australia australian supermarkets - macquarie.com.au · the market share loss to aldi in australia

Please refer to page 46 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

Inside

Keep Calm and Carry On 2

Woolworths 5

Wesfarmers 6

Valuation: WOW the standout 7

UK a cautionary tale, not a crystal ball 9

Key differences between UK and Australia 13

Focus on UK space growth 16

Australia space growth to remain rational 18

Coles vs. WOW key in absence of tail risks 20

Scenarios for the Australian supermarkets 24

Are EBIT margin differentials sustainable? 25

Supermarket price perception vs. reality 28

Private label battleground 35

Appendix 1: MICAWBER Methodology 43

6 February 2015 Macquarie Securities (Australia) Limited

Australian Supermarkets Keep Calm and Carry On Will Australia repeat the UK experience?

The Australian supermarket industry is structurally different to the UK, which saw

significant earnings and margin pressure in 2014. While some of the features of

the market are consistent (e.g. discounters), there are several fundamental

differences. We do not expect the Australian market will follow the UK.

Why is Australia different?

Balanced Australian Supply-Demand growth is the key differentiator vs. the

UK, as the Australian market is not oversupplied with space. We expect rational

supply and demand of 2.4%p.a. and 2.5%p.a. respectively over the next 5 years.

Small price differentials between: 1) Aldi vs. basic private label offerings from

Woolworths and Coles; 2) Woolworths and Coles’ ‘typical baskets’.

Macro backdrop more supportive of WOW and Coles than it has been for UK

majors: 4 years of Australian food price deflation, stronger income growth, lower

unemployment, population growth, etc. are supportive of WOW and Coles.

Aldi a headwind but not ‘crowding out’ WOW and Coles

Aldi’s aggressive expansion plans will likely see them grow sales at ~12% p.a.

for the next 5 years, with market share rising from 6.4% to 10.0%. Due to the

robust demand backdrop and rational supply of supermarket space, Coles and

WOW are expected to produce F&L sales growth of 4.2% and 3.8% p.a.

respectively. We expect sub-scale independents to lag the market with growth of

1.8% p.a. as Aldi takes greater share from this sector, particularly in SA and WA.

Coles vs. Woolworths remains the main game

We estimate Coles’ supermarket sales per square meter surpassed Woolworths’

supermarkets in FY14. While Coles will continue to outperform at the top line, we

expect the gap in growth rates to narrow due to:

Coles turnaround near completion. Coles’ comps have benefited from

elevated closures of underperforming stores and fewer immature new stores.

Space growth rates are converging at ~2.5% - 3.0% p.a.

WOW addressing price perception via marketing, promotional activity, and

price investment, while Coles shifts focus to a turnaround in Liquor.

Are Woolworths’ F&L margins sustainable?

While Woolworths’ F&L EBIT margin (8.0%) is elevated vs. Coles (5.3%) and

global peers, in our view they are sustainable at current levels due to: 1) the

historic and ongoing investment in supply chain and logistics (Project

Refresh/Mercury 1 and 2); 2) IT transformation program; 3) incumbency in a

highly consolidated industry; 4) GM similar to Coles given consistent pricing.

Earnings and Target Price Impacts

As operating performance differentials narrow in FY16 and FY17, while WOW

maintains its 250 – 300bps EBIT margin premium vs. Coles, we expect WOW to

re-rate towards a 15% - 20% PER premium to the market.

WOW is fundamentally mispriced at current levels and presents 9.5%

upside to our target price. Maintain Outperform recommendation.

WES is performing well but is fully valued at 19.2x. While we do not see

material share price risk, little upside remains. Downgrade to Underperform.

Small earnings changes reflect a full review of the industry.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Australian Supermarkets

6 February 2015 2

Keep Calm and Carry On Executive Summary

Market power should not be underestimated.

The Australian supermarket duopoly has come under increased scrutiny by investors in

recent months. As with many industries in Australia which tend towards powerful duopolies or

oligopolies (telcos, media, insurance, banking), Coles and Woolworths have a powerful

incumbency position in food and liquor. The barriers to entry and scale benefits of their

existing operations are significant. Despite this strong market position, the recent UK

experience and emergence of ALDI brings the future of this market structure into question.

We analyse the causes of the UK experience as a read through for Australia while looking in

detail at price perception and private label strategies.

UK an interesting case study…

The major UK supermarkets experienced unprecedented volatility in 2014 as comps turned

negative and margins compressed. The key factors contributing to this were:

1) Space growth well ahead of demand growth across the industry for many years.

2) Strategic development errors, as hypermarkets in poor locations have held back

growth.

3) Capex deployed primarily towards new stores rather than refurbishments of the

existing network. As comps declined, cost cutting centred on headcount, reducing service

standards.

4) Expanding gross margin and EBITDAR margins required to cover increased operating

lease payments on expanding property portfolios just to maintain flat EBIT margins.

5) Inflationary environment driven by limited discounting which enabled Aldi and Lidl to

gain a foothold in what has been a challenging employment and income growth

environment.

6) Poorly executed private label strategy by major supermarkets – product quality of

basic private label below discounters’ initially impacted customer confidence and

perceptions of private label.

Fig 1 UK Supply of space expanding at 4% p.a. between FY08 and FY13 as Demand growth turned negative

Source: Company Accounts, UK Office for National Statistics, Macquarie Research, February 2015

… But key differences exist between the UK and Australia.

While many of the issues highlighted above are familiar to the Australian supermarket

industry, we consider the magnitude of the UK earnings and share price outcomes to be

unlikely in Australia. This is due to:

1) Space growth in line with demand. Australia has higher population and consumption

growth as well as rational space growth, so is not under pressure from excess supply.

2) Better strategic development, with many new stores in growth corridors with no

hypermarkets. We note, however, that some cannibalisation is inevitable in store roll outs.

3) Reinvestment in the network. Coles and Woolworths have continued to invest in the

existing network through refurbishments and optimising the store network.

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

UK Space growth

Other

Discounters

Big 4

UK Industry

-2%

0%

2%

4%

6%

8%

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

Growth (%) Trading area (UK) - supply

Retail food volume (UK) - demand

Coles and

Woolworths have a

powerful

incumbency

position in F&L

UK saw challenging

market conditions in

2014 for a number of

reasons:

excess supply;

uncompetitive

prices;

poor capital

allocation and

strategic decision

making

The magnitude of

the UK earnings and

share price

outcomes are

unlikely in Australia


6 February 2015 3

4) Australian margins have expanded due to the significant investment in operating

costs, logistics and supply chain, while more favourable supplier agreements supported

gross margins. We expect margins to be higher than the UK due to the concentrated

market structure (Woolworths and Coles control ~65% of the supermarket industry

compared to 73% grocery market share in the UK shared amongst the top four).

5) Deflationary environment. Discount driven deflation from Coles and Woolworths

reduces price differentials between private label and discounters.

6) Australian Private label strategy learned from UK mistakes and has been successful,

with appropriately priced, high quality private label products, albeit still lagging Aldi.

Fig 2 Australian supermarket deflation slowed down the market share loss to Aldi in Australia…

Fig 3 … UK food inflation above 3% provided an opportunity for discounters between 2009 - 13

Source (for all above): Company Data, ABS, UK Office for National Statistics, Factset, Macquarie Research, February 2015

Domestic competitive environment the focus

As UK and Australian supermarket industries are fundamentally different, the domestic

environment will determine the relative winners and losers. We have identified two key drivers

of relative performance: price perception and private label strategies.

Perceptions trump reality for Price and Quality. With Coles outperforming Woolworths

on comps and now sales per sqm, we analyse the drivers of price perception:

Perception: Coles has a consistent lead in low price perception vs. Woolworths,

however Woolworths has a clear advantage in quality perception over Coles.

Reality: Our MICAWBER index indicates Coles and Woolworths are very close on

price, with Woolworths consistently having slightly lower prices than Coles over the

past nine months.

Aldi impact: Aldi has a material impact on price perception and sales performance. In

the eastern states, price perception of the major supermarkets is lower than in the

west.

Fig 4 Perception: Coles cheaper… Fig 5 … Reality: WOW cheaper

Source (for all above): Roy Morgan Single Source data to Dec-14, Macquarie Research

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5e

FY1

6e

FY1

7e

FY1

8e

FY1

9e

FY2

0e

Growth (%) Trading area (AUS) - supply

Retail food volume (AUS) - demand

ForecastsActual

-4

-2

0

2

4

6

8

10

12

14

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

Food InflationAustralia

UK

20%

25%

30%

35%

40%

20%

25%

30%

35%

40%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that identify supermarket with

"Low Prices" (3m average)

% that identify supermarket with "Low Prices" (3m average)

Coles

Woolworths

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3-Jan

-14

17-Jan

-14

31-Jan

-14

14-F

eb-14

28-F

eb-14

14-M

ar-14

28-M

ar-14

11-A

pr-14

25-A

pr-14

9-M

ay-14

23-M

ay-14

6-Jun

-14

20-Jun

-14

4-Jul-

14

18-Jul-

14

1-A

ug

-14

15-A

ug

-14

29-A

ug

-14

12-S

ep

-14

26-S

ep

-14

10-O

ct-

14

24-O

ct-

14

7-N

ov-14

21-N

ov-14

5-D

ec-14

19-D

ec-14

2-Jan

-15

16-Jan

-15

30-Jan

-15

WOW vs. Coles (%)TOTAL - ex. Liquor and tobacco

Colescheaper

WOW cheaper

Price perception

between Coles and

WOW, underpinned

by private label

offerings, will be key

in Australia


6 February 2015 4

Private label critical to price and value perception. Private label products are a key

weapon for Coles and Woolworths to compete with Aldi for price sensitive customers. The

UK experience highlights not only price but value (which also reflects quality) are critical.

Aldi prices are ~4% below Coles and Woolworths’ basic private label and ~10% - 15%

below the core/mid level private label offerings, when comparing online prices.

EBIT Margins: Are the differentials sustainable?

Woolworths has a ~275bps higher F&L EBIT margin than Coles, with both well above most

global peers. We conclude that WOW’s margin premium is:

Hard earned. WOW has invested for over 15 years in improving the efficiency of the

business through Mercury One, driving supply chain and logistics improvements. Gartner

independently ranks WOW as the 6th most efficient supply chain in Asia Pac (57

th globally),

ahead of all other Australian companies (WES not in top 10 in Asia Pac).

Continuing to invest. WOW is embarking on Mercury Two and is benefiting from their

stake in Quantium in order to drive future benefits through technology.

Defendable. Significant barriers to entry exist for competitors to attempt to generate a

national footprint and compete with Woolworths and Coles. Aldi is only just approaching

7% market share after 14 years in Australia.

Not driven by pricing differentials. While gross margins are not disclosed for either

supermarket, Woolworths is delivering slightly lower prices with a higher margin than

Coles, indicating lower CODB rather than higher GM is driving EBIT margins.

Fig 6 Food and Liquor margins expected to stabilise for Woolworths and Coles

Source: Company data, Macquarie Research February 2015

Valuations favour Woolworths over Wesfarmers

Woolworths’ share price has declined by 8.9% following the 1Q15 results in early November,

underperforming the ASX200 by ~13.5%. This underperformance has been principally driven

by concerns around the F&L business, as 2.1% comps disappointed the market, which many

attributed to Aldi taking share, driving concerns of a UK-type environment in Australia. As we

highlight below, we do not expect this scenario to play out in Australia.

Wesfarmers in comparison has performed well, with the share price rising by 2.8% since its

strong 1Q15 results in late October. While WES has underperformed the ASX200 by ~3.3%,

this is to be expected in the current rally.

Fundamentally, WOW is mispriced at current levels and presents 9.5% share price

upside to our target price. In comparison, WES is performing well but is fully valued. As

sales and space growth performance differentials narrow in FY16 and FY17, while WOW

maintains its 250 – 300bps EBIT margin premium vs. Coles, we expect WOW to re-rate

towards its long term average 15% - 20% premium to the market, which we consider

reasonable given the degree of earnings certainty in the business.

WOW should trade at a ~5% - 10% discount to WES over the medium term in our view,

accounting for business mix, most notably the Masters/Bunnings differential, which outweighs

WOW’s advantage in Liquor and WES’ exposure to Coal prices.

2%

3%

4%

5%

6%

7%

8%

9%

10%

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

F&L EBIT margin

Woolworths Coles

ForecastActual

WOW’s margin

premium is the

result of many years

of investment…

… Not price

differentials

WOW valuation is

attractive at a

market multiple,

which is factoring in

tail risks

6 February 2015 5

AUSTRALIA

WOW AU Outperform

Price (at 06:58, 05 Feb 2015 GMT) A$32.46

Valuation A$ 34.89-36.24

- Sum of Parts

12-month target A$ 35.57

12-month TSR % +14.1

Volatility Index Low

GICS sector Food & Staples Retailing

Market cap A$m 40,997

30-day avg turnover A$m 123.0

Number shares on issue m 1,263

Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E

Revenue m 60,773 63,212 65,886 68,506 EBIT m 3,775 3,893 4,117 4,368 Reported profit m 2,452 2,532 2,687 2,835 Adjusted profit m 2,452 2,550 2,687 2,835 Gross cashflow m 3,455 3,605 3,801 4,008

CFPS ¢ 275.7 284.3 298.2 312.7 CFPS growth % 3.1 3.1 4.9 4.9 PGCFPS x 11.8 11.4 10.9 10.4 PGCFPS rel x 1.26 1.20 1.24 1.22 EPS adj ¢ 195.7 201.1 210.8 221.2 EPS adj growth % 3.3 2.8 4.8 4.9 PER adj x 16.6 16.1 15.4 14.7 PER rel x 1.01 0.97 0.99 1.00 Total DPS ¢ 137.0 140.9 147.8 155.0 Total div yield % 4.2 4.3 4.6 4.8

Franking % 100 100 100 100 ROA % 16.3 15.8 16.0 16.0 ROE % 25.4 23.7 22.8 22.0

EV/EBITDA x 9.3 9.0 8.6 8.2 Net debt/equity % 32.6 31.3 30.4 28.7 P/BV x 4.0 3.7 3.4 3.1

WOW AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, February 2015

(all figures in AUD unless noted)


Woolworths Delivering at the margin Event

We identify the key implications for Woolworths from our review of the UK

supermarkets and the implications for the Australian supermarket industry.

Impact

Outstanding margin performance over 15 years which is unlikely to be

competed away in the medium term. Following a range of efficiency programs

and significant long term capex investment, WOW has a ~275bps margin gap

over Coles. Woolworths has been recognised by Gartner as having a world

class supply chain and logistics system, ranking 6th in Asia Pac and 57

th

globally last year. While specific F&L metrics are not disclosed, we do not

consider this EBIT margin differential to be a product of relatively higher gross

margins than Coles, as the two supermarkets are likely to receive similar

buying terms.

Investment to continue for WOW as they progress to Mercury Two and

efficiency benefits are gained from insights from Quantium. While Coles is

also investing in efficiency, during the turnaround of the business, much of

this investment has, by necessity, been focussed on refurbishments.

Woolworths supermarket sales per sqm has stabilised, as Coles has

rapidly closed the sales productivity gap. WOW is likely to continue to lag

Coles on this key measure as WOW generates lower comps and higher

space growth.

Space growth expected to moderate from ~4% over the past four years

to ~3% p.a. going forward, broadly in line with Coles (~2%-3%). This space

growth convergence is expected to narrow the comps growth differential as

Coles is likely to see a reduced tailwind from store optimisation and an

increased headwind from newer stores yet to reach maturity

Room for WOW, Coles, and Aldi to grow at healthy rates over the next

five years. Despite our forecasts predicting Aldi to reach ~10% market share

by 2020, we expect WOW to be able to grow supermarket sales by 4.1% p.a.,

above market rates of 4.0% as independents lose share (+1.0% p.a. growth).

