Johannesburg - Retailer Woolworths says it has recently lost market share in its food segment as consumers made a "flight to value" amid accelerating food price inflation, said CEO Simon Susman.
Woolworths has until now made significant inroads into the fiercely competitive South African food retail market, taking market share from established supermarket players Pick n Pay, Shoprite and Spar.
For the year to end-June, Woolworths maintained its hold on 9.2% of the food retail market. From 2006 to 2007, it grew its market share by 8.2%. Overall food sales - which comprise 52% of Woolworths' turnover of R20.1bn - grew by 18.8% to R10.4bn, with food inflation running at 13.1%
"We are now more exposed to the middle market and sales trends have continued to decline. There has been a recent loss in market share but we are now fighting on price," said Susman, speaking at a presentation of the company's full-year results to end-June.
Absa Capital Private Clients retail analyst Christopher Gilmour said the market share was likely to have been taken by Pick n Pay, which in late 2007 rebranded its business and relaunched its fresh and convenience food offering, introducing new product lines.
Woolworths' managing director of retail, Andrew Jennings, said the company had re-examined its pricing strategy, becoming more competitive and focusing efforts on promotions.
Analysts were concerned that Woolworths had rolled out its food store concept too aggressively and that the proliferation of new stores in concentrated areas was resulting in cannibalisation of sales in existing stores.
Woolworths finance director Norman Thomson says an average of 28% of sales are cannibalised when a new store opens, which is lower than Woolworths' projection of 30%. "The remaining 70% is new sales. The strategy has been very successful for us."
Woolworths has opted to open larger format, 1 100m² food stores, in line with its strategy for stores to have "the mind of a supermarket with the soul of a delicatessen", said Susman.
Bad debts shoot up 80%
The company said revenue for the year grew 16.7% to R21.8bn, with operating profit rising 11.6% to R2.1bn. The operating profit margin fell from 9.9% in 2007 to 9.5% due to a rise in bad debts, said Thomson. The second half of the financial year made a bigger contribution to profit due to better control of expenses, he said.
Bad debts shot up 80% to 7.9%, or R451m of the total debtors' book, but remained stable in the second half of the year as Woolworths held back on extending new credit. Fewer purchases are being made on Woolworths cards, with the percentage of sales spent on the cards falling from 32.2% for the year to June 2007 to 27.2% for the same period in 2008.
The sale of 50% of Woolworths' financial services business to Absa has yet to receive all regulatory approvals, but Susman expects it will be cleared on October 1. The expected profit on the disposal will be R397m.
Woolworths' headline earnings per share fell 9.5% to 115.7c. Its share price was 1.3% lower on Thursday morning at 1 150c, placing the company on an earnings multiple of 9.9 times.
A final dividend of 49.5c/share was declared, taking the total dividend for the year to 79c/share, up 4% on 2007.
Woolworths shares have fallen 28% over the year to date; Gilmour says there is a general view that retail shares have bottomed out and that there is "a lot of value" in Woolworths shares at these levels.
Tough times ahead
Thomson said Woolworths expects negative real (after-inflation) growth in like-for-like sales in financial 2009.
"There are signs that bad debts may have peaked, but provisions remain under pressure," he said.
Susman said Woolies' consumers - typically more affluent South Africans in higher earnings and spending categories as measured by living standards measures (LSMs) - "had built up a lot of red" and needed to "work that down". Research by Cadiz Securities showed that spending power in LSMs 7 to 10 had declined by an average of 7.3% in 2008.
He said inflationary pressures are expected to continue, especially in the food business, although changes in the business have better positioned it to face what it terms "recession".
"We don't see things easing up quickly at all," said Susman.
- Fin24.com
* The writer holds shares in Woolworths.