Who pays for Woolworths’ bigger piece of pie?

Woolworths reported another increase in its net profit after tax today and shareholders will receive an increased dividend. This is great news for short-term investors, but with Woolworths casting a bigger and bigger shadow over our retail sector, it is also important to look at how the pursuit of these numbers impacts our society.

For instance, despite consumer price deflation, Woolworths has managed to increase its profit margin on its continuing operations to 26.94%, its fifth straight rise and an increase of more than one per cent on five years ago. So the question is, if prices are dropping but profit margins are rising, who is being squeezed?

The Federal Government’s FOODMap report, released in July 2012, analysed the Australian food supply chain. According to the report, Woolworths and Coles account for 68% of all food and liquor sales in Australia in 2010/2011. The report found that increased pressure from these food retailers for cost savings and larger scale has led to further rationalisation in food production. That means more people going out of business and fewer people producing more at lower margins. Further pressure is placed on these producers from cheaper imports being substituted for local product.

Both Woolworths and the Wesfarmers-owned Coles are pushing hard into the ‘own label’ space in their supermarkets and this has given them enormous, and uneven levels of power in the supply chain. Smaller, local producers have no bargaining power and those that want to stay in business must agree to the retail giant’s terms. This doesn’t just affect food producers, but all of the suppliers to the business.

So while the stock markets may revel in the results of this retail giant today, surely as ultimate investors in the company, we have to ask what other costs are we prepared to pay for Woolworths to generate these profits.

We, as members of superannuation funds and other investment vehicles, provide the capital to the likes of Woolworths, and we can use our collective power to get them to be more transparent about their activities. We just have to get the institutional investors who manage our money on our behalf to be more active.

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