WOW is lagging on price perception vs. Coles despite having lower prices

on average over the past twelve months. WOW has retained it’s quality

premium due to relatively high value perception vs. price perception..

Earnings and target price revision

EPS: FY15 -0.7%, FY16 -1.3%, FY17: -3.0%. Target Price: $35.57 (-0.8%)

Price catalyst

12-month price target: A$35.57 based on a Sum of Parts methodology.

Catalyst: 1H15 Result: 27 February

Action and recommendation

Maintain Outperform. WOW is factoring in a degree of structural risk while

trading at a market PER. As a result, WOW is .fundamentally mispriced at

current levels and presents a clear opportunity for a quality business at

discounted levels.


6 February 2015 6

AUSTRALIA

WES AU Underperform

Price (at 05:10, 05 Feb 2015 GMT) A$44.53

Valuation A$ 47.85 - DCF (WACC 7.5%, beta 0.9, ERP 5.0%, RFR 4.5%, TGR 2.5%) 12-month target A$ 44.07

12-month TSR % +3.8

Volatility Index Low

GICS sector Food & Staples Retailing

Market cap A$m 50,041

30-day avg turnover A$m 87.7

Number shares on issue m 1,124

Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E

Revenue m 62,060 63,482 66,984 70,447 EBIT m 3,786 3,717 4,079 4,527 Reported profit m 2,689 2,428 2,636 2,899 Adjusted profit m 2,398 2,428 2,636 2,899 Gross cashflow m 3,521 3,580 3,819 4,110 CFPS ¢ 312.4 318.7 339.9 365.8 CFPS growth % 4.6 2.0 6.7 7.6 PGCFPS x 14.3 14.0 13.1 12.2

PGCFPS rel x 1.53 1.47 1.50 1.43 EPS adj ¢ 212.7 216.1 234.6 258.0 EPS adj growth % 4.7 1.6 8.5 10.0 PER adj x 20.9 20.6 19.0 17.3 PER rel x 1.27 1.24 1.22 1.18 Total DPS ¢ 254.4 306.7 224.7 247.1 Total div yield % 5.7 6.9 5.0 5.5 Franking % 100 100 100 100

ROA % 9.1 9.3 10.0 10.7 ROE % 9.2 9.5 10.5 11.4 EV/EBITDA x 11.0 11.0 10.2 9.3 Net debt/equity % 11.5 21.1 24.5 27.2 P/BV x 1.9 2.0 2.0 2.0

WES AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


(all figures in AUD unless noted)


Wesfarmers Winning at the top line Event

We identify the key implications for Wesfarmers from our review of the UK

supermarkets and the implications for the Australian supermarket industry.

Impact

Coles continues to perform well at the top line. Having closed the sales

productivity gap vs. WOW, the Coles turnaround nears completion. We expect

Coles to continue to grow sales/sqm ahead of WOW.

Space growth to increase to 2%-3% p.a. from ~1.3% p.a. in recent years as

store closures of underperforming stores has largely been completed. This

space growth convergence with WOW (~3%p.a.) will likely moderate Coles’

comps growth due to the reduced tailwind from store optimisation and a larger

headwind from newer stores yet to reach maturity.

While continuing to lag WOW on margins. Coles’ 5.3% EBIT margin lags

Woolworths (8.0%), as WOW has invested for many years in supply chain

and logistics. We do not expect material EBIT margin expansion for Coles as

management have guided to reinvest gains in price in order to drive footfall

and other business activities.

Aldi will continue to gain market share, but is unlikely to crowd out

Coles. Despite our forecasts predicting Aldi to reach ~10% market share by

2020, we expect Coles supermarkets to be able to grow sales by 4.5% p.a.,

above market rates of 4.0%, as independents continue to lose share (+1.0%

p.a. growth).

Clear leader on price perception relative to WOW. Despite having

marginally higher prices over the past twelve months, Coles has retained its

long term hold on price perception ahead of WOW. A key risk for Coles is

WOW addressing price perception through effective advertising campaigns

and achieving the right balance within their promotional strategies. We do not

expect either Coles or WOW to cut gross margins materially in order to drive

volumes and gain share.

Earnings and target price revision

EPS: FY15: +1.0%, FY16 +0.2%, FY17 +1.3%, TP +0.4% to $44.07

Price catalyst

12-month price target: A$44.07 based on a Sum of Parts methodology.

Catalyst: 1H15 Result: 19 February

Action and recommendation

WES is performing well but is fully valued, with the current share price in line

with our current price target. As a result, we downgrade to Underperform.

While we do not see material share price risk (relative to the market), little

share price upside remains at a 24% premium to the ASX300 (19.2x PER).



6 February 2015 7

Valuation: WOW the standout Woolworths: A rare opportunity at a sub-market multiple

Woolworths’ share price has declined by 8.9% following the 1Q15 results in early November,

underperforming the ASX200 by ~13.5%. This has driven WOW to a market PER multiple.

In our view, this is factoring in a degree of structural risk. The share price

underperformance and PER de-rating has been principally driven by concerns around the

F&L business, as 2.1% comps in 1Q15 disappointed the market, which many attributed to

Aldi taking share, driving concerns of a UK-type environment in Australia. As we highlight

above, we do not expect this scenario to play out in Australia.

Fig 95 WOW trading at a market multiple for the first time in 15 years

Source: Factset, IBES, Macquarie Research, February 2015

Wesfarmers in comparison has performed well, with the share price rising by 2.8% since its

strong 1Q15 results in late October. While WES has underperformed the ASX200 by ~3.3%,

this is to be expected in the current rally. With a further re-rate highly unlikely and earnings

volatility likely to remain modest, the opportunity for share price outperformance is limited.

Fig 96 WES trading near fair value, at a 24% premium to the market ex resources

Source: Factset, IBES, Macquarie Research, February 2015

8

10

12

14

16

18

20

22

24

26

8

10

12

14

16

18

20

22

24

26

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

PER(Consensus 1yr fwd)


ASX300 Ex Resources

Woolworths

8

10

12

14

16

18

20

22

24

26

8

10

12

14

16

18

20

22

24

26

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14



ASX300 Ex Resources

Wesfarmers

WOW share price is

factoring in a degree

of structural risk

With a further re-

rate highly unlikely

and earnings

volatility likely to

remain modest, the

opportunity for

share price

outperformance is

limited


6 February 2015 8

Fundamentally, WOW is mispriced at current levels and presents ~10% share price

upside to our target price. In comparison, WES is performing well but is fully valued.

Catalysts required to narrow the valuation gap:

Space growth performance differentials narrow in FY16 and FY17 as Coles moves

to roll out stores;

Coles increases store roll out while near the end of the underperforming store closures

while moderate comps growth broadly in line with Woolworths at ~2.5% - 3.0%;

WOW maintains its 250 – 300bps EBIT margin premium vs. Coles.

If this occurs as we expect, WOW should re-rate towards its long term average of a 15% -

20% premium to the market, which we consider reasonable given the degree of earnings

certainty in the business.

WOW should trade at a ~9% - 10% discount to WES over the medium term in our view,

accounting for business mix, most notably the Masters/Bunnings differential, which outweighs

WOW’s advantage in Liquor and WES’ exposure to Coal prices.

Fig 97 WOW trading at an 18 % discount to WES, double the long term average

Source: Factset, Macquarie Research, February 2015

0.70

0.80

0.90

1.00

1.10

1.20

1.30

0.70

0.80

0.90

1.00

1.10

1.20

1.30

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Dec

-14

PERel(Consensus 1yr fwd)

PERel(Consensus 1yr fwd)

WOW valuation is

attractive at a

market multiple,

which is factoring in

tail risks


6 February 2015 9

UK a cautionary tale, not a crystal ball The challenges faced by the four major UK supermarkets (Tesco, Sainsburys, Morrisons and

ASDA) are seen by many as a read through for the Australian experience due to the

oligopolistic nature of the markets, historically attractive margins and the role of discounters in

both markets.

While similarities exist, many of the drivers of the highly challenging UK environment are

not prevalent in Australia (excessive space growth, offshore expansion, etc).

ALDI has been identified by many as a catalyst for a UK type period of margin contraction

and market share loss. We consider the presence of ALDI to be an ongoing headwind to the

revenue and profit growth of the incumbents, rather than driving both sharply lower.

What happened in the UK?

The major UK supermarkets have seen dramatic earnings and share price declines over the

past twelve months as comps have turned negative and margins have compressed. This has

principally occurred due to:

Space growth well ahead of demand across the industry as supply of supermarket space

grew at ~3% to ~5% between FY08 and FY13 as demand growth turned negative. In addition

to this imbalance, several strategic errors were made in development plans, most notably with

hypermarkets (~6000sqm) developed in inconvenient locations.



Expanding gross margin and EBITDAR margins. As UK companies stopped disclosing

gross margin, many investors focussed on stable EBIT and EBITDA margins, which masked

gross margin expansion which was required to cover operating lease payments on expanding

property portfolios.

Fig 8 Tesco EBITDAR margin expanded from FY10–FY12 as EBIT margin was stable

Source: Company Data, Macquarie Research, February 2015

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

UK Space growth

Other

Discounters

Big 4

UK Industry

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

% Change

UK PopulationVolume per person/mix effectUK Retail Volume - Food

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

6.0%

7.0%

8.0%

9.0%

10.0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

EBIT margin

EBITDAR margin

EBITDAR margin (LHS)

EBIT margin (RHS)

Many of the drivers

of the highly

challenging UK

environment are not

prevalent in

Australia


6 February 2015 10

Capex deployed almost entirely towards new stores rather than refurbishments of the

existing network. As comps declined, cost cutting centred on headcount, reducing service

standards. The combination of low capital and operational investment clearly impacted the

quality of the shopping experience.

Inflationary environment for several years driven by limited discounting which enabled

discounters to gain a foothold in a challenging employment and income growth environment

Fig 9 Australian supermarket deflation slowed down the market share loss to Aldi in Australia…

Fig 10 … UK food inflation above 3% provided an opportunity for discounters between 2009 - 13

Source (for all above): Kantar Worldpanel, Macquarie Research, February 2015

Poorly managed private label strategy by major supermarkets in response to discount

supermarkets – product quality of basic private label below discounters’ initially impacted

customer perception in ‘comparable’ private label products.

Aldi and Lidl have taken 2-3ppts of market share directly from the big four supermarkets

over the past three years, with other established UK supermarkets (Co-op, Waitrose, etc)

broadly stable.

The Australian independent supermarket operators have a much larger share (~29%)

than in the UK (~4%). As a result, market share loss to Aldi in Australia is likely to be shared

across both the majors and the independents.

Fig 11 ALDI and Lidl UK growth and market share Fig 12 UK Big 4 growth and market share

Source (for all above): Kantar Worldpanel, Macquarie Research, February 2015

2.0%

4.6%

-0.5%

-2.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Sep

-04

Mar-

05

Sep

-05

Mar-

06

Sep

-06

Mar-

07

Sep

-07

Mar-

08

Sep

-08

Mar-

09

Sep

-09

Mar-

10

Sep

-10

Mar-

11

Sep

-11

Mar-

12

Sep

-12

Mar-

13

Sep

-13

Mar-

14

Sep

-14

% Change

ABS Food Inf lation

WOW food Inf lation (standard shelf price)

Coles food & Liquor Inf lation (avg. prices)

WOW food & liquor Inf lation (avg. prices)

-4

-2

0

2

4

6

8

10

12

14

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4


UK

4%

5%

5%

6%

6%

7%

7%

8%

8%

9%

9%

0%

5%

10%

15%

20%

25%

30%

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Market ShareSales growth

Aldi & Lidl sales growth

ALDI & Lidl market share

70%

71%

72%

73%

74%

75%

76%

77%

78%

79%

80%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Market ShareSales growth

Big 4 sales growth

Big 4 Market Share

Capex deployed

towards new stores

rather than

refurbishments of

the existing network

Aldi and Lidl have

taken 2-3ppts of

market share

directly from UK big

four supermarkets


6 February 2015 11

UK analyst and investor response to industry challenges

UK supermarket consensus earnings forecasts have been downgraded by 40% to 70% over

the past 14 months. Unprecedented earnings volatility for what have historically been very

stable businesses.

Fig 13 Consensus forecasts have been downgraded by 40% to 60% in twelve months

Fig 14 Tesco EPSg had been consistent until heavy downgrades over the past 12m

Fig 15 Sainsburys’ EPS has been more cyclical Fig 16 Morrisons has been heavily downgraded

Source (for all above): Factset, Macquarie Research, February 2015

Interestingly, despite the earnings downgrades highlighted above, the relative PER

multiple did not fall materially. UK Investors have responded positively to the recent Tesco

update, looking through the earnings challenges being faced in the next twelve months.

Fig 17 UK PERs have re-rated following Tesco’s market update in early January


-65%

-40%

-52%

-66%

-43%

-52%

-61%

-40%-45%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Tesco Sainsbury Morrisons

Consensus EPS downgrades

(Dec-13 - Dec - 14)FY15 FY16 FY17

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

Dec

-94

Dec

-95

De

c-9

6

De

c-9

7

Dec

-98

Dec

-99

Dec

-00

De

c-0

1

Dec

-02

Dec

-03

Dec

-04

De

c-0

5

Dec

-06

Dec

-07

Dec

-08

De

c-0

9

Dec

-10

Dec

-11

Dec

-12

De

c-1

3

Dec

-14

EPS Forecasts (p)EPS forecasts (p)Tesco EPS forecasts by financial year

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

De

c-94

De

c-95

De

c-96

De

c-97

De

c-98

De

c-99

De

c-00

De

c-01

De

c-02

De

c-03

De

c-04

De

c-05

De

c-06

De

c-07

De

c-08

De

c-09

De

c-10

De

c-11

De

c-12

De

c-13

De

c-14

EPS Forecasts (p)EPS forecasts (p)Sainsbury EPS forecasts by financial year

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

De

c-98

De

c-99

De

c-00

De

c-01

De

c-02

De

c-03

De

c-04

De

c-05

De

c-06

De

c-07

De

c-08

De

c-09

De

c-10

De

c-11

De

c-12

De

c-13

De

c-14

EPS Forecasts (p)EPS forecasts (p) WM Morrison EPS forecasts by financial year

4

6

8

10

12

14

16

18

20

22

24

26

4

6

8

10

12

14

16

18

20

22

24

26

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

PER (Consensus 1yr fwd)

PER (Consensus 1yr fwd)

FTSE 100

Sainsbury

Morrisons

Tesco

UK Investors have responded positively to the recent Tesco update, looking through the earnings challenges


6 February 2015 12

The 40% - 70% earnings downgrades over the past 14 months have been driven by both

large revenue and margins downgrades. The consensus one year forward revenue growth

and margin forecasts for each UK supermarket is highlighted below, with the following

trends clear:

Revenue growth has turned negative for all three major listed supermarkets

(ASDA is owned by Wal-Mart) after consistent long term top line growth of +4% to

+10% for Tesco (boosted by offshore expansion) and +3% to +6% for Sainsburys

and Morrison. This is a function of 1) price deflation, underpinned by aggressive

discounting; 2) negative comps growth as market share has been lost to

discounters; 3) recalibration of space growth back towards sustainable levels.

