Woolworths Supermarket Business Analysis - Case Study Example

Woolworths Supermarket Business Analysis Name Course Instructor Date Basic information about the company Woolworths Supermarket is an Australian company founded in Sydney in 1924. As a retailer company, Woolworths Supermarket strives to provide convenient shopping experience as well as offer value and range of quality products to customers. The company’s primary activities are in supermarket and retail outlets. Over the years, the company has expanded to offer food, petrol, liquor, home improvement, general merchandise, and consumer electronics among other products. Woolworths Supermarket owns some of the most recognized and trusted brands , including Liquor Group, Thomas Dux, and ALH Group among others. It is a listed company on the Australian Securities Exchange under the code WOW. The company employs about 198,000 people in 3,000 locations in Australia (Woolsworth 2016). Woolworths Supermarket’s headquarters are in Bella Vista, New South Wales. Since 2011, the company’s revenues have been increasing consistently over the years. In 2011, company total revenues totaled to 54,280 million, while in the 2015 financial year, the company’s revenues totaled to $60,868. Despite this, the company’s net profits have not improved significantly. Growth in profits has been painfully slow at 0.01%. Earnings per share for Woolworths Supermarket were increasing significantly until 2015 when the company recorded a sharp decline in earnings per share. This decline resulted from a reduction in the share price of Woolworths Supermarket. An economic outlook for Woolworths Supermarket suggests that since the global financial crisis in 2009, the impacts of crisis rocked the retail industry causing a reduction in consumer confidence and domestic demand. Financial indicators such as financial leverage show a declining financial average since 2006 onwards. In 2006, the company’s financial leverage ratio was 3.31 while in 2015; the financial leverage ratio was 2.34. Similarly, return on invested capital continues to decline and is currently at 20.35 as at June 30, 2015. Year over year, Woolworths Supermarket revenue growth has been -0.14, while on a 3-year average, the growth is 3.16 as at June 30, 2015. Operating income for the company as at June 30, 2015 was -13.90. The growth in the previous financial year was at 5.54. Cash and short-term investments have doubled since 2006. According to the company’s balance sheet, there is a significant growth in cash and short-term investment, which stands at 6.1 as at June 30, 2015. The company has been consistent with the current ratio ranging between 0.76 and 0.95. This is indicative that the company is in a good financial health since it is liquid. Quick ratio of the company ranges between 0.23 and 0.21 indicative of the company’s good ability to meet its short-term financial obligations. Description of the business and analysis of its strategic position in the industry Woolworths Supermarket seeks to deliver customers right shopping experience every time. This is integrated in the company’s vision statement. The company’s mission statement reads, “We are passionate committed retailers, understand and lead our customers through excellence and deep knowledge of our products and services…” As such, the key priority of the company is to build a multi-option retailing platform for which customers can shop at low prices without compromising quality of products and services. Woolworths Supermarket ranks as the largest online retailer in Australia and New Zealand. In order to achieve its mission, Woolworths Supermarket has four strategic priorities: a. Extend leadership within food and liquor industry Woolworths has been trying to reestablish marketing campaigns as a means to boost business growth. The marketing campaigns communicate Woolworths’ commitment to adding value for stakeholders. In addition, the company has been trying to break the sales growth point through Australia’s Fresh Food People marketing campaigns. This is in a bid to accelerate leadership in food and liquor sectors. b. Act on portfolio to maximize shareholder value Woolworths Supermarket has been trying to reevaluate its joint ventures, especially, within the electronics industry. The company resolved to restructure and divest Dick Smith partnership. Woolworths would also accelerate alignment with Big W in order to offer customers with competitive reality in terms of value. Woolworth Supermarket has a strong portfolio within the hotel industry. It is the most responsible implementer of local pubs and hotels in Australia. c. Observe track-record of building new growth The company’s strategic objective is to become the most trusted leader in multi-option retailing. In order to achieve this strategic objective, the company supports