Supermarkets

The SST report:

Woolworths New Zealand’s underlying profit margins have increased much faster than the cost of food for the past three years.

Australian-owned Woolworths, which operates Countdown supermarkets locally, said the results were due to improved efficiency, but the Green Party said an investigation into supermarket pricing is overdue and the industry is in need of tighter regulation.

What a bizarre comparison. It is a good thing that profits have increased faster than the cost of food.

Are the Greens saying that if profits had stayed the same, and food prices had increased more (hence decreasing the gap), that would be good for NZers?

Are they saying that if profits had stayed the same, and food prices had dropped (hence increasing the gap), that would be bad for NZers?

The comparison is absolutely nonsensical. What the Greens are really saying is that just don’t like companies making profits.

Calculations by the Sunday Star-Times show that once unusual costs and income are stripped out of Woolworths NZ’s accounts – items such as losses on the company’s investment in The Warehouse and the impact of the Christchurch earthquakes – the business posted year-on-year increases in earnings before interest and tax of 14.3%, 19.3% and 9.6% over the period.

Recorded food inflation over the same time-frame was 7%, -0.7% and 7.5%, according to Statistics New Zealand.

Again, so what? Take the middle year – EBIT increased 19.3% and food prices dropped by 0.7%. Great.

If you want to make the case the supermarkets are making excessive profits, then you need to be looking at profits compared to capital and dividends compared to share price etc.

The supermarket operator’s latest financial statements show that it earned gross revenue of $22.33 for each $100 of sales shoppers put through its tills in the year to the end of June 2011. That was up from $21.95 in 2010 and $21.61 the year before.

That’s higher than UK chains Tesco and Sainsburys, which earned gross revenue of 8.30 and 5.50 respectively for every 100 that went through their tills.

Gross margins mean little, especially when comparing just four companies in two countries. What about economy of scale, what about underlying costs?

Green MP Mojo Mathers said the country needs to act on food prices, and promote “genuine” competition.

“We are overdue for an investigation into supermarket pricing practices,” she told the Sunday Star-Times. “We need a supermarket code of conduct and a supermarket ombudsman set up to enforce the code.”

Such measures, now established in the UK and being considered in Australia, will help create a level playing field for consumers and producers, Mathers said.

I fail to understand what is needed beyond the current provisions of the Commerce Act and Fair Trading Act. I suspect the Green call for an Ombudsman is so the Greens can achieve their long held desire to ban foods they don’t approve of, such as large easter eggs which Sue Kedgley used to campaign against.

However, Woolworths said its margin and earnings improvements are the result of investment in efficient systems that have delivered food price increases below the rate of inflation.

“We think there is a really great business story in our results over the past three years, which, in the main, is due to the significant investment Woolworths has been making in Progressive Enterprises and our brand Countdown,” said Dave Chambers, the managing director of Woolworths’ subsidiary Progressive Enterprises.

“This investment in new systems, new warehouses, and new and refurbished stores is now well in excess of $1 billion and has meant our Countdown stores are more appealing to customers, as evidenced by our sales growing ahead of the market,” he said.

As a result, the company has reduced wastage, stock losses and trimmed stock in the supply chain.

Sounds good to me.