Margins have been compressed following over a decade of stability. This is

partly driven by declining top line growth over a large fixed cost base but also

resulting from lack of focus on costs, with supply chain efficiencies not being

generated.

Fig 18 Tesco’s consensus 1yr fwd revenue growth and EBITDA margin forecasts have collapsed after 15 years of remarkable stability

Fig 19 Sainsburys revenue growth has disappeared while margin contraction is less pronounced.

Fig 20 Morrison margin forecasts have begun to increase with negative revenue growth

Source: Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

Tesco

Revenue growth (Consensus 1yr fwd) EBITDA Margin (Consensus 1yr fwd)

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Sainsbury

Revenue growth (Consensus 1yr fwd)

EBITDA Margin (Consensus 1yr fwd)-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

WM Morrison

Revenue growth (Consensus 1yr fwd)

EBITDA Margin (Consensus 1yr fwd)

40% - 70% earnings

downgrades have

been driven by both

large revenue and

margins

downgrades


6 February 2015 13

Key differences between UK and Australia While many of the issues facing the UK which we have highlighted above are familiar to the

Australian supermarket industry, we consider the magnitude of the UK earnings and share

price outcomes to be unlikely in Australia. This is due to:

The duopolistic market structure in Australia naturally results in less competition.

The major UK supermarkets experience a more competitive environment within the top 4,

while also under pressure from a further five scale operators. In Australia, Woolworths and

Coles control ~65% of the market, competing with only two scale operators, one of which

(IGA) is under a franchise model which does not experience the same scale benefits as

Woolworths, Coles and Aldi.

While Aldi already has a larger market share in Australia than the UK, the Australian

market is further differentiated by a large independent supermarket network, which is

under greater pressure than larger operators in the current deflationary environment.

Fig 21 Consolidated Australian supermarket industry, independents holding a large share

Fig 22 … UK grocery market is relatively fragmented with independents holding little market share

Source: ABS, Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015

Australian supply of supermarket space has been in line with demand, unlike the

UK. Higher population growth and rational space growth have not put the productivity and

profitability of the Australian supermarket industry under pressure from excess supply.

In the UK, the major supermarkets saw supply growth accelerate above 6% from FY10 –

FY12. At the same time, demand for supermarket space was flat to negative due to: 1) low

population growth (~0.6%) and 2) a recession putting pressure on food volume per person.

As this supply/demand imbalance was maintained for several years, the productivity of

new space fell materially while opex and capex required to service additional space

increased, heavily impacting profitability.

Fig 23 Australian demand for supermarkets generally in line with supply…

Fig 24 … while UK supermarket supply well ahead of demand…

Source: ABS, Company Data, Macquarie Research, February 2015 Source: Company Data, Macquarie Research, February 2015

22.4%

6.3% 6.4%

28.6%

36.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Oth

er

su

pe

rma

rke

ts

IGA

Ald

i

Cole

s

Wo

olw

ort

hs

Market share Incumbents 64.8%

4.4%2.2%

3.5%4.8% 5.1% 5.9%

11.3%

16.8% 16.9%

29.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Oth

er

Ice

lan

d

Lid

l

Ald

i

Wai

tro

se

Co

-op

Mo

rris

on

s

Asd

a

Sain

sbu

ry's

Tesc

o

Market ShareIncumbents: 74.1%

Discounters: 10.5%

-2%

0%

2%

4%

6%

8%

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14



-2%

0%

2%

4%

6%

8%

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14



The major UK

supermarkets

experience a more

competitive

environment within

the top 4


6 February 2015 14

Reinvestment in the network. Coles and Woolworths have continued to invest in the

existing network through refurbishments while also progressively closing underperforming

stores.

Deflationary environment. Falling food prices in the major Australian supermarkets in

addition to discounting by Coles and Woolworths moderate the price differentials between

discounters and the major supermarkets. We analyse the pricing differential between the

discounters and private label ranges in detail on pg 31.

We consider the deflationary environment is likely to moderate over the next two to three

years as several drivers of lower supermarket prices have reversed/moderated, including:

1) High Australian dollar decreasing the cost of imported items;

2) Wesfarmers’ acquisition of Coles in 2007 increased price competition as one lever

Wesfarmers used to turn around operational performance;

3) The end of the eight year Millennium drought in 2009 increased supply of fresh

food;

4) Cyclone Yasi drove fruit prices sharply higher in 2011, which provided a tailwind to

deflation through 2012.

Fig 25 Australian food inflation below the UK for most of the past three years…

Fig 26 … As Australian comps outperform the UK which have seen greater pressure from discounters


Tesco specific issues accelerated the challenges facing the business. Tesco

aggressively expanded offshore and had a major accounting scandal where earnings

were overstated, reducing management credibility.

-4

-2

0

2

4

6

8

10

12

14

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4


UK

-6%

-4%

-2%

0%

2%

4%

6%

8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

Average Comps Growth

Average Comps growth

Australian Average

UK Average

The deflationary

environment is

likely to moderate

over the next two to

three years


6 February 2015 15

Macro environment. The Australian economic environment has been much more

favourable for the incumbents relative to the discounters. This compares to a very

challenging economic period in the UK from 2009 to 2012, which enabled the discounters

to capitalise on low wage growth and confidence levels.

Fig 27 Australian income growth ahead of the UK… Fig 28 … with lower Australian unemployment…


Fig 29 … UK consumer confidence significantly lagged Aust from 2009 – 2013…

Fig 30 … resulting in sluggish UK food sales growth since 2012…


Population density in Australia is materially lower than the UK, creating supply chain and

distribution challenges for new entrants. The UK is 5% smaller than the state of Victoria

with population density of 298 people per square km vs. 9 in NSW and 22 in VIC.

Fig 31 Sydney vs. London population density

Source: ABS, Macquarie Research, February 2015

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Australia wage growth

UK wage growth

0

1

2

3

4

5

6

7

8

9

10

De

c-9

4

De

c-9

5

De

c-9

6

De

c-9

7

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

Unemployment rate

Australian Unemployment

UK Unemployment

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

1-Ja

n-94

1-Ja

n-95

1-Ja

n-96

1-Ja

n-97

1-Ja

n-98

1-Ja

n-99

1-Ja

n-00

1-Ja

n-01

1-Ja

n-02

1-Ja

n-03

1-Ja

n-04

1-Ja

n-05

1-Ja

n-06

1-Ja

n-07

1-Ja

n-08

1-Ja

n-09

1-Ja

n-10

1-Ja

n-11

1-Ja

n-12

1-Ja

n-13

1-Ja

n-14

1-Ja

n-15

Consumer confidence (st dev

from average)

Consumer

confidence (st dev from average)

UK Consumer Confidence

Australian Consumer Confidence

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

De

c-9

6

De

c-9

7

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-1

1

De

c-1

2

De

c-1

3

De

c-1

4

Retail sales

growth (12m MAT)

Australia Food retail sales growth

UK Food retail sales growth

Population density

in Australia is

materially lower

than the UK creating

distribution

challenges


6 February 2015 16

Focus on UK space growth UK an oversupplied market: UK space growth ran well ahead of demand for a number of

years. This differential persisted for a number of years (2008 – 2014). As with any industry,

an oversupply of products or capital creates a very challenging environment for the

incumbents, typically taking several years to normalise, particularly when this oversupply

involves fixed assets (rather than portable capital such as financial services). Soft demand

environments tend to have shorter impacts on the industry as stimulus can be directly

applied.

Fig 32 UK Supply of supermarket space growing at ~4% p.a. from 2008 – 2013

Source: Company websites, Macquarie Research January 2015

Supply of UK Supermarket space grew at ~3% to ~5% across the industry between FY08

and FY13. This growth was underpinned by the big four but also saw material growth from

discounters.

Demand for UK supermarket space is estimated as the combination of population growth

and volume of consumption per person.

UK population growth is relatively low, consistently around ~0.8%.

UK consumption per person has been declining post financial crisis due to the highly

challenging economic environment, particularly outside of London.



-2%

0%

2%

4%

6%

8%

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4



-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

UK Space growth

Other

Discounters

Big 4

UK Industry

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

FY9

7

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY

07

FY

08

FY

09

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

% Change

UK PopulationVolume per person/mix effectUK Retail Volume - Food

UK space growth

ran well ahead of

demand for a

number of years


6 February 2015 17

Nature of space growth a major issue: While overall supermarket supply growth in the UK

was clearly too high for the level of demand growth, the nature of the space growth was

another major issue as the construction of hypermarkets drove growth.

Tesco led the charge: The UK supermarket sector, led by Tesco (Tesco Extra), saw a shift

in the type of supermarkets being built. As highlighted in the charts below, Tesco was

aggressively opening an average of 18 hypermarket stores per year (hypermarkets are very

large stores which are effectively a combination of supermarkets and discount department

stores) averaging ~6,500sqm each from 2001 – 2012. By 2012, 42% of Tesco’s space was in

Tesco Extra stores, as the network was transformed from a traditional structure, similar to

Woolworths and Coles, to a hybrid supermarket/hypermarket network similar to Wal-Mart in

the US.

Fig 34 Tesco store mix has shifted towards larger supermarkets (~6500sqm)…

Fig 35 … Space growth was underpinned by large supermarkets and convenience stores for many years


Lower sales intensity and inconvenient locations: Tesco Extra typically offers (in addition

to food): clothing, electronics, banking services, petrol, pharmacy, and restaurants. As non-

food categories are less sales intensive and large sites were required, in order for store roll

out to appear economic, several of the ~250 Tesco Extra stores were built in lower cost, and

inconvenient locations, resulting in significant declines in sales density. Tesco now faces

significant impairment risk on their store network.

Fig 36 Tesco sales intensity and profitability has declined materially over the past 3yrs


Australian hypermarket experience very limited: Hypermarkets have not taken hold in

Australia. Coles Myer unsuccessfully attempted the format between 1982 and 1989. Super

Kmart stores (effectively merged Kmart and Coles stores) were split into separate Coles and

Kmart stores in May 1989. Both Woolworths and Coles have learnt from the recent UK

experience with large format stores and hypermarkets, resulting in the largest new stores

being limited to ~3500 to 4000sqm with very limited space dedicated to non-food items.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Tesco UK

Supermarket space (million

sqm)

Tesco UK Supermarket space (million

sqm) Tesco Convenience (~250sqm)

Tesco Small Format (~1000sqm)

Tesco Supermarkets (~2500sqm)

Tesco Hypermarkets (~6500sqm)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Tesco UK sqm growth

Tesco UK

sqm growth

Tesco Convenience (~250sqm)

Tesco Small Format (~1000sqm)

Tesco Supermarkets (~2500sqm)

Tesco Hypermarkets (~6500sqm)

Total Supermarket space growth

-

100

200

300

400

500

600

700

800

900

1,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1H08

2H08

1H09

2H09

1H10

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

2H14

1H15

Profit per sqm

Revenue per sqm Revenue per sqm

Profit per sqm

Construction of

hypermarkets drove

UK space growth

Coles Myer

unsuccessfully

attempted

hypermarkets

between 1982 - 1989

Hypermarkets

negatively impacted

Tesco sales

productivity


6 February 2015 18

Australia space growth to remain rational Australian space growth has been rationally deployed over the past decade, with ~2.5%

space growth broadly in line with the ~2.4% demand growth, on a CAGR basis, since 2005.

Fig 37 Australian supply of space consistently in line with demand growth.

Source: Company websites, Macquarie Research February 2015

The key drivers of both supply and demand are highlighted below.

Supply growth (supermarket trade area) has historically been relatively stable, as

Woolworths and ALDI have expanded store networks and space consistently over the past

decade, growing at a combined ~5.0% p.a. and contributing 1.8ppts to 2.5% national

space growth. This has been offset by Coles and independents growing much more

modestly. We forecast supply growth of ~2.5% p.a. over the next five years.

Fig 38 Australian supply historically growing at ~2.5%...


-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

e

FY

16

e

FY

17

e

FY

18

e

FY

19

e

FY

20

e



ForecastsActual

1.7%

3.7%

2.4%

3.4%

1.0%

1.9%

3.1% 3.0%2.1% 2.5%2.5% 2.5% 2.5% 2.3% 2.3%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

e

FY

16

e

FY

17

e

FY

18

e

FY

19

e

FY

20

e

Space growth (%)

Domestic independents International competitors

Domestic majors Trading area (AUS) - supply

ForecastsActual

Space growth and

demand in line both

historically and

inbuilt into our

forecasts

We forecast supply

growth of ~2.5% p.a.

over the next five

years


6 February 2015 19

Demand growth (food retail volume) is underpinned by population growth, which has

been relatively strong at a 1.7% CAGR since 2005, much higher than other developed

economies with large incumbent supermarkets. In addition, the quantity/mix of food

consumed per person is a key driver of demand. This tends to be cyclical, with a better

economic environment resulting in greater food consumption, which has expanded at a

rate of ~0.8% p.a. since 2005. We forecast demand growth of ~2.6% p.a. over the next

five years.

Fig 39 ... in line with Australian demand at ~2.5% - 3.0%


Woolworths have been increasing trading space of their supermarket network at a

CAGR of ~4.0% per year over the last decade1. This rate of growth is materially above the

rest of the market (~2%). We do not consider this to be a risk to Woolworths’ profitability due

to:

Moderate market-wide space growth resulting in the market not being oversupplied in

aggregate. Coles is a major contributor to this moderate growth as management has (to

date) focussed on refurbishments and replacement stores rather than net new store roll-

out post acquisition.

Woolworths have acted defensively by building sites potentially earlier than required to

crowd out competitors entering the same catchment. Although additional stores carry the

risk of cannibalisation of the existing Woolworths network, many of the target catchments

are sufficiently capable of supporting additional planned supermarkets, as discussed in

detail: Woolworths / Wesfarmers - Bigger, more people and less cannibalisation.

1 Due to the difference in disclosure by Woolworths and Wesfarmers we have estimated the attributable space

to Woolworths supermarkets.

-4%

-2%

0%

2%

4%

6%

8%

Se

p-8

4

Se

p-8

6

Se

p-8

8

Se

p-9

0

Se

p-9

2

Se

p-9

4

Se

p-9

6

Se

p-9

8

Se

p-0

0

Se

p-0

2

Se

p-0

4

Se

p-0

6

Se

p-0

8

Se

p-1

0

Se

p-1

2

Se

p-1

4

Se

p-1

6

Se

p-1

8

% Change Population

Volume per person/mix effect

Retail Volume - FoodActual Forecast

We forecast demand

growth of ~2.6% p.a.

over the next five

years


6 February 2015 20

Coles vs. WOW key in absence of tail risks As we highlight in the preceding analysis, UK style structural risks are considered unlikely in

Australia. Nevertheless, the Australian supermarket industry is not without risk. Operating

performance will vary, with relative winners and losers determined by the strategies

undertaken. We compare the key operating metrics between Coles and Woolworths below,

and construct scenarios around Aldi’s progress towards its long term goals for market share

and sales growth.

Sales productivity gap has closed, Coles to overtake Woolworths

Aggressive store rollout has affected Woolworths’ productivity. Woolworths’

supermarkets sales intensity has remained relatively flat over the past 5 years as space

growth accelerated. This is to be expected as Woolworths has defensively grown its network

in order to secure sites in particular locations ahead of Coles. Several of the more recent

stores being rolled out are done so opportunistically in what it considers to be growth

corridors to provide benefit once the catchments mature.

Fig 40 Coles supermarket sales/sqm has overtaken Woolworths supermarkets...