innovative creations that are sustainable. It also approaches international market opportunities. d. Put in place enablers for new area of growth The company engages in effective supply chain by keeping suppliers’ close and eliminating inefficient supply chains. In 2015, the company altered its staffing policy to take advantage of international and local talent. External analysis Understanding Woolworths’ external environment can provide an insight into the company’s competitiveness in its business strategies. External factors affect the company’s business performance as well as affect the accomplishment of the company’s strategy. An analysis of the external environment will help understand Woolworths’ position in retailing industry (Uddin , Kamrul &Bahauddin 2010). The external environment falls in industry environment and macro environment categories. To understand industry environment, the report uses the Porter’s five forces. Bargaining power of suppliers The company engages various suppliers owing to the extensive nature of the retail industry. However, in the Safeway supermarkets, the company has low dependence on suppliers. This implies the company does not rely on suppliers a lot, therefore; there is a weak bargaining power of suppliers. According to Porter, the higher unimportant suppliers are, the weaker their bargaining power. Bargaining power of customers Majority of the company’s customers are individual customers. There is no umbrella uniting customers, but the majority of customers at Woolworths Supermarket have strong bargaining power. Strong bargaining power forces the company to review prices downwards, making the company less competitive because it cannot control prices (Uddin, Kamrul, &Bahauddin 2010). Threat of new entrants The threat of new entrant in the same industry that Woolworths Supermarket operates in is very low. This is because setting up a similar business requires huge capital investment. Secondly, Woolworths Supermarket is a dominant player among other competitors such as Cole. A new entrant would require a lot of financing to access distribution channels and trust such as one Woolworths Supermarket receives. In addition, new entrants have to face the risk of losing investment to the existing giants. Threat of substitute products With the exiting opportunities of investing in Australia, Woolworths Supermarket faces stiff competition. The major supermarkets in Australia offer substitute products. The substitutes retail at cheaper or better prices, making the threat of substitutes very high. Coles, for instance, adopted a rewind price strategy to combat the threat of substitutes (Uddin, Kamrul,&Bahauddin 2010). Therefore, competitiveness of Woolworths Supermarkets is limited by the threat of substitutes. Rivalry in the industry Within Australia, Woolworths Supermarket faces intense competition from the retail and grocery industry. Myer and Coles are the largest competitors of Woolworths Supermarket. These competitors are likely to limit the Woolworth’s market share (Uddin, Kamrul, &Bahauddin 2010). Because of the intensity of competition, Woolworths Supermarket is forced to create effective strategies that would help differentiate the company from competitors. The internal environment A company’s strengths and weakness are internal and based on the ability to coordinate available resources for the competitive purposes (Hanson et al 2005). Woolworths Supermarket seizes competitive advantage by utilizing resources and capabilities effectively. This is evident in the management of finances and human resources. As of 2012, Woolworths Supermarket operated around 3,329 stores in Australia and New Zealand. During that time, the company employed 195,206 people. The company managed to maintain its low operating costs despite the large workforce. This efficient management of resources is indicative of company’s competitiveness in resource management (Thompson,Strickland, & Gamble 2010). The company has consistently grown to become one of the most trusted brands. Its core competencies mainly arise from the use of experienced workers and focusing on customer value. Employment criteria at Woolworths Supermarket favors experienced staff. This is the reason why Woolworths Supermarket has competent workers as opposed to those working in other supermarkets. Woolworths prefers to employ middle-aged experienced workers rather than employ young workers. The company also invests in training its workforce to ensure they deliver the quality experience to customers. Furthermore, the company’s strategy priority focuses greatly on in-store services. In the recent past, the company expanded its in-store sushi kitchens in a bid to meet customer demands. The specific focus on customers gives the company the much needed competitive edge. Woolworths Supermarket