It’s a rare situation where a major supplier is a better financial performer than the retailer it supplies.
In fact modern business lore tells us that the big retailers in most major western markets (Tesco in the UK, Wal-Mart in the US, Woolies in Australia, Carefour in France) are so tough that suppliers dance to their buying tunes, accepting the retailers’ price and promotional deals and in turn screwing down on their own suppliers.
Coles is generating a lot of fuss now with its decision to change the buying terms for milk and meat.
It’s coping a lot of flack with price cutting campaigns being driven by with supermarkets chief Ian McLeod, an experienced retailer from a far more competitive market in Britain where Tesco is dominant.
He has made life very difficult for Woolies (which is battling to fight back), and for Metcash, which squealed this week as it halved its profit growth forecast, thereby joining Woolies.
Both are still very profitable: Metcash has a wholesaling margin of 4.9c in the dollar, Woolies an earnings before interest and tax to sales margin of around 6.7%. Both are fat and have become slow moving competitors.
Woolies in fact has joined Wal-Mart (a company on which it has modelled itself, along with Tesco of the UK) in the slow-moving lane as they grow too big and start appearing to be too big for their markets.
Wal-Mart has moved off shore and got more sales and profit growth from its international business than it did inside the US where it has now had over a year of falling same store sales.
In Australia Woolies has faced up to that by going into hardware to take on Bunnings, which is owned by Wesfarmers, which also owns Coles Group. That is going to be an expensive move for Woolies and its US partner Lowes; around $1 billion each by the time the joint venture is up and running.
Perhaps the management of Woolies should look to one of its suppliers for a bit of help.
Coca Cola Amatil (CCA) is the one company the two big supermarkets can’t break; its sheer dominance in Australia has given it record profits and sales in the 2010 financial year.
Retailers need its customer-attracting suite of soft drinks and water more than CCA needs the big retailers, so wide and powerful is its distribution and network of vending machines.
Its 2010 results last week tell us just how dominant it is, and why when looking at retail price inflation, its role shouldn’t be discounted.
While it sells in New Zealand, the Pacific, Indonesia, and in food and coffee in Australia, CCA’s most important business is selling Coca Cola and its associated drinks (waters in particular which are immensely profitable) in Australia which is the heart of its business (food, beer, liquor and food stuffs are a small part of profits and sales).
According to its results CCA managed to lift its trading profit in Australia by 7.3% (to $597 million) on a revenue growth of just 1%. Australian sales volumes fell by 1.8% (and 7.5% in Queensland), and yet the company managed to boost profits seven times faster than its sales growth.
That tells us two things: this company was able to boost profit margins in a year when there was price deflation in many parts of retailing, especially in food, and managed to do it despite a drop in sales volumes which would have normally added to costs.
Companies improve margins by squeezing costs (Coke’s single biggest cost is the ‘fee’ it pays the Coca Cola Company in the US for the various syrups that make up the different versions of Coke sold in Australia), or by putting up prices. CCA does both and Woolies and Coles can’t resist.
CCA’s most profitable beverages are its own brand of waters, led by Mt Franklin. There are no ‘syrups’ to buy from the parent, nor other charges. There’s just the bottling and distribution costs to cover. And as we know water is very popular and powerful.
It’s also why CCA can appear to be community-minded by getting involved with campaigns such as breast cancer research and fund raising through ‘pink’ product branding.
Women are big drinkers of water and such campaigns encourage support (while raising money) and more sales.
As a result CCA claims 95% of the local soft drink sector’s profits, meaning that Asahi, which bought local Pepsi bottler Schweppes a year ago and wants to buy the third-biggest bottler P&N, is struggling.
CCA’s overall revenue was up just 1.2% (to $4.49 billion), but the company lifted profit by 7.3%, indicating that its margins were maintained or improved across all businesses, including coffee and food in Ardmona where it’s been a bit of a struggle in recent years with the drought hurting (but drought and dry weather boosts its sales of soft drinks).
Another measure of profitability is return on capital or funds and there CCA had a record year. CCA’s return on invested capital (ROIC) increased from 16.5% to a record 17.8%.
Woolies’ was 16.7% for the six months to December.
It’s rare that a supplier to these big groups has a better return on capital than the retailer.
Certainly Goodman Fielder, which this week reported a flat result and cut its forecast for the year to no growth, lags behind CCA and Woolies.
With commodity prices rising and oil costing more, CCA faces a repeat of 2007 and 2008 when a