Fig 41 ... however Coles’ productivity growth is moderating


Focus on store network optimisation has driven Coles’ sales intensity above

Woolworths. The productivity of Coles’ supermarkets has improved from a ~17% discount to

Woolworths in FY08 to a ~1% premium in FY14. This is a remarkable turnaround off a low

base for Coles to date and with the focus of Coles’ management on sales rather than EBIT

expansion going forward, the productivity premium to Woolworths will likely increase.

Coles should see productivity growth moderate as they begin to roll out net new

stores... Coles has focussed on refurbishments and replacement stores rather than net

network expansion, shrinking its total store network by 1 store (on a net basis) since June

2009 (although trading area has increased ~6% since June 2009 due to smaller unprofitable

stores being closed as larger stores are opened). This strategy has proven to be highly

effective in increasing productivity, especially when coming from an inefficient starting point

as Coles were in 2008.

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Sales/sqm ($)

WOW sales/sqm

Coles sales/sqm

ForecastActual

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%F

Y05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Sales/sqm growth

WOW sales/sqm growth

Coles sales/sqm growth

ForecastActual

Coles sales/sqm

has overtaken

Woolworths

Coles should see

productivity growth

moderate as they

begin to roll out net

new stores


6 February 2015 21

Coles’ low hanging fruit has been picked. With the network optimisation and refurbishment

program largely complete, Coles is shifting gears in FY15. As Coles rolls out new stores at

naturally lower initial productivity levels, while at the same time having fewer underperforming

stores left to close, Coles’ net sales productivity growth is likely to moderate.

... but expect further divergence of sales productivity from Woolworths over the next 5

years as the differential between total sales growth and space growth at Woolworths (~3.7%

& 3.0%) exceeds that of Coles (~4.0% & 2.4%).

Fig 42 Comparable growth gap in F&L forecast to converge in the long term


Difference in comp growth a major factor in divergence of productivity. The long run

comp growth differential assumption of +0.5% in favour of Coles (WOW: +2.5% vs. Coles:

+3.0%) will drive further differential in the productivity between the two supermarkets.

Fig 43 WOW long term F&L growth forecast to be +3.8% with comp sales of +2.5% ...

Fig 44 ... while Coles are forecast to experience F&L growth of +4.2%, driven by 3.0% comp growth

Source: Company Data, Macquarie Research, February 2015 Source: ABS, Macquarie Research, February 2015

0%

1%

2%

3%

4%

5%

6%

7%

8%F

Y05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Comp sales growth

WOW - F&L Comp sales growth

Coles - F&L Comp sales growth

ForecastActual

0%

2%

4%

6%

8%

10%

12%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Growth WOW - F&L Comp sales growthWOW - F&L New space sales growthWOW - F&L Total sales growth (Reported)

ForecastActual

0%

2%

4%

6%

8%

10%

12%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Growth Coles - F&L Comp sales growthColes - F&L New space sales growthColes - F&L Total sales growth (Reported)

ForecastActual

With the network

optimisation and

refurbishment

program largely

complete, Coles is

shifting gears in

FY15


6 February 2015 22

Space race converging

Woolworths have a long term space growth target of ~3%, which in our view is rational

based on the expected ~2.6% demand growth in Australia, underpinned by ~1.8% population

growth. Further, new Woolworths stores being rolled out are increasing in size with the

average size of a Woolworths supermarket ~2,300sqm, growing by ~0.5%p.a, driving space

growth of 3.0% consistently ahead of store number growth (2.5%).

Fig 45 Woolworths’ store rollout and space growth Fig 46 Woolworths’ average store size


Coles have been increasing supermarket trading space at a rate of ~1.3% p.a. since

FY09. The relatively low level of space growth across Coles is a reflection of Wesfarmers

management focusing on refurbishing the current store network and closing underperforming

stores. Since FY09 Coles total supermarket stores have decreased by 1 while Woolworths

have added 140 net new stores.

However, as underperforming stores have closed they have been replaced by larger stores

which have driven Coles’ ~1.3% p.a. space growth (average store size ~2,200sqm). Coles

expect to accelerate total supermarket space growth to ~2-3% over the next few years, a

similar level to WOW (~3%) through new stores rather than replacing existing stores.

Fig 47 Coles’ store rollout and space growth Fig 48 Coles’ average store size


ALDI continues to gain traction in Australia

ALDI offers a highly competitive supermarket offering in all markets around the world and is a

formidable competitor to Woolworths and Coles in Australia. While market share estimates

vary, based on ABS data, ALDI has a ~7% share of the ~$93bn Australian supermarket

industry. In a recent interview (January 2104) Aldi stated that they believe their share of the

East Coast grocery market to be ~11% and have a long term target of ~15%.

Aldi have averaged ~27 new stores per year over the last decade. To date the Aldi

supermarket rollout has been only on the East Coast of Australia (QLD, NSW, VIC), however

with the near completion of distribution centres in both SA and WA, Aldi expect to begin

rolling out stores across the respective states from FY16.

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

200

400

600

800

1,000

1,200

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

Trade area (sqm) growth

# of supermarkets

WOW - Supermarkets

WOW - Supermarket trading area growth

ForecastActual

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

GrowthSupermarket size (sqm)

WOW - Avg. Supermarket size

WOW - Avg. supermarket size growth

ForecastActual

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

200

400

600

800

1,000

1,200

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20


# of supermarkets

Coles - Supermarkets

Coles - Supermarket trading area growth

ForecastActual

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

GrowthSupermarket size (sqm)

Coles - Avg. supermarket size

Coles - Avg. supermarket size growth

Actual Forecast

Aldi have averaged

~27 new stores per

year over the last

decade


6 February 2015 23

Aldi have long term expectations of 70-80 stores in WA and 40-50 stores in SA. On the

East Coast Aldi believe there is potential for 500-600 stores, with expectations of ~100 East

coast stores opening over the next 5 years. As of January Aldi had 367 stores.

As Aldi store sizes are ~40% smaller than Coles and Woolworths (Aldi: ~1,300-1,600sqm

vs. major supermarkets: ~2,200-2,500sqm) the aggressive growth in store numbers is less

pronounced when considering the contribution to market-wide space growth. In considering

this, Aldi’s aggressive store rollout is unlikely to lead the market into an oversupplied position

as the additional stores are likely to put more pressure on existing independents, particularly

in WA and SA where independents have larger market share in less competitive regions.

Fig 49 Aldi store rollout and space growth Fig 50 Aldi store rollout by state

Source: Company Data, Macquarie Research, February 2015 Source: Industry sources, Macquarie Research, February 2015

The key elements of ALDI’s strategy, which differentiate ALDI from Woolworths and Coles,

and that have underpinned their success to date, include:

A sophisticated private label offering which is priced in line with or below the basic

Woolworths and Coles private label offering but is not packaged and marketed as private

label. Advertising directly compares the ALDI private label product to the leading brands in

each category. This results in consumer perceptions of brand equity, which drive greater

volumes for Aldi.

Strong relationships with suppliers driven by simple and fair supplier agreements and

limited ranges (Aldi stocks ~1500 SKUs vs. ~20,000-30,000 SKUs at a typical Coles or

Woolworths), which when combined with strong comp sales growth and store roll outs, is a

powerful combination for suppliers. This compares to recent ACCC rulings against Coles

and accusations made against Woolworths with regards to the treatment towards their

suppliers.

Quality offering across fresh and grocery is achieved through limiting SKUs and

incentivising suppliers. Sales momentum drives improved stock turns and supply chain

efficiencies, improving the quality of the fresh offer.

A measured store roll out program which has been well executed to date with smaller

format stores (~1,300-1,600sqm vs. major supermarkets at ~2,200-2,500sqm) in

convenient locations. The next phase of the store rollout into SA and WA will be a greater

logistical challenge for ALDI, resulting in higher prices than the Eastern seaboard.

Special buys drive foot traffic with highly seasonal, rapidly changing range of non-

grocery items. These are typically priced at very attractive levels and include electronics,

apparel, kitchenware, garden supplies, furniture, etc.

Liquor offering in-store is a key differentiator as Coles and Woolworths typically offer

Liquor in an attached format, rather than in the supermarket, as ALDI currently does. The

low price point, mix of private label and brands, combined with the relative high quality of

Aldi wines in what is a convenient offering has been successful.

Progression from basic grocery items to premium products (Avocado oil, organic

quinoa, black chia seeds, etc) in order to capture higher average product values and

basket sizes.

0%

5%

10%

15%

20%

25%

30%

0

100

200

300

400

500

600

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20


# of supermarkets

Aldi - SupermarktsAldi - Supermarket trading area growth

ForecastActual

0

100

200

300

400

500

600

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

# of supermarkets

NSW & ACT

VIC

QLD

WA

SA

Expansion into SA and WA from FY16

ForecastActual

Aldi plan to have

70-80 stores in WA

& 40-50 stores in SA

Aldi believe there is

potential for 500-600

stores on the East

coast; expect ~100

new stores over

next 5 years


6 February 2015 24

Scenarios for the Australian supermarkets ALDI a headwind, not a game changer. In considering population growth, per unit price

growth and volume per person/mix we expect a CAGR for supermarkets of ~4% over the long

term. If ALDI achieves its publicly stated store rollout targets on both the eastern seaboard

and in SA and WA, it will grow sqm at a CAGR of ~8.0% and estimated sales at ~12% p.a. for

the 6 years until 2020.

In our base case we expect ALDI to reach ~10% total supermarket industry market

share in five years (from ~6% currently), with majority of market share taken from the

independents. This scenario implies independents will experience below market growth at a

+1.0% CAGR, while Woolworths and Coles (food only) will grow above the market at +4.1%

and +4.5%, respectively.

Fig 51 Base case: WOW and Coles with sales growth roughly in line with market growth, Aldi market share at the expense of independents

Sales

Market share

BASE CASE FY14 FY20

BASE CASE 2014 2020 Change Sales CAGR

Supermarket sales (abs) $m 93,042 117,728

Woolworths 36.3% 36.5% 0.2% 4.1%

Market CAGR %

4.0%

Coles 28.6% 29.4% 0.8% 4.5%

Aldi 6.4% 10.0% 3.6% 11.9%

Woolworths supermarket sales $m 33,771 42,976

Independents 28.7% 24.1% -4.6% 1.0%

Woolworths market share % 36.3% 36.5%

Total 100% 100% 0% 4.0%

Implied CAGR % 4.1%

Coles supermarket sales $m 26,567 34,558 Coles market share % 28.6% 29.4% Implied CAGR % 4.5%

Aldi sales $m 6,000 11,773 Aldi market share % 6.4% 10.0% Implied CAGR % 11.9%

Independent sales $m 26,705 28,421 Independent market share % 28.7% 24.1% Implied CAGR % 1.0%

Source: Company data, Macquarie Research January 2015

Fig 52 Bear case Fig 53 Bull case

Market share

BEAR CASE 2014 2020 Change Sales

CAGR

Woolworths 36.3% 34.4% -1.9% 3.1%

Coles 28.6% 27.7% -0.9% 3.5%

Aldi 6.4% 10.0% 3.6% 11.9%

Independents 28.7% 27.9% -0.8% 3.5%

Total 100% 100% 0% 4.0%

Market share

BULL CASE 2014 2020 Change Sales

CAGR

Woolworths 36.3% 38.6% 2.3% 5.1%

Coles 28.6% 31.1% 2.5% 5.5%

Aldi 6.4% 10.0% 3.6% 11.9%

Independents 28.7% 20.3% -8.4% -1.8%

Total 100% 100% 0% 4.0%


Coles and Woolworths have managed Aldi’s expansion well to date, leveraging their

scale to increase efficiency; competing on price; and developing their respective private label

offerings to minimise market share loss.

There is little evidence that the Australian industry will follow the UK. While it will act as

a thorn in the side of Woolworths and Coles for the foreseeable future, Aldi is unlikely to drive

a dramatic shift in sales growth and margins as:

The demand environment continues to grow in line with space growth;

Price competition has been more aggressive for many years with consistent deflation for

both Woolworths and Coles;

Several lessons have been learned from the UK experience, most notably, maintaining a

focus on the existing supermarket network (capex, service levels, etc) and core markets

(no offshore expansion or hypermarket developments)

While Aldi will act as

a thorn in the side of

Woolworths and

Coles for the

foreseeable future,

Aldi is unlikely to

drive a dramatic

shift in sales growth

and margins

Our base case

expects ALDI to

reach ~10% market

share in five years


6 February 2015 25

Are EBIT margin differentials sustainable? The EBIT margin differentials present in the Australian supermarket industry results in a

degree of scepticism around margin sustainability. This is due to the divergence between:

The Australian supermarkets (5% - 8%) vs. global peers (3% - 5%)

Woolworths (8%) vs. Coles (5.3%).

Fig 54 Food and Liquor margins expected to stabilise for Woolworths and Coles


EBIT margins have continued to expand during the low productivity growth period. Food

and liquor margins have experienced strong expansions in recent years with Woolworths’

margins reaching 8.0% vs. Coles’ 5.3%. This has occurred in conjunction with deflation,

indicating the Australian supermarkets have been able to reduce CODB ahead of Gross

Margin pressure.

Coles expects to maintain current margins in the medium term as potential margin

expansion generated from operating leverage and efficiencies are expected to be

reinvested in price and continue to generate sales momentum.

There is a large differential between the performances of the respective liquor departments

that impacts the EBIT margins of the F&L division.

In addition, the ACCC review into fuel discounts has effectively shifted margin from the

Convenience business into F&L as discounting must now be funded by the convenience

stores, not the supermarkets.

Drivers of margin differentials: We consider the key drivers and sustainability of the above

margin differentials to be:

Woolworths’ investment in its supply chain and logistics over the past ten years;

Consolidated Australian supermarket industry results in significant market power;

Barriers to entry presented by significant geographic and population density challenges.

2%

3%

4%

5%

6%

7%

8%

9%

10%

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

F&L EBIT margin

Woolworths Coles

ForecastActual

WOW F&L margin at

a 275bps premium

to Coles


6 February 2015 26

WOW historical supply chain investment drives efficiency

Woolworths have invested in supply chain and overall efficiency of the business for

many years to build an 8% F&L EBIT margin. Both Woolworths and Coles are sophisticated

logistics businesses with significant scale. They have a materially lower operating cost base

than competitors which has been leveraged effectively to date in order to protect share.

WOW delivered on a major efficiency program from 2000 – 2007, which underpinned the

margin expansion seen throughout the 00’s.

Investment to continue: Woolworths are at the early stages of their Mercury 2 investment

aimed at further supply chain improvements, particularly the logistics of online retail and

delivery.

Fig 55 WOW’s Project Refresh generated savings equivalent to ~470bps of sales

Source: Company presentation, February 2015

The strength of the supply chain has been independently assessed by Gartner, which

last year ranked the WOW supply chain as the 6th most efficient in Asia-Pac, behind only tech

and motor manufacturers (Samsung, Lenovo, Toyota, Hyundai and Huawei) and ahead of

Honda, Flextronics, LG and Sony. WOW was 57th globally across all industrial businesses.

Wal-Mart was the highest ranked retailer at 14th.

Neither Wesfarmers, nor any other Australian companies or retailers, are featured in the top

10 in Asia-Pac. The Gartner rankings are a combination of quantitative and qualitative factors

with over 170 supply chain experts contributing to the qualitative component. Gartner made

the following comments on WOW:

Unlike many other Asia/Pacific retailers that are still developing strategies, Woolworths

has already embarked on its supply chain transformation journey.

Efficiencies gained from historical initiatives like "Mercury One" — that touched

almost every aspect of the supply chain, including procurement, distribution, order

consolidation, inventory management, merchandizing and in-store stock availability —

have helped integrate and mature the organization's supply chain capabilities, and are

proving a competitive advantage in an otherwise challenged market sector.

