Sector Report

Australian consumer – Margin tug-o-war

by Richard Barwick / Jun 11, 2019


Supermarket margins face an ongoing tussle
We took a detailed look at 52 supermarket businesses globally, which worryingly shows that profitability is under pressure. In fact, our analysis shows that 64% have weaker margins today than five years ago – and the story in Australia is no different. While recognising many factors contribute to margin outcomes, most people assume sales to be the most important.

Woolworths and Coles
In an environment where Woolworths and Coles are achieving around 4% revenue growth and costs are only increasing at around 3%, some view Ebit margin expansion as inevitable. However, our assessment of the last five years’ operating outcomes shows only a weak correlation. The reality is that sales growth is a driver of Ebit growth (a 94% correlation) but not of Ebit margin expansion (an 8% correlation).

Sales growth is not a driver of Ebit margin expansion
We believe the jump in internet shopping is increasingly a contributor to weaker margins. Walmart has referenced it as being a drag on profitability, while supermarket retailing guru Archie Norman has clearly identified this to be the case. Looking ahead, we believe the inevitable rise of ecommerce will crimp Australian operators’ margins and profitability.

Limits to new players
Quite aside from the negative Ebit margin drag from their rising online penetration, we see it as rational for both Woolworths and Coles to keep a lid on margins. New entrants – real and threatened – will encourage investment in price and service to limit the traction of new players.