portrays strong financial performance, growing consistently in the past years. The financial growth is attributable to increases in sales growth rate. The overall growth in revenues in five-year period is 7.90%, which is good for the company’s financial health. The company has also been working on reducing its overall business costs, thereby maximizing profits. Another advantage for the company is the company’s liquidity ratio that allows the company to generate capital to meet short-term financial obligations. This allows the company to expand as and when the need arises without necessarily having to sell assets. Woolworths Supermarket enjoys strong reputation which makes the company competitive in the industry. As one of the most trusted brands in Australia, the company was voted the most sustainable retailer of the year in 2012 (Woolworths, 2016). It is the largest online retailer in Australia and New Zealand. The company also has a range of products and services. These factors protrude the position of Woolworths Supermarket as competitive. Strength of the company is the excellent relationship with suppliers. While the bargaining power of suppliers is weak, the company seeks to build strong long-term relationships with suppliers and producers. This involves working with producers and suppliers to realize sustainable growth for both the company and the suppliers. Weaknesses The major weakness at Woolworths Supermarket is the increasing debt. By the end of 2015, the company’s debts had risen compared to the five previous years. The ever increasing debt is attributable to many acquisitions. This trend may be dangers especially if it causes financial risk for Woolworths. The company operates in a limited geographical market share. The largest market is Australia while other operations are in New Zealand. If Woolworths is to compete with other multinational corporations such as Wal-Mart, the company will need to consider expanding internationally. Opportunities There is the opportunity of expanding the business online. Development of technology and innovation in Australia prompts business to leverage on infrastructures and systems in place in order to remain competitive. This means, if the company embraces innovation and technology, it has the chance to grow over time. The internet growth would allow the company to reach out to more customers as well as enhance customers’ shopping experiences. Financial analysis Woolworths Supermarket cost of equity is necessary to determine systematic risk of Woolworths relative to the overall market. Cost of equity is derived from the Fama-French model, which is 0.2930 while covariance is 0.923. Low covariance value is indicative of lower risk of the company. Yahoo Finance estimates risk-free rate for Woolworths Supermarket to be equal to capital market yield for five year government bond. The return of a five-year bond is 2.82%. The enterprise market value and share price of Woolworths Supermarket as at June 30, 2015 was $50,632 million and $22.10 respectively. Market capital of the company as at April 29, 2016 was valued at $28.21 billion (Morning Star 2016). The company has been performing extremely well in return on assets, recording an average growth of 6.3% for the past five years. Assessing the company’s income statement, it is evident that revenue has been growing, though not very consistently. At the end of 2015 financial year, the company closed accounts with a total of 60.41B in revenues (Yahoo Finance 2016). The gross profit for the same period was 16.69B. An analysis of the company’s financial health reveals that the company has been doing extremely well over the past five years. This finding comes from assessment of current ratio, quick ratio, financial leverage, and debt to equity ratio. The current ratio since 2011 has fluctuated between 0.8 and 0.91. This trend shows the company is potentially able to pay off its short-term liabilities with its current assets. The company’s quick ratio fluctuates between 0.22 and 0.23 in the last five years. This implies the company has $0.22 of liquid assets available to cover each $1 of current liabilities (Yahoo Finance 2016). A high quick ration is indicative of better position in terms of liquidity. In this case, Woolworths’ Supermarket quick ration is not very low nor is it negative. Although the ratio is low, the company’s ability to meet short term obligations is guaranteed. Debt to equity ratio at Woolworths Supermarket has been reducing over years. From a pure risk perspective, debts ratios that are lower than 0.4 are considered appropriate (Damodaran 2012). This is because interest on debt ought to be paid regardless of whether the company is profitable or not. In addition, a lot of debt may compromise business operations, especially, when cash flow ceases. High debt ratio on the