With an eye toward the future of online retailing, the "Mercury Two" initiative looks to

couple its already capable network with advanced analytics and deeper direct selling

expertise to drive the future of retail, and define the evolution of its network.

The 2013 investment in Quantium delivered advanced demand-sensing capabilities,

positioning Woolworths to better comprehend the rapidly changing consumer

environment and make informed trade-off decisions to optimize the flow of goods in

and out of its network.

WOW delivered

savings equivalent

to ~470bps of sales

through the 00’s

which underpinned

margin expansion

Gartner ranked

WOW supply chain

the 6th most

efficient in Asia-Pac,

and 57th globally


6 February 2015 27

Key risks to industry margins

In our view, there are limited external threats to major supermarkets margins. However,

Coles and Woolworths may elect to sacrifice gross margin to drive footfall and comps.

Price Investment: While price investment is used as a lever to drive growth, the current

Coles and Woolworths price structure is justifiable relative to Aldi given the differentiated

offering, indicating limited need to sacrifice margin with the current level of competition.

While gross margins are not easily identified due to disclosure, price differentials between

WOW, Coles and Aldi are a potential indicator of gross margin.

We expect WOW and Coles have similar gross margins due to very small price

differentials (see chart on the following page) and similar buying power with suppliers.

Woolworths may choose to cut gross margins and invest in price in order to drive sales

productivity growth. We do not think this is required as the potential payoff from materially

lower prices (improved comps and sales/sqm) is unlikely to offset the operational leverage.

ACCC continue to highlight strained supplier relationships, however to date the financial

impact has been immaterial to the supermarkets.

Aldi will gain market share from current 6% levels, however we expect sub-scale

independents (~28% of the industry) to be disproportionately impacted by Aldi, particularly as

they roll out into the SA and WA markets, where independents have a larger presence. Aldi

growing share does not require Coles and WOW to lose material market share or margin.

The key risk to

Coles and WOW

margins is that they

may elect to

sacrifice gross

margin to drive

footfall and comps


6 February 2015 28

Supermarket price perception vs. reality Pricing differentials very small in reality and virtually undetectable for consumers.

Despite differences in price perception between Coles and Woolworths, our MICAWBER

index (100+ products) illustrates that the overall price differential between the major

supermarkets is small on a weighted basis (±2%) and varies from week to week with

promotional activity. We have used our MICAWBER index (100+ products) to track the price

of a typical basket over the past 12 months.

Woolworths has been consistently cheaper for the past nine months:

Woolworths has on average been 0.7% cheaper than Coles since Mid-April.

Woolworths has been cheaper than Coles for 33 of the past 41 weeks.

Fig 56 WOW vs. Coles: Long run price differential negligible on a weighted basis


On average there were ~17.6% of the 110+ products tracked from Woolworths were on

promotion and ~13.8% at Coles. Both supermarkets saw a slight decline as the year

progressed in terms of the proportion of products on promotion.

Fig 57 Woolworths on average have a greater number of products on promotion (17.6% vs. 13.8% at Coles)

Source: Macquarie Research, February 2015

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3-J

an

-14

17-J

an

-14

31-J

an

-14

14-F

eb-1

4

28-F

eb-1

4

14-M

ar-

14

28-M

ar-

14

11-A

pr-14

25-A

pr-14

9-M

ay-1

4

23-M

ay-1

4

6-J

un

-14

20-J

un

-14

4-J

ul-

14

18-J

ul-

14

1-A

ug

-14

15-A

ug

-14

29-A

ug

-14

12-S

ep

-14

26-S

ep

-14

10-O

ct-

14

24-O

ct-

14

7-N

ov-1

4

21-N

ov-1

4

5-D

ec-1

4

19-D

ec-1

4

2-J

an

-15

16-J

an

-15

30-J

an

-15

WOW vs. Coles (%)TOTAL - ex. Liquor and tobacco

Colescheaper

WOW cheaper

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

31

-Ja

n-1

4

7-F

eb

-1

4

14

-F

eb

-1

4

21

-F

eb

-1

4

28

-F

eb

-1

4

7-M

ar-1

4

14

-Ma

r-1

4

21

-Ma

r-1

4

28

-M

ar-1

4

4-A

pr-1

4

11

-A

pr-1

4

18

-A

pr-1

4

25

-Ap

r-1

4

2-M

ay

-1

4

9-M

ay

-1

4

16

-M

ay

-1

4

23

-M

ay

-1

4

30

-M

ay

-1

4

6-J

un

-14

13

-Ju

n-1

4

20

-Ju

n-1

4

27

-Ju

n-1

4

4-Ju

l-1

4

11

-Ju

l-1

4

18

-Ju

l-1

4

25

-Ju

l-1

4

1-A

ug

-1

4

8-A

ug

-1

4

15

-A

ug

-1

4

22

-A

ug

-1

4

29

-A

ug

-14

5-S

ep

-1

4

12

-S

ep

-1

4

19

-S

ep

-1

4

26

-S

ep

-1

4

3-O

ct-1

4

10

-O

ct-1

4

17

-O

ct-1

4

24

-O

ct-1

4

31

/1

0/2

01

4

07

/1

1/2

01

4

14

/1

1/2

01

4

21

/1

1/2

01

4

% of basket under promotion (4-week average)

% of products - WOW % of products - Coles

Linear (% of products - WOW) Linear (% of products - Coles)

MICAWBER index

illustrates that the

price differential

between the major

supermarkets is

negligible (~0.7%)

~17.6% of the 110+

products tracked

from Woolworths

were on promotion

and ~13.8% at Coles


6 February 2015 29

In terms of promotional depth, Coles has a greater absolute depth across products with an

average depth of 35% vs. 28% at Woolworths. However, when we consider the weightings in

line with the ABS in terms of the money actually spent on particular products the promotional

difference between the two supermarkets is practically nil (4.4% at Woolworths vs. 4.3% at

Coles). This means although Coles may have deeper promotions, when considering what

customers actually spend their money on there is a negligible difference.

Fig 58 Coles promotions nominally deeper but equivalent when considered on a weighted basis at ~4%


With very small actual price differentials between Woolworths and Coles, and Woolworths

prices consistently lower than Coles over the past nine months, we analyse the impact on

Price perception.

Coles retain the low price perception title despite Woolworths pricing being marginally

more attractive. As we highlight over the following three pages, Coles have effectively

positioned themselves as lower priced than Woolworths in the minds of consumers, largely

due to:

Marketing strategy – The highly successful, long running marketing campaign ‘Down

Down’ has clearly influenced customer perceptions;

EDLP strategy – Greater focus on maintaining low prices across KVIs rather than high-low

promotional activity, creating an element of ‘pricing trust’ with the customer; and

Private label strategy – Focused more on value of core range as opposed to Woolworths’

tiered strategy promoting private label products of varying quality.

In response to customer price perceptions, Woolworths recently launched their new “Cheap

Cheap” marketing campaign which has a strong resemblance to Coles’ successful “Down

Down” campaign. At this early stage, trading to date suggests the “Cheap Cheap” campaign

is yet to have a material impact on sales growth.

In order to accurately gauge price perception, we analyse in detail a national supermarket

attitudes survey conducted monthly by Roy Morgan across ~1,200 – 2,000 grocery buyers

each month2, with data up to December 2014. This survey covers Coles (including Bi-Lo),

Woolworths (including Safeway), Aldi and IGA (including Foodland).

Critically, the survey clearly highlights that Coles has been the leader on consumer

perception of low supermarket prices for the past four years, with Coles having an average

1.1ppt lead over Woolworths throughout this period.

2 We take three month rolling averages in order to smooth sampling volatility and aid graphical presentation.

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

31

-Ja

n-1

4

7-F

eb

-1

4

14

-F

eb

-1

4

21

-F

eb

-1

4

28

-F

eb

-1

4

7-M

ar-1

4

14

-M

ar-1

4

21

-M

ar-1

4

28

-M

ar-1

4

4-A

pr-1

4

11

-A

pr-1

4

18

-A

pr-1

4

25

-A

pr-1

4

2-M

ay

-1

4

9-M

ay

-1

4

16

-M

ay

-1

4

23

-M

ay

-1

4

30

-M

ay

-1

4

6-Ju

n-1

4

13

-Ju

n-1

4

20

-Ju

n-1

4

27

-Ju

n-1

4

4-Ju

l-1

4

11

-Ju

l-1

4

18

-Ju

l-1

4

25

-Ju

l-1

4

1-A

ug

-1

4

8-A

ug

-1

4

15

-A

ug

-1

4

22

-A

ug

-1

4

29

-A

ug

-1

4

5-S

ep

-1

4

12

-S

ep

-1

4

19

-S

ep

-1

4

26

-S

ep

-1

4

3-O

ct-1

4

10

-O

ct-1

4

17

-O

ct-1

4

24

-O

ct-1

4

31

/1

0/2

01

4

07

/1

1/2

01

4

14

/1

1/2

01

4

21

/1

1/2

01

4

Weighted avg. depth of promos (4-week average)

WOW promotional depth Coles promotional depthLinear (WOW promotional depth) Linear (Coles promotional depth)

Through effective

marketing Coles has

retained the low

price perception

among consumers

Weighted

promotional depth

between the major

supermarkets is in

line with each other


6 February 2015 30

Despite Coles having the perception of lower prices, Woolworths has historically been

perceived as better value, reflecting of the quality of the offering. Interestingly, over the

past three months, Coles has had a clear lead on value perception as the gap on price

perception has widened.

Fig 59 Coles the clear leader on price perception across Australia…

Fig 60 … Yet value perception similar between Coles and Woolworths and better than price perception

Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14 Source: Roy Morgan Single Source, Macquarie Research, data to Dec-14

We further analyse the long term perception differentials between the majors below, where it

is clear that Woolworths has seen:

Price perception deteriorate towards the bottom end of the historical range.

Maintained its quality premium at ~2ppts. This is implied through the spread between

price and value differentials over time. Given value is a combination of price and quality, if

a product is viewed as similar value but at a higher price, it is inherently thought of as

better quality. Therefore, as Coles’ “Down Down” marketing strategy has influenced price

perception, Woolworth’s “Fresh Food People” campaign still resonates for consumers in

quality perceptions.

Fig 61 Woolworths’ relative value perception consistently better than relative price perception…

Fig 62 … creating a consistent 2.2ppt WOW quality premium inherent in consumer perceptions

Source: Roy Morgan Single Source, Macquarie, data to Dec-14 Source: Roy Morgan Single Source, Macquarie, data to Dec-14

20%

25%

30%

35%

40%

20%

25%

30%

35%

40%

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14




Coles

Woolworths

20%

25%

30%

35%

40%

20%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14


"Good Value"

(3m average)

% that identify supermarket with "Good Value" (3m average)

Coles

Woolworths

-6%

-4%

-2%

0%

2%

4%

6%

-6%

-4%

-2%

0%

2%

4%

6%

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14

ppt differential(3m average)

ppt differential (3m average) Low price differential (Woolworths - Coles)

Value differential (Woolworths - Coles)

-6%

-4%

-2%

0%

2%

4%

6%

-6%

-4%

-2%

0%

2%

4%

6%

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

Jun

13

Dec

13

Jun

14

Dec

14

ppt differential between Value and Price (3m average)

ppt differential between Valiue and Price (3m average) Quality premium (Woolworths - Coles)

Woolworths

maintains implied

quality perception

amongst consumers


6 February 2015 31

Fuel price declines to benefit supermarkets

With the unleaded petrol price declining by 26% over the past three months, supermarkets

are, in our view, the major beneficiaries due to:

As petrol prices are a regular weekly purchase, similar to grocery shopping, and a key

component of the household budget, we consider a value transfer of ~$20 per week in

petrol savings to be more likely to be directed towards a non-discretionary variable cost

such as grocery than to a discretionary retail spend such as clothing or electronics.

The triangular relationship between grocery, petrol and liquor, linked by rewards cards and

shopping frequency, provides an opportunity for both Coles and Woolworths to cross-

promote and incentivise greater spending within the network.

Fig 63 Declining petrol prices to alleviate household budgetary pressure, reducing deflationary pressure in supermarkets

Source: Australian Institute of Petroleum, Macquarie Research January 2015

Woolworths the relative winner as disposable incomes expand. Given the inherent high

quality perception still present for Woolworths (relative to a low price perception at Coles), we

consider Woolworths to be the relative winner from greater household budget flexibility on

grocery items as consumers may ‘trade up’ from Aldi/Coles to Woolworths if Woolworths

continues to deliver on value perception.

In addition to lower petrol prices, consumers are also seeing budgetary relief from:

Electricity and Gas prices in NSW and QLD post carbon-tax which are declining by 5% -

10% p.a. in both 2015 and 2016.

Lower CPI seen in 4Q14, with headline CPI rising 0.2% QoQ, to be up 1.7%YoY

Potential for lower mortgage rates as the RBA has moved to an easing bias.

80

90

100

110

120

130

140

150

160

170

De

c 0

3

De

c 0

4

De

c 0

5

De

c 0

6

De

c 0

7

De

c 0

8

De

c 0

9

De

c 1

0

De

c 1

1

De

c 1

2

De

c 1

3

De

c 1

4

Unleaded Petrol price

(cents per litre)

Supermarkets

expected to be a

main beneficiary of

the 26% decline in

petrol prices

Woolworths

expected to gain

more from higher

levels of disposable

income


6 February 2015 32

ALDI to impact price perception in WA and SA

ALDI clearly considered cheaper than Woolworths and Coles on the eastern seaboard.

Currently, 51% of shoppers believe Aldi has low prices, compared to 27% and 29% for

Woolworths and Coles. In the highly competitive eastern states, Coles has achieved lower

price perception over the past five years, on average 1.2ppts ahead of Woolworths.

The frontier markets for Aldi (SA and WA) have materially better price perception than

the eastern states (NSW, QLD and VIC), where Woolworths and Coles have, on average, a

low price perception of 32% over the past five years, well ahead of the east (25%). In our

view, this reflects:

Less competition, with a larger independent supermarket sector; and

No discount supermarket presence highlighting the price differential to Coles and

Woolworths.

Fig 64 Aldi clearly perceived as cheaper where it is established in the eastern states (NSW/VIC/QLD)…

Fig 65 ... while WA and SA shoppers consider incumbent supermarkets to have lower prices


Value perception is also stronger in the SA and WA markets, with IGA/Foodland broadly

comparable to Coles and Woolworths on this metric. For Coles and Woolworths in isolation,

they see a ~4ppt uplift in value perception in SA and WA relative to the eastern seaboard. As

with price perception above, we believe this is due to a less competitive market and the

absence of Aldi highlighting price differentials.

Fig 66 Aldi is considered better value, the gap is narrower than price in the eastern states…

Fig 67 ... while also considered better value, the gap has narrowed in the eastern states (NSW/VIC/QLD)


0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that dentify supermarket with



ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4




Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value" (3m average)


ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value" (3m average)


Coles

Woolworths

IGA

Aldi clearly

recognised as

cheaper on the East

coast; gap

significantly smaller

in WA and SA


6 February 2015 33

ALDI States: To date, Aldi has rolled out 367 stores only across the eastern states (NSW,

VIC and QLD). Aldi is consistently considered cheaper than Coles, Woolworths and IGA, with

the only major variance in QLD. We note Aldi does not have stores north of Bundaberg. As a

result, residents in northern Queensland are unlikely to nominate Aldi as good value or having

low prices, as there aren’t any Aldi’s in the region. This reduces the likely gap between Aldi

and the major supermarkets.

