Supermarket Industry In Australia: Analysis Of Wesfarmer And Woolworths

The Dominance of Wesfarmer and Woolworths in the Australian Supermarket Industry

Question:

Analyse and interpret the annual reports and financial statements and to do a comparative analysis using ratio and trend analysis of prescribed companies and write an executive report in order to make an investment decision.
 

Considering the past few decades, the segment of Supermarket in Australia has undergone a sea change. Is functioned, as well as tamed by the two major that is the Wesfarmer and Woolworths. Going by the presence and coverage, both the giants accounts for more than 70% of the market and hence, can be aptly termed as duopolistic. The business continues to gather a strong response as the necessity items are always needed by the public. The food market is best described as a component that is essential part for an economy and plays a predominant role in the process of development. This leads to all around growth of the economy. The government should evaluate this sector to keep the economy regulated (Choi & Meek, 2011).

The presence of Woolworths Limited can be traced to 1924 when the initial supermarket store was opened and in the current scenario, it has appeared to be the largest in Australia and the second largest when it comes to New Zealand. The expansion can be seen in segments like retail goods, furniture retailing, covering of floors, retailing of footwear, hotel resorts, departmental stores, etc (Woolworths Limited, 2015).

On the other hand, Wesfarmer is a supermarket retailer that has its presence over 770 supermarkets in entire Australia. It has a rich history in Australia and its presence can be traced to 1914. It is dedicated to provide the families of Australia with the products they require for an affordable price. Under the ownership of Wesfarmers, a new team lead to a changeover that restored the glory and provided a strong boost that helped the brand to revive (Wesfarmers Ltd, 2015).   

Wesfarmers, as well as Woolworths are mainly dominated by the suppliers and have eliminated the small players in the market. The two companies has seen a substantial growth  in the past half century. It is to be noted that the combined power has accumulated 70% of the profitability and the factor of profitability has enhanced more than 40% and 24%. Going by the current trend, it can be said that the companies will continue to ride on huge profits (Woolworths Limited, 2015).

Gathering a strong and major chunk of the market has provided them with the skills to ascertain prices, establish barriers and other exceptional level in the entire industry. Hence, the other players of small stature are under constant pressure in terms of pricing, output and strategies of the market. The reason that the super market of Australia is dominated by Wesfarmers and Woolworths is that they are the major players and have captured a major chunk (Wesfarmers, 2015).

An initial analysis of trends in the items

*Quick assets= Current Assets- Inventory-Prepaid Expenses

From the above table we can see the movement in the figure and ratio of Wesfarmers Limited for the year 2015 and 2014.

History and Growth of Woolworths and Wesfarmer

We see that the revenue of the company has gone up from $60,181million to $62,447million from 2014 to 2015. The major source of increase of revenue has come from sale of goods which is due to increase in operating activities. Also we can see that last year’s net profit was $ 2689 million and this year’s net profit is $ 2440 million, even though revenue has increased net profit has dropped, this is due to the reason that in the year 2014 company earned a profit of $1179 million which was earned from discontinued operations. Overall we see an increase in net profits of the company from continuing operations (Horngreen, 2013).

Moving to the balance sheet we find that there are no major variances. Mostly there has been a negative variance in the currents assets of the company by $238 million, which is mainly due to decrease in cash and deposit balances with bank. Also we can witness an increase of $893 million which is due to increase in intangible assets machineries and goodwill of the company. The total liabilities of the company have also increased due to increase in operations of the company (Brealey et. al, 2011).

Profitability Ratios – from the above comparison it is indicated that the

*Quick assets= Current Assets- Inventory-Prepaid Expenses

From the figure of Woolsworth Limited that there has been a very little decline in sales of the company, which is alright since, the economies do not work in a same way every year. The net income of the company has also showed a similar trend.  Similar is the state of balance sheet of the company. The current assets of the company have shown a little movement of $554.8 million, the major reason of which is increase in cash balances of the company (Northington, 2011). Also the non-current assets of the company have increased from $17030.4million to $17675.9million due to increase in investing activities of the company. There has been a huge movement of fund from non-current liabilities to current liabilities, which is due to increased short term borrowings of the company and decreased long term borrowings.

Profitability Ratio

Return on Assets ratio – The return on total assets for Wesfarmers declined in the year 2015 as compared to 2014 indicating the assets were not used in an optimum manner  (Albrecht et. al, 2011). It has dropped in the year 2015. On the other hand the same has been witnessed for Woolsworth where the return on total assets has dropped indicating that the assets was not utilized properly. However, the drop in Wesfarmers is less.

Net profit margin – The net profit margin of both the companies dropped marginally and can be attributed to the difference in the sales factor. The external factors were mainly responsible for it and competition from others.

From the computation it has observed that the current as well as acid test ratio has fallen for Wesfarmers and in both the division it fails to be near the ideal ratio indicating that the company will face difficulty in meeting the obligations.

The same has been noticed for Woolsworth where the current and the liquid ratio has dropped. Though the drop in current ratio is marginal but it is indicated that the company will face problems in meeting the obligations (Williams, 2012).

From the comparison it is seen hat the debt equity of Wesfarmers has increased marginally but is less than .50 indicating that the company utilizes a balance between equity and debt. The equity ratio of the company is properly balanced and hence, is ideal for the company.

However, in the case of Woolsworth, the debt equity is more than .50 and equity ratio is low indicating higher proportion of debt for the company (Parrino et. al, 2012).

Earnings per share are the allocation of company’s profit to each of its outstanding share. From the above we clearly see that, earnings per share of Wesfarmers Ltd are 216 cents whereas that of Woolsworth limited is 174 cents. The dividend payout ratio of Wesfarmers is approximately 51% and that of Woolsworth limited is 42%.  

Conclusion

From the whole analysis we see that the overall performance of Wesfarmers is better than Woolsworth is most of the cases. But we should keep in mind that even if companies with high payout ratio sometimes do not perform well. The companies should aim at maximizing the shareholders wealth. Thus, total market capitalisation of the company is a major part which shows the market performance of a company. Therefore, going by the overall analysis it can be said that selection of Wesfarmers is a good bet as the company has good capital structure and market share. The liquidity problem can be settled with ease. 

References

Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.

Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Choi, R.D. and Meek, G.K 2011, International accounting,  Pearson .

Davies, T. and Crawford, I 2012, Financial accounting, Harlow, England: Pearson.

Horngren, C 2013, Financial accounting,  Frenchs Forest, N.S.W: Pearson Australia Group.

Northington, S 2011, Finance, New York, NY: Ferguson’s.

Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Williams, J 2012,  Financial accounting, New York: McGraw-Hill/Irwin.

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