other hand makes it difficult for the company to borrow money. Unfortunately, investors do not want to purchase the stock of a company when debt ratios are low. A low debt ratio from an investor perspective suggests that the company does not finance increased operations through borrowings, limiting the total return for the company (Damodaran 2012). Using this interpretation for Woolworths Supermarket, it is evident that the financial health of the company is linear from the risk perspective. However, in terms of investors, the company is not doing very well. Investment recommendation Owing to the good financial health of Woolworths Supermarket, it is recommendable for investors to consider investment opportunities with the company. This is because the company has the potential to achieve growth in the global market. Considering that it is the largest online retailer company, it can replicate its business strategy on a global perspective to achieve exponential success (Nguyen 2013). Constant growth at the company is a good indication that the company has not yet realized its full potential. As a trusted brand across Australia, the company stands a chance to become the leading retailer replicating the steps of giant Wal-Mart. Investors should not fear the low debt to equity ratios sustained by the company. In fact, the low debt/equity ratio is a strategy to mitigate financial risk, allowing the company to leverage on available resources, rather than borrowing. The company has in the past borrowed heavily to finance its operations, consequently resulting into huge debts (IBIS world, 2015). However, in the recent past, the company implemented a strategy to reduce the debt burden, reflecting on the overall debt/equity ratio. The elementary discussion on ethical behaviour of professional fund managers Ethics management on an international platform is rapidly evolving in a bid to inculcate ethical reasoning among organizations’ senior managers. These include fund managers, financial managers, main cashiers, and fund controllers. While seeking to enforce ethics, considerable emphasis is placed on anti-corruption initiatives (Menzel 2006). With reference to fund managers, it is noteworthy that fund managers hold public office. According to national law, a public office is a position of trust. Thus, the position is of public interest. Persons holding public office should ensure integrity and transparency, in accordance with administrative polices and laws. Fund managers are to provide services with undue preferential treatment to any individual or group (Pitesa 2013). In a publicly traded company such as Woolworths Supermarket, the fund controller is supposed to uphold integrity and transparency, reporting on financial performance of the company as mandated by the law. The finance industry at large was singled out as a case of corporate greed and unethical behavior. Senior professionals including fund managers are among the persons engaging in unethical behavior in their organizations (Menzel 2006). One of the reasons why fund managers engage in greed and other unethical behaviors is because they think that, in order to be successful, they must steal or engage in unscrupulous deals. Another factor is time pressure. The fund manager may tend to work under pressure to meet deadlines (Pitesa 2013). For those wishing to avoid the pressure, they may opt to cook data or harmonize financial information without consideration of the company’s real performance (Pitesa 2013). These deeds amount to unethical behavior. Reference list DAMODARAN, A. 2012. Investment valuation: tools and techniques for determining the value of any asset.Hoboken, New Jersey, Wiley.http://www.books24x7.com/marc.asp?bookid=46153. IBIS world 2015. Woolworths Limited: profile company report Australia. Australia. Menzel D. 2006 Ethics management internationally. Transparency Organization Morning Star 2016.Woolworths Limited: WOLWF. Retrieved from http://financials.morningstar.com/ratios/r.html?t=WOLWF®ion=usa&culture=en-US Nguyen J. 2013. Financial analysis: Woolworths Australia Limited. Retrieved from http://jakenguyen.weebly.com/articles/financial-analysis-woolworths-australia-ltd Pitesa M. 2013. The psychology of unethical behavior in the finance industry. Porter M., 1996. What is strategy? Harvard Business Review 74 Thompson A., Strickland A., & Gamble J. 2010. Crafting and executing strategy: the quest for competitive advantage: concepts and cases, Boston, McGraw Hill Uddin M., KamrulH.&Bahauddin A. 2010. Case study on Woolworths Limited. East West University Woolworths Limited 2016.Financial performance. Retrieved from http://www.woolworthslimited.com.au/page/Invest_In_Us/Financial_Performance/ Yahoo Finance 2016.Woolworths Limited: Company summary. Retrieved from https://au.finance.yahoo.com/q?s=WOW.AX Read More