Fig 68 NSW: Wide price perception differentials between Aldi and Coles/WOW

Fig 69 NSW: Price perception translates into value perception for Aldi

Fig 70 VIC: Aldi the clear price leader as Coles marginally ahead of Woolworths

Fig 71 VIC: Smaller differential in value perceptions between WOW and Coles, Aldi still well ahead

Fig 72 QLD: Price gap narrower than NSW & VIC Fig 73 QLD: Value similar for WOW, Coles and Aldi

Source(for all above): Roy Morgan Single Source, Macquarie Research, data to Dec-14

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that dentify

supermarket with "Low Prices"

(3m average)

% that identify


(3m average)

ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value"

(3m average)

% that identify

supermarket with "Good Value"

(3m average)

ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that dentify


(3m average)

% that identify


(3m average)

ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value"

(3m average)

% that identify


(3m average)

ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that dentify


(3m average)

% that identify


(3m average)

ALDI

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value"

(3m average)

% that identify


(3m average)

ALDI

Coles

Woolworths

IGA


6 February 2015 34

Non-Aldi States: Aldi plans to roll out 110 - 130 stores across SA and WA from 2016. This

market is characterised by a large presence of independents and a third major supermarket

which is competitive on price (IGA/Foodland). Particularly in SA, Foodland is considered on

par with Coles and Woolworths for both low price and good value.

Price and value perception may shift lower post the entry of Aldi. We consider the SA

and WA markets to be less competitive than the NSW/VIC/QLD markets.

Fig 74 SA: Price perception differentials are small Fig 75 SA: While Foodland has led on value

Fig 76 WA: Low Price perception stable above 30% Fig 77 WA: Value also remains high vs. NSW/VIC

Source(for all above): Roy Morgan Single Source, Macquarie Research, data to Dec-14

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that dentify


(3m average)

% that identify


(3m average)

Coles

Woolworths

Foodland

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value"

(3m average)

% that identify


(3m average)

Coles

Woolworths

Foodland

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4

% that dentify


(3m average)

% that identify


(3m average)

Coles

Woolworths

IGA

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

De

c 0

9

Jun

10

De

c 1

0

Jun

11

De

c 1

1

Jun

12

De

c 1

2

Jun

13

De

c 1

3

Jun

14

De

c 1

4


"Good Value"

(3m average)

% that identify


(3m average)

Coles

Woolworths

IGA


6 February 2015 35

Private label battleground Shift to private label in Australia being accelerated by ALDI. Woolworths and Coles’

private label product development is continuing to evolve. This ongoing evolution is

necessitated by the increased relevance of discount supermarket ALDI, which appeals to

customers in part through low cost private label products. In order to compete with the

discounter’s offering the major supermarkets have invested in the range, quality and

marketing of their private label products.

International private label more developed than Australia. The chart below shows that the

overall proportion of grocery spending on private label products in Australia (~21%) still

significantly lags that of the UK (~41%) and other European nations. However, it is interesting

to note that Australia is slightly higher than both the US (18%) and Canada (~18%).

Fig 78 Australia’s private label offering low when compared internationally

Source: Nielson, Macquarie Research, February 2015

Opportunity to increase private label exists across multiple categories. Private label

share varies across categories with the relatively easily replicated products (milk, water, bags,

foils etc.) having a higher level of private label penetration. However, the charts below show

that there is still significant opportunity in categories which have strong brand positions (Coca

Cola in soft drinks, Kellogg’s in breakfast cereals, Arnott’s in biscuits etc.), where private label

is a relatively small contributor.

Fig 79 Drinks & dairy products vary in private label penetration...

Fig 80 ... while noticeable opportunity still exists for a number of grocery related products

Source: Retail World, Macquarie Research, February 2015 Source: Retail World, Macquarie Research, February 2015

Private label strategies are increasing in importance across the Australian

supermarket industry. In terms of the major supermarkets, we estimate that private label

sales represent ~15-17% of grocery sales (including perishables such as dairy) with this

number expected to increase ~1-1.5ppt over the next few years. The inevitable increase in

private label sales has a number of important implications, including:

41%

21%18% 18%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Swit

zerl

and

Spai

n

UK

Ge

rman

y

Po

rtu

gal

Be

lgiu

m

Au

stri

a

Fran

ce

Ne

the

rlan

ds

De

nm

ark

Swe

de

n

Hu

nga

ry

Po

lan

d

Cze

ch R

ep

ub

lic

Fin

lan

d

Slo

vaki

a

Au

stra

lia

No

rway

Can

ada

Sou

th A

fric

a

USA

Ire

lan

d

Ital

y

Gre

ece

Co

lum

bia

Private label market share

Soft drinks

Fruit juices & drinks

Chilled juice Milk

Cheese

Chilled dairy

Butter & blends

Still waterIce-cream

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

-10% 0% 10% 20% 30% 40% 50%

Private label discount

Private label share

Biscuits

Breakfast cereals

Canned fish

Toilet tissue

Bags, wraps & foils

Nutritional snacks

-60%

-50%

-40%

-30%

-20%

-10%

0%

0% 10% 20% 30% 40%

Private label discount

Private label share

Private label market

share in Australia

(~21%) is

significantly less

than internationals

(UK ~41%)

Categories with

strong branded

products possess

the most significant

opportunity for

private label


6 February 2015 36

Price deflation as consumers substitute higher unit price branded products for lower unit

price private label products;

Greater GP margin control as the supermarket has the opportunity to control input costs

for private label products more effectively;

Managing shelf space and positioning brands and private label products to

maximise sales and EBIT per sqm. Woolworths and Coles must showcase branded

products as a key differentiator from ALDI and to keep the full-service supermarket appeal.

Management of Supplier relationships is a key consideration for supermarkets,

particularly in consolidated categories where the leading brand has considerable market

power (Coca-Cola, Kellogg’s, Johnson & Johnson, etc.) in a category where supermarkets

are attempting to grow private label.

ALDI Australia cheaper than Coles and WOW private label for an average basket of

products. Based on our research of >50 comparable products across the major supermarket

categories from Aldi, Woolworths and Coles, a typical $100 weekly shop at ALDI would cost:

~18% more at Coles or Woolworths if only basic private label products are bought; and

~23% and 30% more at Coles and Woolworths respectively for mid-level private label

products.

Fig 81 $100 at Aldi will get you ~$118 in value at the major supermarkets

Fig 82 Grocery differential much less pronounced against supermarkets basic private label products

Source: Macquarie Research, February 2015 Source: Macquarie Research, February 2015

Fruit and Veg driving price differential. Fruit and vegetables are the key drivers of the price

differential between Aldi and the major supermarkets with the weighted average difference to

ALDI prices for Fruit and Vegetables standing at 11.8% and 8.7% for Woolworths and Coles,

respectively3. At the product level, the following were considered to be the major contributors

to the weighted price differential shown above in the fruit and vegetable category: Potatoes

(WOW +3.2%; Coles +3.2%), Apples (WOW +2.4%; Coles +2.4%).

Grocery differential less pronounced. Excluding fruit, vegetables and meat; Woolworths

and Coles’ basic private label prices are generally in line and are ~4.0% more expensive

than ALDI. At the mid level, Woolworths private label products are ~6% more expensive than

Coles, with both major supermarkets materially above ALDI (15.0% and 9.5% respectively)

which in part reflects Woolworths’ tiered private label strategy approach as it positions its mid-

level range at a generally higher price point from the basic level products as a point of

differentiation and implied greater level of quality.

Below we have considered the relative cost difference between a $100 shop at Aldi and the

comparable baskets (basic and mid) at the major supermarkets when considering the

weighted average price differentials.

3 Note that the analysis above considers the fruit, vegetables and meat categories to be the same for both the basic and mid-

level ranges. Further, it should be noted that this is a static view and that fruit and vegetable prices are quite variable due to short term supply and demand factors and tend to have prices applied according to particular geographical regions

100.0

118.7 117.6123.0

129.7

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

Aldi WOW - Basic Coles - Basic Coles - Mid-range

WOW - Mid-range

Weekly shop ($)

Total basket

100.0104.0 104.1

109.5

115.0

90.0

95.0

100.0

105.0

110.0

115.0

120.0

Aldi WOW - Basic Coles - Basic Coles - Mid-range

WOW - Mid-range

Weekly shop ($)

Total basket - excluding Fruit, Vegetables and Meat

Aldi ~4.0% cheaper

than major

supermarkets’ basic

private label

Coles core private

label range cheaper

than WOW;

reflecting pricing

strategies


6 February 2015 37

At a department level, after fruit and vegetables and meat the largest differential came Other

Food4, which for basic private label products, Woolworths and Coles are ~2% more

expensive than ALDI on a weighted basket basis. At the mid level, Woolworths were +8.6%

more expensive and Coles were +5.1% more expensive than ALDI.

Fig 83 Differential less pronounced across basic range

Fig 84 ’Other food’ major contributor across mid range


Consumers capturing brand equity. ALDI private label is priced broadly in line with the

basic private label products at Coles and Woolworths, but is marketed and packaged like a

branded product. When combined with a quality product, this is a powerful offering as the

consumer effectively captures the brand equity as savings, rather having this go to the brand

owner in the form of a price premium.

4 Other Food includes eggs, jams, spreads, oils, condiments etc.

0.3%

11.8%

2.9%

0.0%

1.8%1.3%

-0.2%0.5%

8.7%

4.8%

0.7%

2.2%0.9%

-0.2%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Bre

ad a

nd

Ce

real

P

rod

uct

s

Fru

it a

nd

Ve

geta

ble

s

Me

at

Dai

ry a

nd

Re

late

d

pro

du

cts

Oth

er

Foo

d

No

n-a

lco

ho

lic

Be

vera

ges

No

n d

ura

ble

ho

use

ho

ld

pro

du

cts

Basic products (vs. Aldi)WOW vs. Aldi

Coles vs. Aldi

3.1%

11.8%

2.9%1.5%

8.6%

1.8%

0.0%

1.7%

8.7%

4.8%

1.5%

5.1%

2.0%

0.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Bre

ad a

nd

Ce

real

P

rod

uct

s

Fru

it a

nd

Ve

geta

ble

s

Me

at

Dai

ry a

nd

Re

late

d

pro

du

cts

Oth

er

Foo

d

No

n-a

lco

ho

lic

Be

vera

ges

No

n d

ura

ble

ho

use

ho

ld

pro

du

cts

Mid-level products (vs. Aldi)WOW vs. Aldi

Coles vs. Aldi


6 February 2015 38

UK Private label pricing analysis

Big 4 still c14% more expensive than ALDI brands on key items

Our UK retail analysts have tracked a basket of Big 4 products against ALDI over the last 12

months. The analysis below highlights the Big 4 having gradually decreased the pricing gap

vs. ALDI from January 2014 to January 2015. ASDA private label products are now just 7%

more expensive than ALDI on our analysis. TSCO and MRW look to have made large

progress in reducing the gap to 13% and 15% each (from 27% and 25%, respectively). SBRY

was still c20% more expensive than ALDI on our basket of 30 products.

Fig 85 Big 4 have slightly reduced core PL gap... Fig 86 ... but almost closed price gap on brands

Source: Big 4 Grocery websites, MySupermarket.com [ALDI], Macquarie Research, February 2015

On branded goods, TSCO has sharply reduced the price gap to just 3% in January from 16%

a year ago. This is slightly sharper than even ASDA which is at a 4% gap followed by MRW at

10% and SBRY at 11%. Clearly, these gaps have all come down over the past year.

We note in Fig 87 below that Big 4 Entry Level pricing has stayed c30% cheaper than ALDI

brand products, but has improved vs ALDI Essentials products (Fig 88).

Fig 87 Entry Level consistently c30% below ALDI Fig 88 Entry level now lower than ALDI Essentials

Source: Big 4 Grocery websites, MySupermarket.com [ALDI], Macquarie Research, February 2015

ASDA MRW SBRY TSCO

Jan-14 17% 25% 33% 27%

Jun-14 14% 20% 43% 26%

Nov-14 12% 17% 30% 18%

Jan-15 7% 15% 20% 13%

Core Private Label vs ALDI

0%

10%

20%

30%

40%

50%

ASDA MRW SBRY TSCO

Jan-14 Jun-14 Nov-14 Jan-15

ASDA MRW SBRY TSCO

Jan-14 15% 19% 19% 16%

Jun-14 5% 16% 23% 15%

Nov-14 -1% 4% 7% 6%

Jan-15 4% 10% 11% 3%

National brands vs ALDI

-10%

0%

10%

20%

30%

ASDA MRW SBRY TSCO


ASDA MRW SBRY TSCO

Jan-14 -33% -32% -28% -33%

Jun-14 -32% -33% -23% -32%

Nov-14 -32% -32% -23% -32%

Jan-15 -33% -29% -26% -37%

Entry Level vs ALDI Brands

-40%

-30%

-20%

-10%

0%

ASDA MRW SBRY TSCO


ASDA MRW SBRY TSCO

Jan-14 6% 8% 14% 8%

Jun-14 5% 4% 24% 6%

Nov-14 -2% -3% 9% -7%

Jan-15 -2% -2% 5% -15%

Entry Level vs ALDI "Essentials"

-20%

-10%

0%

10%

20%

30%

ASDA MRW SBRY TSCO



6 February 2015 39

Private Label EDLP pricing strategy

EDLP driving price perception. When considering pricing/promotional strategies

supermarkets generally use a combination of EDLP (Every Day Low Prices) and high-low

pricing strategies (“specials”). In our opinion, it is the EDLP that is the key driver of price

perception between supermarkets with the consistency in low prices creating trust with the

consumer. The EDLP strategies have been aggressively marketed through Coles’ “Down

Down” and its newly updated “Down Down Every Day” campaigns, as well as Woolworths’

newly introduced “Cheap Cheap” campaign.

Coles prevails as EDLP leader. Our research indicated that Coles had 43.6% of products

under the promotional strategy vs. 25.6% at Woolworths, clearly highlighting Coles’

preference to be seen as a more sustained low price supermarket. Note this analysis is based

on 39 comparable private label grocery items from both Coles and Woolworths (across both

basic and mid-range categories). Interestingly, these trends vary by the level of private label,

highlighting Coles’ emphasis on their core mid-level range:

Basic: Woolworths have a higher proportion of basic level products under promotion

(38.9% vs. 17.6% Coles);

Mid-range: Coles have a higher proportion of mid range products under promotion (63.6%

vs. 14.3% at Woolworths).

Fig 89 Of the 39 private label products at each supermarket (basic and mid-range)...

Fig 90 ... Coles has 43.6% under the EDLP promotional strategy, with Woolworths at 25.6%.


1821

39

17

22

39

0

5

10

15

20

25

30

35

40

45

Basic Mid-range Total

# of private label products

WOW Coles

38.9%

14.3%

25.6%

17.6%

63.6%

43.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Basic Mid-range Total

% EDLP promotion

WOW Coles

Coles had 43.6% of

products under the

promotional

strategy vs. 25.6%

at Woolworths


6 February 2015 40

Branded products: Are you just paying for packaging?

Brands at a premium. Following the relative pricing differential between the private label

products available at Coles and Woolworths and those found at Aldi, we have also looked at

9 leading branded products available at both Coles and Woolworths across various

categories to determine the price differential against key branded products and their

comparable private label products.

Each branded product is materially more expensive than their private label

counterparts. This is particularly evident in soft drinks where branded Coca-Cola is ~3x

more expensive than the various private label alternatives across each of the supermarkets.

Fig 91 Price differential of branded and private label products to Aldi prices...

