The country’s biggest supermarket chain, Woolworths, has recorded a dramatic lift in margins for its Australian food business to well above pre-pandemic levels, underpinning a strong profit result amid a cost-of-living crisis.
The company’s net profit increased 4.6% to $1.62bn for the full financial year, while overall sales hit $64.29bn, derived from its Australian and New Zealand supermarket operations as well as discount chain Big W.
But it was the near 20% rise in earnings flowing from its Australian supermarkets that may grab the attention of policymakers – and shoppers – as parliament and unions start to scrutinise the sector’s pricing decisions through a series of inquiries concerned with living costs.
Woolworths’ financial results show it has used the pandemic and inflationary period to not just sell more goods but also increase the profit from sales, ultimately paid for by shoppers.
The sector’s preferred gauge of profitability, known as operating margins, spiked at Woolworths from 5.3% to 6% during the financial year for its Australian food division.
This is the highest margin for the groceries division recorded at Woolworths, according to analysis over the past decade when its previous high-margin liquor business is stripped out of calculations.
Woolworths now enjoys double the margins recorded by some peers in more competitive markets, such as UK chain Sainsbury’s.
Woolworths’ chief executive, Brad Banducci, said supermarket margins were not solely related to groceries, with upgrades to supply chains and improved business operations helping the group.
“It is not a direct result of food inside supermarkets,” he said. “The most important thing we need to do is provide value for our customers.”
Earnings from its Australian food division climbed 19.1% to $2.87bn.
The ACTU secretary, Joseph Mitchell, said: “Woolworths has been able to pass on more than the cost of inflation to their customers over the last year and now see profits that sit above pre-pandemic levels.
“It seems the average Aussie is copping it in the pocket whilst big business is fattening their bottom line.”
Former regulatory heads and economists have attributed the expansion in profit margins to a lack of competition in Australia, where Woolworths and Coles control two-thirds of the market.
The 2022-23 financial year lines up closely with a period of increased stress on households, with the majority of interest rate rises occurring during that time.
Banducci said on Wednesday that competition was strong and customers were “becoming increasingly thoughtful” when comparing food retailers.
“They are more concerned and conscious of where they shop and what they shop for.”
Australian food margins have been increasing at a faster pace at Woolworths than rival Coles, which reported a 4.8% rise in net profit to $1.1bn. Coles’ profitability was weighed down by a sharp increase in theft.
The supermarkets flagged that while some food prices were falling, such as cauliflower and iceberg lettuce, many packaged goods along with dairy and bakery items were still rising.
Michael Brennan, the outgoing chair of the Productivity Commission, said regulatory settings could be improved to ensure new supermarket players could enter the market.
“One of the things that has been an inhibitor to competition in supermarkets has been planning at the state level because Coles and Woolies are pretty well embedded in the planning systems, pretty good at identifying sites, potentially pretty good even at freezing out rivals,” he said at a National Press Club address on Wednesday.
Large German retailer Kaufland invested significant funds in Australia ahead of a proposed opening in a move that would have added a major competitor. It abruptly cancelled its plans in early 2020 due to difficulties setting up.
Woolworths announced it would pay a final dividend of 58¢ a share, representing a 9.4% increase from a year ago. Investors approved of its financial books, sending shares up 4% on Wednesday.
With Paul Karp
