Australia’s largest supermarket chain, Woolworths, is looking to the US-based Wal-Mart for inspiration despite discovering a highly successful formula for growth at home, reports Dave Robertson.

Woolworths, which has nearly 40% of the supermarket business in Australia, has delivered some excellent results under its chief executive Roger Corbett. The company has been so successful, in fact, that it has been criticised for failing to adequately keep the stock market up to date with its rocketing performance.

This is in stark contrast to Coles, part of the Coles Myer retail empire and Woolworths’ only serious competitor, which has been hammered by investors for profit warning after profit warning.

“Woolworths’s Roger Corbett is as close to the perfect retailer as one is likely to see, and he has beaten Coles to a pulp – competitively speaking,” commented the Australian Financial Review. In the current business environment this is praise indeed.

Interim results robust, share buyback in the pipeline

Corbett cemented his reputation last month, delivering yet another strong set of interim results. Group profits were up 18.3% to A$349m (US$209m) in the first six months and pre-tax profits in the food division were up 15% to $451.5m. The full year forecast has sales growth up 10.5-11.5% this year, after a 10.9% increase in the first half.

This success has attracted attention but Corbett has shown no sign of wanting to give up control of the company; he is thought to have turned down an informal approach from Tesco in the UK valued at $7.50 a share when Woolworths was trading at little more than $5. Woolworths’s share price has responded to this confidence hitting a peak of $13.64 last May although it has slid back to $11.41 but remains a popular stock with investors.

“Roger Corbett is as close to the perfect retailer as one is likely to see”

After the latest set of results Corbett announced that he had up to $600m in spare cash, which will be returned to shareholders through a share buyback, equivalent of about 4% of stock.

Little wonder then that analysts gush their praise for the company and its chief executive while competitors look on with envy.

Woollies not resting on its laurels

Despite this comfortable position, and an unbreakable duopoly, Woolworths is looking for new growth strategies and Wal-Mart has emerged as a favoured model.

Woolworths’ growth in the last couple of years has been driven by a number of factors, all of which are coming to the end of their run. The first is Project Refresh, a quality control system that has created savings of about $1bn since it was started in 2000. Total savings could hit as much as $4bn by 2007 but this sort of project is by its nature finite – and most analysts have already costed the benefits into their forecasts.

Woolworths, like other Australian food retailers, has also benefited from food inflation that has driven up the value of sales while the disintegration of Franklins, the third-placed supermarket chain, produced a market made up of two giants and a number of minnows. Neither of these events can be counted on again and with Aldi, Foodland and others attempting to gain market share, competition could again get tough. Possibly the biggest external threat would be the emergence of US-based CostCo Wholesale Corporation, with rumours circulating that it is interested in making a major move into Australasia.

With these threats to growth in the offing, Woolworths has decided to react early by looking for alternatives and, in so doing, the company has again impressed analysts who believe its foresightedness will maintain a buoyant share price.

Expansion into non-food

Corbett is understood to be impressed at the speed with which Wal-Mart entered the food market in 1988. Food now accounts for 40% of Wal-Mart sales and has become a significant growth driver. Woolworths is going the other way: it is expanding its non-food operations in larger supermarkets and through its giant Big W outlets.

“Greater non-food merchandising is seen as the key to success in suburbia”

Earnings from non-food products were up 11.8% in the first half and the company believes the division’s potential is high. Analysts also point to a demographic shift in the workforce that supermarkets need to take advantage of; with more single people of both sexes working long hours the demand for one-stop shopping is rising. Convenience will become the buzzword and already longer store openings and “metro” style stores are tapping this potential in urban areas but greater non-food merchandising is seen as the key to success in suburbia.

“The Wal-Mart comparison has been kicked around by Woolworths for a while now and they have made a good start with non-food,” says one analyst. “This has been done by retailers like Asda in the UK but Woolworths is the first to make a step towards it in Australia. It is an interesting move as long as they don’t sacrifice food sales to get more non-food in their stores.”

This is the sort of strategy that might have been expected from Coles, which has failed to take advantage of its links to the non-food side of its parent company. If Woolworths starts to generate significant growth from this channel it seems highly likely that Coles will follow – as it did earlier this month with petrol. But for the moment it appears that Woolworths is ahead of the game.