Fig 92 ... Coles and Woolworths’ branded prices generally in line with each other


Promotions a feature of branded products. The significantly higher shelf price of branded

products relative to private label products results in a high frequency and depth of

promotional activity to drive foot traffic and volumes. The below charts outline the frequency

and depth of promotions across the 9 branded products selected. Across the selected

products Woolworths on average had a higher frequency of promotions while Coles had a

higher depth of promotions.

Fig 93 Peanut butter at Woolworths the most frequently promoted (36%)...

Fig 94 ... while personal care products at Coles had the deepest promotions (42%).


Coles’ price perception leadership driven by marketing of EDLP strategy, not

promotional pricing. We have measured the promotional activity of the supermarkets

using our MICAWBER data5 ( Woolworths - The MICAWBER). Based on this data,

Woolworths has a similar absolute basket price, more products on promotion and a similar

weighted average depth of promotion. Despite this relative price parity, Woolworths has seen

comps lag Coles materially, as the volume payoff from discounting has disappointed vs.

Coles, in a deflationary environment.

5The MICAWBER is an index tracking +110 products (majority branded) at both Woolworths and Coles

315%

21%

81% 82%

144% 152%

104%

336%

87%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Packaged Bread

Breakfast cereals

Milk Ice Cream Peantnut Butter

Jams Food additives

and condiments

Soft drinks Personal care

products

Aldi differential (%)

Brand (WOW) Woolworths Select Woolworths Homebrand Aldi

315%

21%

71%82%

150% 155%

97%

347%

92%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Packaged Bread

Breakfast cereals


Jams Food additives

and condiments


products

Aldi differential (%)

Brand (Coles) Coles Brand Coles Smart Buy Aldi

12.8%

2.1%0.0% 0.0%

36.2%

23.4% 23.4%

14.9%

8.5%

4.3%

0.0% 0.0% 0.0%

21.3%

10.6%

19.1%

31.9%

23.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Packaged Bread

Breakfast cereals


Jams Food additives

and

condiments


products

Frequency over last 10 months

Frequency (WOW)

Frequency (Coles)

-26.4%

-10.5%

0.0% 0.0%

-20.2%

-24.9%-27.8%

-24.9%

-32.6%-31.4%

0.0% 0.0% 0.0%

-28.3%

-42.0%

-35.1% -34.9%

-44.4%-50.0%

-45.0%

-40.0%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

Packaged Bread

Breakfast cereals Milk Ice Cream

Peantnut Butter Jams

Food additives

and

condiments Soft drinks

Personal care

products

Average depth of

promotion over last 10 months

Average Depth (WOW)Average Depth (Coles)


6 February 2015 41

Fig 98 Woolworths Financial Summary


Woolworths Limited Price: $32.46Group P&L FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Revenue A$m 57,063 59,564 61,195 33,150 30,479 63,629 34,463 31,845 66,309 68,927

Cost of Sales A$m -42,602 -43,781 -45,175 -24,453 -22,537 -46,991 -25,381 -23,546 -48,927 -50,793

Gross Profit A$m 14,461 15,783 16,020 8,697 7,941 16,638 9,082 8,300 17,382 18,133

CODB A$m -10,226 -11,164 -11,248 -6,081 -5,614 -11,695 -6,328 -5,836 -12,164 -12,616

EBITDA A$m 4,236 4,619 4,772 2,616 2,327 4,943 2,754 2,464 5,218 5,517

D&A A$m -884 -966 -996 -525 -525 -1,051 -551 -550 -1,101 -1,149

EBIT A$m 3,352 3,653 3,775 2,091 1,802 3,893 2,203 1,914 4,117 4,368

Interest expense A$m -284 -380 -260 -127 -117 -244 -130 -129 -260 -284

Minorities A$m -1 -5 -7 -8 4 -4 -12 -1 -13 -25

Tax A$m -885 -914 -1,057 -589 -505 -1,095 -622 -535 -1,157 -1,225

Underlying NPAT A$m 2,183 2,354 2,452 1,367 1,183 2,550 1,439 1,248 2,687 2,835

Non-recurring items (after tax) A$m -366 -95 0 -18 0 -18 0 0 0 0

Reported NPAT A$m 1,817 2,259 2,452 1,349 1,183 2,532 1,439 1,248 2,687 2,835

Key ratios FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Adjusted EPS cps 177.7 189.4 195.6 108.0 93.2 201.1 113.0 97.8 210.8 221.1

DPS cps 126.0 133.0 137.0 66.4 74.5 140.9 69.6 78.2 147.8 155.0

FCFPS cps 171.7 152.8 210.2 77.3 92.7 169.8 123.0 98.4 221.1 232.7

PER x 18.3 17.1 16.6 15.0 17.4 16.1 14.4 16.6 15.4 14.7

EV/EBITDA x 8.5 8.0 7.8 7.2 8.1 7.6 6.9 7.6 7.2 6.8

EV/EBIT x 10.7 10.1 9.9 9.0 10.4 9.6 8.6 9.8 9.1 8.6

EV/Sales x 0.65 0.63 0.61 0.57 0.62 0.59 0.55 0.59 0.57 0.55

Dividend Yield % 3.9 4.1 4.2 4.1 4.6 4.3 4.3 4.8 4.6 4.8

Payout ratio % 70.9 70.2 70.0 61.6 80.0 70.1 61.6 80.0 70.1 70.1

Sales grow th % 4.7 4.4 2.7 3.4 4.6 4.0 4.0 4.5 4.2 3.9

EBITDA grow th % 2.5 9.0 3.3 1.8 5.8 3.6 5.3 5.9 5.6 5.7

Underlying NPAT grow th % 2.8 7.8 4.2 3.4 4.7 4.0 5.3 5.5 5.4 5.5

EPS grow th % 2.4 6.5 3.3 2.2 3.5 2.8 4.7 4.9 4.8 4.9

Cost of Sales / Revenue % 74.7 73.5 73.8 73.8 73.9 73.9 73.6 73.9 73.8 73.7

CODB / Revenue % 17.9 18.7 18.4 18.3 18.4 18.4 18.4 18.3 18.3 18.3

Gross Profit Margin % 25.3 26.5 26.2 26.2 26.1 26.1 26.4 26.1 26.2 26.3

EBITDA margin % 7.4 7.8 7.8 7.9 7.6 7.8 8.0 7.7 7.9 8.0

EBIT margin % 5.9 6.1 6.2 6.3 5.9 6.1 6.4 6.0 6.2 6.3

NPAT margin % 3.8 4.0 4.0 4.1 3.9 4.0 4.2 3.9 4.1 4.1

ROA % 13.7 16.1 16.0 17.1 14.6 15.8 17.3 14.6 15.9 15.9

ROE % 26.7 26.8 24.6 25.3 20.9 23.1 24.3 20.2 22.2 21.4

Australian Food and Liquor FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Supermarket sales A$m 30,949 32,831 33,771 18,093 16,873 34,966 18,730 17,470 36,200 37,474

Liquor sales A$m 6,600 7,200 7,400 4,200 3,570 7,770 4,410 3,749 8,159 8,566

Revenue A$m 37,549 40,031 41,171 22,293 20,443 42,736 23,140 21,219 44,358 46,041

EBITDA A$m 3,339 3,604 3,827 2,103 1,950 4,053 2,195 2,035 4,231 4,438

D&A A$m -521 -542 -548 -283 -283 -566 -294 -294 -588 -612

EBIT A$m 2,817 3,062 3,279 1,820 1,667 3,488 1,901 1,741 3,642 3,826

F&L Price grow th % -4.4 -2.9 -3.1 -1.8 -1.6 -1.7 -1.3 -1.1 -1.2 -0.7

F&L Volume grow th (ex space grow th)% 5.5 5.6 6.1 4.3 4.1 4.2 3.8 3.6 3.7 3.2

F&L Comp growth % 1.1 2.7 3.0 2.5 2.5 2.5 2.5 2.5 2.5 2.5

F&L Contribution from Space grow th% 2.7 2.0 1.7 1.3 1.3 1.3 1.3 1.3 1.3 1.3

F&L Sales growth % 3.8 4.7 4.7 3.8 3.8 3.8 3.8 3.8 3.8 3.8

EBITDA margin % 8.9 9.0 9.3 9.4 9.5 9.5 9.5 9.6 9.5 9.6

EBIT margin % 7.5 7.6 8.0 8.2 8.2 8.2 8.2 8.2 8.2 8.3

Supermarket sqm (est) sqm 2,034,506 2,110,932 2,206,361 2,237,443 2,272,552 2,272,552 2,304,567 2,340,728 2,340,728 2,410,950

Supermarkets (number) # 883 908 942 954 966 966 979 991 991 1,016

sqm per supermarket sqm 2,304 2,325 2,342 2,345 2,353 2,353 2,355 2,362 2,362 2,373

Supermarket sales per sqm A$ 15,212 15,553 15,306 8,086 7,425 15,386 8,127 7,464 15,465 15,543

Supermarket space grow th % 4.7 3.8 4.5 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Supermarket productivity grow th % -2.3 2.2 -1.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Liquor sqm (est) sqm 354,023 374,352 390,582 394,048 401,726 401,726 405,133 412,869 412,869 424,013

Liquor stores (number) # 1,313 1,355 1,402 1,422 1,442 1,442 1,462 1,482 1,482 1,522

sqm per Liquor store sqm 270 276 279 277 279 279 277 279 279 279

Liquor sales per sqm A$ 18,643 19,233 18,946 10,659 8,887 19,342 10,885 9,079 19,760 20,203

Liquor space grow th % 8.4 5.7 4.3 2.9 2.9 2.9 2.8 2.8 2.8 2.7

Liquor productivity grow th % 3.2 3.2 -1.5 2.0 2.1 2.1 2.1 2.2 2.2 2.2

Convenience FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Revenue A$m 6,714 6,794 7,065 3,598 3,479 7,076 3,780 3,655 7,435 7,804

EBITDA A$m 159 171 121 50 32 82 52 33 86 89

EBIT A$m 127 138 89 33 16 49 35 16 52 54

NZ Supermarkets (AUD) FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Revenue A$m 4,302 4,600 5,186 2,872 2,701 5,573 2,913 2,763 5,676 5,635

EBITDA A$m 309 322 368 205 196 402 209 200 409 406

EBIT A$m 225 236 271 154 145 298 156 148 304 302

Home Improvement FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Masters Revenue A$m 146 529 752 584 655 1240 733 927 1660 2080

Danks Revenue A$m 682 710 775 420 420 839 439 439 878 918

Total Revenue A$m 828 1239 1527 1004 1075 2079 1172 1366 2538 2998

EBITDA A$m -80 -99 -111 -20 -23 -43 14 12 26 103

EBIT A$m -97 -139 -169 -69 -71 -141 -45 -48 -93 -39

BIG W FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Revenue A$m 4,180 4,383 4,352 2,378 1,889 4,267 2,435 1,935 4,370 4,476

EBITDA A$m 261 285 247 129 82 211 140 95 235 247

EBIT A$m 178 191 153 81 34 115 89 45 134 143

Cash Flow FY12A FY13A FY14A 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Operating Cashflow AU$m 2,873.8 2,719.9 3,472.7 1,417.5 1,601.8 3,019.3 2,024.6 1,701.3 3,725.9 3,929.0

Investing Cashflow AU$m -2,080.3 -1,201.7 -2,031.4 -523.0 -1,133.6 -1,656.6 -1,164.5 -1,172.4 -2,337.0 -2,354.6

Financing Cashflow AU$m -1,469.2 -1,520.4 -1,371.9 -894.4 -468.2 -1,362.6 -860.1 -528.9 -1,388.9 -1,574.4

Net increase/ (decrease) in cash heldAU$m -675.7 -2.2 69.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Balance sheet FY12A FY13A FY14A FY15E FY16E FY17E Valuation

Assets SOTP FY15 FY16

Cash and cash equivalents AU$m 833 849 923 923 923 923 Australian Food & Liquor 40,319 42,083

Trade and other receivables AU$m 870 969 926 1,044 1,123 1,204 New Zealand Supermarkets 3,717 3,784

Inventories AU$m 3,698 4,205 4,693 4,696 4,902 5,104 Big W 1,896 2,114

Property, plant and equipment AU$m 9,589 9,246 9,601 10,293 11,634 12,944 Home Improvement 0 187

Intangibles AU$m 5,282 5,784 6,335 6,312 6,289 6,265 Hotels 2,733 2,694

Other Assets AU$m 1,309 1,197 1,728 1,728 1,728 1,728 Other -872 -891

Total Assets AU$m 21,581 22,250 24,205 24,996 26,598 28,168 Enterprise Value 47,794 49,972

Liabilities - Net Debt -3,610 -3,832

Trade Creditors AU$m 5,242 5,390 6,006 5,578 5,822 6,062 Equity Value 44,184 46,140

Debt AU$m 4,750 4,452 4,356 4,532 4,754 4,879 Equity Value per Share 34.89 36.24

Other Liabilities AU$m 5,282 5,784 6,335 6,312 6,289 6,265 Target price

Total Liabilities AU$m 13,135 12,950 13,680 13,474 13,986 14,396 Capital return

Equity Dividend yield

Share Capital AU$m 4,337 4,523 4,850 5,057 5,273 5,501 Total Return

Retained Earnings AU$m 4,163 4,661 5,423 6,209 7,069 7,976 EV/EBITDA at target

Other AU$m -54 117 252 256 269 294 PER at target price

Total Equity AU$m 8,446 9,301 10,525 11,522 12,611 13,772 Div Yield at Target Price

35.57

16.4

4.5

9.4

9.57

4.44

14.01


6 February 2015 42

Fig 99 Wesfarmers Financial Summary


Wesfarmers Limited Price: $44.71Group P&L FY12 FY13 FY14 1HFY15 2HFY15 FY15E 1HFY16 2HFY16 FY16E FY17E

Revenue AU$m 58,079 59,832 62,348 32,255 31,227 63,482 34,110 32,874 66,984 70,447

Total Divisional EBITDA AU$m 4,544 4,729 4,909 2,653 2,216 4,869 2,866 2,396 5,262 5,739

Depreciation and Amortisation AU$m -995 -1,071 -1,123 -576 -576 -1,152 -592 -592 -1,183 -1,211

Adj. Equity accounted associates & non recurring itemsAU$m 40 -22 -65 -30 -35 -65 -30 -35 -65 -65

Adj. Equity accounted associates AU$m -16 48 65 30 35 65 30 35 65 65

EBIT from continuing opertaions AU$m 3,573 3,684 3,786 2,077 1,641 3,717 2,274 1,805 4,079 4,527

Non-recurring items AU$m -24 -26 364 0 0 0 0 0 0 0

Group EBIT AU$m 3,549 3,658 4,150 2,077 1,641 3,717 2,274 1,805 4,079 4,527

Net Interest Expense AU$m -505 -432 -363 -109 -139 -248 -149 -165 -314 -386

Tax Expense AU$m -918 -965 -1,098 -590 -450 -1,041 -638 -492 -1,130 -1,242

Minorities AU$m 0 0 0 0 0 0 0 0 0 0

Reported NPAT AU$m 2,126 2,261 2,689 1,378 1,051 2,428 1,488 1,148 2,636 2,899

Non-recurring Items (post tax) AU$m 17 18 -291 0 0 0 0 0 0 0

Adjusted NPAT AU$m 2,143 2,279 2,398 1,378 1,051 2,428 1,488 1,148 2,636 2,899

Key ratios FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Adjusted EPS cps 185.4 197.2 209.0 122.6 93.5 216.1 132.4 102.2 234.6 258.0

