, with accurate reporting systems, right down to the fact that the dodgy fruit that gets reported to the warehouse is booked against the store room, not the retail floor.

Starting with good execution comes good prices, great service and quality fresh fruit in renewed stores and a customer-first team culture. That’s the game plan. In a $35bn business nothing seems to happen quickly, but there are signs Banducci is getting some traction. Which is a start, but a long way from declaring victory.

Perpetual profits

The way Perpetual’s Geoff Lloyd sees it, it’s a matter of keeping the game simple, focusing on keeping staff happy and through them ­clients, and that’s the best way to keep shareholders happy.

Yesterday everyone was happy with Perpetual’s profit, up 8 per cent at $132m, dividends up 6 per cent and the company’s stock price up 4.1 per cent at $48.83.

While Perpetual attracts most attention for the likes of its $1.7bn bet on Brad Banducci at Woolworths, a growing business is handling native title land investments. It forms part of the profitable philanthropic unit of Per­petual Private, which recorded $34.2m profit on $107.8m in ­revenues.

Perpetual investments made a profit of $118.1m on $227.9m in revenues, while the star was the trust business, which made $34.1m on $48.3m in revenues.

The franchise remains in good shape at a time when the industry has copped a beating.

Amcor delivers

Amcor boss Ron Delia has not missed a beat since taking the reins from former boss and new BHP director Ken MacKenzie, with yesterday’s profit in the words of Macquarie’s John Purtell “a model of consistency”.

The packaging group recorded a 7.5 per cent jump in profits to $US671.1m ($880m) in constant currency terms on a 2 per cent fall in sales to $US9.4bn. Return on funds was up at 21.6 per cent and free cash flow edged up to $US311m.

The company’s engine, flexible packaging, recorded return on funds of 25.1 per cent on sales of $US6.3bn.

The Zurich-based Delia said the global economy was stuck in a low-growth-for-longer cycle, meaning increased focus on costs.

Amcor is in the midst of an internal restructuring and is shutting four plants around the world including Australia, with more to come. Last year, Amcor spent about $US1.2bn with roughly half on about eight acquisitions and the other half on a stock buyback, which helped earnings per share up some 4.3 per cent to 57c.

The company earns one third in sales in emerging markets, which means it still has a gap to close with its client base that earns roughly half its sales outside developed economies.

Delia said the company would work to close that gap.