With the demise of Franklins, Australia’s retail scene has changed dramatically. Most importantly, WA chain Foodland has evolved into a serious contender to the supermarket sector’s giants, Woolworths and Coles Myer. With expansion plans afoot in Queensland and New Zealand, just-food.com correspondent David Robertson takes a look at where Foodland’s headed.

The evolution of a small grocery chain in West Australia into virtually the only company capable of challenging the hegemony of the leading two retailers has turned Foodland into one of the country’s hottest stocks.

Following the demise of Dairy Farm’s Franklins chain, Foodland is well positioned to move out of its stronghold in the west and into the lucrative markets in the east. It has bought 36 stores in Queensland from Dairy Farm and this week starts the process of rebranding and upgrading them. The company’s New Zealand operations are also attracting attention as it bids to increase its share of the Kiwi food market from 25% to 44%.

Impressing the investors

Foodland has impressed the stockmarket and its share price has risen from about A$8 (US$3.99) l

Company Profile:

Woolworths Ltd

ast year to A$12.70. Macquarie Equities believes that a current share price evaluation of A$13.96 is fair and if the company gets its way in New Zealand, the stock could be worth A$16.85. ABN Amro is also forecasting strong growth, despite net profit for the year to July falling 18% to A$59.2m because of a A$20.6m write off of losses from the now defunct Deka discount department store chain in New Zealand.

Foodland’s Australian supermarkets increased earnings by 19% last year and in NZ, the food business boosted earnings by 40% – offsetting a 31% drop from its non-food department store business, Farmers.

“The market has generally been more interested in our business,” managing director Trevor Coates told just-food.com: “We are looking at creating growth in our existing portfolio and with additions in

Queensland and New Zealand people are getting a lot more interested – including overseas investors in a big way for the first time.”

Foray into Queensland

Woolworths and Coles Myer dominate the supermarket business in Australia, particularly in the country’s two most populous states of New South Wales and Victoria. Foodland has so far been sniping around the edge of their dominance and the Queensland move is its first serious foray into the east.

“In Queensland we are looking to grow and are already talking to people about buying more stores as well as selling some of the smaller ones from the Franklins portfolio. Queensland represents a good opportunity for us as its population is growing and it’s a fairly wealthy state. We are not in NSW yet. We are looking at that but it is a different issue.”

Foodland is understood to be talking to partners about setting up green field sites around the major population centres and has a loose link with South Africa’s Pick’n’Pay supermarket chain, which also plans to move into NSW. Although Coates won’t reveal his plans for NSW and Victoria, he admits that his first priority is to make a success of Queensland before worrying about competing head on in the other states.

Progressing into NZ

Everything was going Foodland’s way until yesterday when New Zealand members of parliament ruled that the company’s subsidiary Progressive Foods could not bid for Woolworths NZ – no relation to Woolworths Australia. Progressive is however competing against Woolworths Australia for the business.

Foodland made its bid a day before new competition laws came into force – these new rules would now block the bid because of Progressive’s current share of the NZ market. The Commerce Commission said Progressive could go ahead and buy Woolworths NZ but a court of appeal decision ruled instead that the new competition tests should be applied. The court of appeal case was brought by Foodstuffs – the major player in the NZ market with a 55% market share.

“This is a constitutional question of understanding whether the new or old law should be used”
– Trevor Coates, Managing Director, Foodland

Parliament stepped in to revue the case but the vote went against Foodland despite receiving the backing of the government.

“This is a constitutional question of understanding whether the new or old law should be used,” says Coates.

If it had been given the go-ahead Foodland was expected to look at raising A$300m in equity and given its good standing in the market that should have been easily done. But the NZ decision going against Foodland has caused the backlash from investors that Coates accepted was likely. The share price has dropped from around A$13 at the start of the week to A$12.60 on Tuesday – decision day – and was down below A$11.60 yesterday.

“There ultimately could be some down side but how much, we would have to see. But we will look at other opportunities to grow and we hope the market would respond to that.”

Non-food option for growth

Foodland is also planning to work on its NZ chain Farmers, which is a heavily under invested business Foodland has only just started turning around – a process started by ditching Deka. Coles Myer has struggled with its non-food operations and other retailers are also suffering given the slow down in the economy, but Coates is optimistic that non-food could be an option for future growth. He says he wants to make Farmers work first and, if it does, he has joint ventures agreed with heavyweight retail property owner Westfield for new sites.

The ultimate key to Foodland’s success however will be to continue to eat away at the two big supermarket chains and develop its presence in the east slowly; otherwise it runs the risk of trying to do too much too soon and end up like Franklins – selling its outlets to yet another up and coming retailer.

By Dave Robertson, just-food.com correspondent

To view related research reports, please follow the links below:-

The Market for Packaged Food in Australia