DPS (ex capital return) cps 165.0 180.0 200.0 88.0 118.7 206.7 95.1 129.6 224.7 247.1

FCFPS cps 244.9 264.9 205.6 113.9 117.7 231.6 127.9 127.5 255.4 279.2

PER x 24.1 22.7 21.4 36.5 47.8 20.7 33.8 43.8 19.1 17.3

Dividend Yield % 3.7 4.0 4.5 2.0 2.7 4.6 2.1 2.9 5.0 5.5

Payout ratio % 89.0 91.3 95.7 71.8 126.9 95.6 71.8 126.9 95.8 95.8

Sales grow th % 5.8 3.0 4.2 1.3 2.4 1.8 5.8 5.3 5.5 5.2

EBITDA grow th % 9.4 4.1 3.8 -2.1 0.8 -0.8 8.0 8.1 8.1 9.1

Underlying NPAT grow th % 11.1 6.4 5.2 1.1 1.5 1.3 8.0 9.2 8.5 10.0

EPS grow th % 11.1 6.4 6.0 3.6 3.2 3.4 8.0 9.2 8.5 10.0

EBITDA margin % 7.8 7.9 7.9 8.2 7.1 7.7 8.4 7.3 7.9 8.1

EBIT margin % 6.1 6.1 6.7 6.4 5.3 5.9 6.7 5.5 6.1 6.4

NPAT margin % 3.7 3.8 3.8 4.3 3.4 3.8 4.4 3.5 3.9 4.1

ROA % 8.5 8.5 9.8 10.3 8.1 9.3 11.0 8.6 9.9 10.6

ROE % 8.4 8.8 9.3 10.8 8.4 9.6 11.9 9.1 10.5 11.4

Coles Food and Liquor FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Revenue AU$m 26,561 27,933 29,220 15,542 15,147 30,690 16,261 15,847 32,108 33,464

EBIT AU$m 1,232 1,368 1,536 831 854 1,686 878 902 1,780 1,872

F&L Comp growth % 3.7 4.3 3.7 4.1 3.7 3.9 3.4 3.4 3.4 3.0

F&L Contribution from Space grow th % 0.9 1.2 1.0 1.2 1.2 1.2 1.2 1.2 1.2 1.2

F&L Sales growth % 4.6 5.5 4.7 5.3 4.9 5.1 4.6 4.6 4.6 4.2

EBIT margin % 4.6 4.9 5.3 5.3 5.6 5.5 5.4 5.7 5.5 5.6

Supermarket sqm sqm 1,630,168 1,656,520 1,692,642 1,720,783 1,734,958 1,734,958 1,763,803 1,778,332 1,778,332 1,822,790

Supermarkets (number) # 749 756 762 776 776 776 789 789 789 804

sqm per supermarket sqm 2,176 2,191 2,221 2,219 2,237 2,237 2,234 2,253 2,253 2,268

Supermarket space grow th 1.9 1.6 2.2 2.5 2.5 2.5 2.5 2.5 2.5 2.5

Liquor sqm 190,247 199,178 205,179 208,538 209,283 209,283 212,709 213,468 213,468 217,738

Liquor stores (number) 792 810 831 840 848 848 857 865 865 882

sqm per Liquor store 240 246 247 248 247 247 248 247 247 247

Liquor space grow th 203 205 203 202 202 202 202 202 202 202

Coles Convenience FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales $m 7,556 7,847 8,171 4,193 4,256 8,449 4,377 4,443 8,821 9,297

EBIT $m 124 165 136 65 59 124 70 77 147 173

Sales Grow th % 11.3 3.9 4.1 0.4 6.5 3.4 4.4 4.4 4.4 5.4

Bunnings FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales (ex-property) $m 7152 7653 8533 4950 4649 9599 5570 5205 10775 11936

EBITDA (ex-property) $m 957 1028 1106 703 548 1251 796 619 1416 1581

EBIT (ex-property) $m 832 896 966 633 479 1113 722 545 1267 1427

Comparable grow th % 3.9 4.4 8.4 8.0 8.0 8.0 6.0 5.0 5.5 5.0

Contribution from space grow th % 2.0 2.8 3.3 3.8 5.2 4.5 6.5 7.0 6.7 5.8

Sales Growth % 5.9 7.2 11.7 11.8 13.2 12.5 12.5 12.0 12.2 10.8

Office Supplies FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales $m 1481 1506 1575 795 891 1686 818 917 1734 1784

EBITDA $m 108 117 124 56 76 132 59 80 139 147

EBIT $m 85 93 103 46 65 111 49 69 118 126

Kmart FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales $m 4055 4167 4209 2411 2006 4417 2547 2099 4646 4846

EBITDA $m 332 415 448 311 158 469 328 166 494 515

EBIT $m 268 344 366 267 114 381 283 121 403 422

Target FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales $m 3738 3658 3501 1949 1490 3440 1946 1483 3429 3395

EBITDA $m 317 216 167 122 60 182 141 74 215 247

EBIT $m 244 136 86 80 18 97 98 31 130 161

Resources FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Revenue $m 2132 1539 1544 673 684 1357 688 711 1399 1538

EBITDA $m 589 299 290 68 78 145 57 79 136 222

EBIT $m 439 148 130 -18 -8 -27 -28 -6 -34 53

Chemicals, Energy & Fertilisers FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales $m 1786 1805 1812 829 1087 1916 881 1130 2011 2086

EBITDA $m 348 348 314 195 84 278 214 90 305 331

EBIT $m 258 249 221 144 33 177 162 39 201 225

Industrial and Safety FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Sales $m 1690 1647 1621 904 1009 1914 1014 1030 2044 2085

EBITDA $m 217 192 161 93 84 177 104 85 190 194

EBIT $m 190 165 131 77 68 145 88 69 158 161

Cash Flow FY12 FY13 FY14 1HFY15 2HFY15 FY15 1HFY16 2HFY16 FY16 FY17

Operating Cashflow AU$m 3,641 3,931 3,226 1,746 1,753 3,499 1,917 1,875 3,792 4,081

Investing Cashflow AU$m -2,169 -1,760 952 -1,254 -1,072 -2,327 -1,143 -1,141 -2,283 -2,203

Financing Cashflow AU$m -1,242 -1,965 -3,444 -1,492 -680 -2,172 -775 -734 -1,509 -1,878

Net Increase/(decrease) in cash held AU$m 230 206 734 -1,000 0 -1,000 0 0 0 0

Balance sheet FY12 FY13 FY14 FY15E FY16E FY17E Valuation

Assets SOTP FY15 FY16

Cash and trade receivables AU$m 3,511 3,674 3,651 2,686 2,771 2,858 Coles 23,802 25,176

Inventories AU$m 5,006 5,047 5,336 5,469 5,745 6,021 Bunnings 17,106 19,326

Property Plant and Equipment AU$m 9,463 10,164 9,952 11,174 12,361 13,440 Office Supplies 1,055 1,114

Goodw ill and other intangibles AU$m 16,097 16,151 14,510 14,550 14,550 14,550 Kmart 4,221 4,444

Intangibles 4,393 4,459 4,446 4,378 4,310 4,242 Target 1,635 1,939

Other Assets AU$m 3,842 3,660 1,832 1,832 1,832 1,832 Resources 1,211 1,211

Total Assets AU$m 42,312 43,155 39,727 40,089 41,570 42,943 Chemicals, Energy & Fertilisers 2,225 2,437

Liabilities Industrial & Safety 1,590 1,708

Trade Creditors AU$m 5,420 5,999 5,417 5,552 5,833 6,112 Other -873 -887

Short & Long Term Debt AU$m 5,502 5,779 5,065 6,340 7,233 7,987 Enterprise Value 51,973 56,468

Other Liabilities AU$m 5,763 5,355 3,258 3,229 3,302 3,374 - Net Debt -4,141 -5,273

Total liabilities AU$m 16,685 17,133 13,740 15,121 16,367 17,474 Equity Value 47,832 51,195

Equity Equity Value per Share 42.6 45.6

Share Capital AU$m 23,286 23,290 22,708 21,565 21,565 21,565 Target price

Retained Earnings & Other Equity AU$m 2,103 2,375 2,901 3,026 3,260 3,526 Capital return

Otehr Equity 238 357 378 378 378 378 Dividend yield

Total Equity AU$m 25,627 26,022 25,987 24,968 25,202 25,469 Total Return 3.4

44.07

-1.4

4.8


6 February 2015 43

Appendix 1: MICAWBER Methodology We have assessed a basket of Coles and Woolworths’ private label products against

what we consider to be their private label counterpart available at Aldi. Comparisons are

made against the major supermarkets’ private label products across their basic range

(Woolworths Homebrand, Coles Smart buy) and the mid-level range (Woolworths Select,

Coles brand)6.

To provide the most accurate reflection of the impact of price differences on households

each segment is weighted according to the most recent ABS expenditure survey (2011),

which provides the average weekly expenditure across each product category. The

individual products within each category are then weighted according to our assumptions

on relative sales volume and dollar contribution.

Fig 100 Segments weights adopted

Source: ABS, Macquarie Research, February 2015

Our private label analysis considers ~50 Aldi products which have been compiled to

represent each category present in a ‘standard basket’ of goods. Comparable private

label products were then compiled from both Woolworths and Coles across both the

basic and mid level product ranges. In instances were comparable products to the Aldi

private label product were unavailable at the major supermarkets; the products across all

3 supermarkets were removed from our analysis.

Our prices for the supermarkets were all sourced from the online websites of the

respective supermarkets. It is important to consider that it is advised that the products

available at the Woolworths online store are on average 2-3% more expensive than in

store, while Coles, without providing any percentages, align prices of catalogue items

and key promotional items (multi-buy, EDLP etc) with in store prices; however, regular

grocery and Fresh items are priced differently online.

Fig 101 Fruit, Vegetables and Meat are key price difference drivers

Weighting Basic

WOW vs. Aldi Basic

Coles vs. Aldi Mid

WOW vs. Aldi Mid

Coles vs. Aldi Basic

WOW vs. Coles Mid

WOW vs. Coles

Bread and Cereal Products 14.3% 0.3% 0.5% 3.1% 1.7% -0.2% 1.5%

Fruit and Vegetables 28.2% 11.8% 8.7% 11.8% 8.7% 3.7% 3.7%

Meat 18.3% 2.9% 4.8% 2.9% 4.8% -1.5% -1.5%

Dairy and Related products 11.0% 0.0% 0.7% 1.5% 1.5% -0.6% 0.0%

Other Food 16.3% 2.6% 2.2% 8.6% 5.1% 0.5% 1.2%

Non-alcoholic Beverages 10.9% 1.3% 0.9% 1.8% 1.2% -0.3% 0.3%

Non durable household products 1.1% -0.2% -0.2% 0.0% 0.0% 0.0% 0.1%

Total 100.0% 18.7% 17.6% 29.7% 23.0% 1.6% 5.3%

Total - Excluding Fruit Vegetables & Meat 53.6% 4.0% 4.1% 15.0% 9.5% -0.6% 3.2%


6 In providing this analysis we make no claim in terms of the quality of individual products and note that each

supermarket has made various claims with regards to the quality and strategic intentions of each product range.

Meat and seafood, 20.6%

Bread and cereal products,

15.3%

Other foods, 15.3%

Fruits, 14.4%

Vegetables, 12.1%

Dairy and related

products, 10.3%

Non-alcoholic drinks, 10.2%

Household goods, 1.9%


6 February 2015 44

Macquarie Quant View

The quant model currently holds a reasonably positive view on Woolworths. The

strongest style exposure is Quality, indicating this stock is likely to have a

superior and more stable underlying earnings stream. The weakest style

exposure is Price Momentum, indicating this stock has had weak medium to long

term returns which often persist into the future.

Displays where the

company’s ranked based

on the fundamental

consensus Price Target

and Macquarie’s

Quantitative Alpha model.

The rankings are

displayed relative to the

sector and country.

20/95 Global Alpha Model

Sector Rank

% of BUY recommendations 44% (7/16)

Number of Price Target downgrades 1

Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and country

For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie

Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Rank within Country Rank within Sector

Attractive

-1.8

-1.1

-0.7

0.1

0.4

0.8

1.1

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil

Treasury Wine Estates

Woolworths

Wesfarmers

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.6

-0.4

-0.5

-0.6

0.5

-0.9

-0.6

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

-70% -50% -30% -10% 10% 30% 50% 70%

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-27%

-26%

-25%

-23%

24%

25%

26%

27%

-30% -20% -10% 0% 10% 20% 30%

⇐ Negatives Positives ⇒

Profit Margin FY1

Working Capital Inc.

FCF Yield FY0

Merton Score

Price to Sales LTM

Price to Book FY1

Incremental Capex

Price to Book NTM

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.34 0.25

1.61 0.05

0.34-0.44

-0.23 0.29-0.11

0.04 0.80

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/95)

0 50 100

Percentile relative

to country(/240)


6 February 2015 45

Macquarie Quant View

The quant model currently holds a strong positive view on Wesfarmers. The

strongest style exposure is Quality, indicating this stock is likely to have a

superior and more stable underlying earnings stream. The weakest style

exposure is Profitability, indicating this stock is not efficiently converting its

investments to earnings as proxied by ratios such as ROE, ROA etc.

Displays where the

company’s ranked based

on the fundamental

consensus Price Target

and Macquarie’s

Quantitative Alpha model.

The rankings are

displayed relative to the

sector and country.

14/95 Global Alpha Model

Sector Rank

% of BUY recommendations 29% (4/14)

Number of Price Target downgrades 5

Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and country

For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie

Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Rank within Country Rank within Sector

Attractive

-1.8

-1.1

-0.7

0.1

0.4

0.8

1.1

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.6

-0.4

-0.5

-0.6

0.5

-0.9

-0.6

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

-70% -50% -30% -10% 10% 30% 50% 70%

Tesco

J Sainsbury

Metcash

Coca-Cola Amatil


Woolworths

Wesfarmers

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-22%

-22%

-19%

-18%

24%

24%

27%

37%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Momentum 3 Month

EPS Growth FY1

CPS Growth FY1

Net Income Margin NTM

EV/EBITDA LTM

Dividend Yield LTM

Price to Earnings FY0

Price to Earnings LTM

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

0.12 0.46

1.49 0.05

0.21-0.07

-0.14-0.32-0.17

-0.02 1.10

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/95)

0 50 100

Percentile relative

to country(/240)


6 February 2015 46

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2014

AU/NZ Asia RSA USA CA EUR

Outperform 51.80% 58.06% 45.07% 44.42% 60.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients)

Neutral 31.80% 27.37% 30.99% 50.10% 35.37% 33.51% (for US coverage by MCUSA, 3.08% of stocks followed are investment banking clients)

Underperform 16.39% 14.57% 23.94% 5.48% 4.08% 19.68% (for US coverage by MCUSA, 0.44% of stocks followed are investment banking clients)

WOW AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

WES AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


12-month target price methodology

WOW AU: A$35.57 based on a Sum of Parts methodology

WES AU: A$44.07 based on a Sum of Parts methodology

Company-specific disclosures: WOW AU: Macquarie Group Limited or one of its affiliates is currently providing non securities services to Woolworths Ltd for which it expects to receive or intends to seek compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Woolworths Limited's equity securities. WES AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates has provided Wesfarmers Ltd with investment advisory services in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Wesfarmers Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Target price risk disclosures: WOW AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. WES AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited


6 February 2015 47

(ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

australia australian supermarkets - macquarie.com.au · the market share loss to aldi in australia

Documents