Private Label Branded Foods In Australia – Top Down And Bottom Up Analysis

Top Down Analysis

Discuss About The Private Label Branded Foods In Australia?

In order to conduct performance evaluation of any firm operating in certain industry, the importance of top down as well as bottom up analysis is inevitable. These are the mechanism to represent information and plan strategies with a broader point of view keeping prime focus on overall performance of the firm.

The top down analysis consists of the process that involves looking into broader view at first and then enters the system slowly in order to gain insight similar to backward calculation. The system is broken into subsystems consecutively until the expected core insight is obtained  (Biswas et al. 2012). It helps to give an overview regarding the design, formulation of strategies and analysis of performance. The bottom up approach of analysis focuses on detailed specification of elements in the first stance and then they are linked to form the bigger subsystems. Adding them up further the larger system is obtained. It is upward moving process of analyzing and integrating information.

This report is designed to present a top down and bottom up analysis of two Australian leading firms in the retail industry, Wesfarmers and Woolworth. The motive behind this paper is to portray how the economic situation in Australia and world are influencing their operation and how their performance is influencing the national as well as global retail industry. The simultaneity and combined effect of their operation are intended to be captured and depicted in the discussion here.

In order to conduct top down analysis, the panoramic view of the national economy should be elaborated with prime focus on the impact on retail industry. The economic condition of the nation reinforces the financial performance of the companies and that further reinstates the health of national and global retail market. Having one of the major mixed market economies among developed countries, Australia has been able to carry out a record of consistent growth over almost more than twenty-six years. The secret behind this consistency and over time improvement is the stable economic condition that further brings forth low inflation, less unemployment, steady state growth, flexible exchange rate and steady cash rate operating in the money market.

As per the current economic snapshot as produced by Reserve Bank of Australia,  the GDP of Australia is 1.205 trillion USD in 2016, inflation rate is 1.9%, unemployment rate is 5.6% with an employment rate of growth is 2%, Cash rate is 1.5% and overall economic growth is 1.8% (RBA 2017). Over the years, Australia has been blessed with a steady GDP, low inflation, low unemployment and steady exchange rate. The economic performance of the country lay the ground of the health growth of the retail industry. Mostly dominated by service sector the nation is globally larger provider of consumer goods and services. The existing and growing market of the country as well as the cross border expansion in demand, there rae ample opportunities for its retail industry to grow.

Woolworths

The growth of population partly boosted by increasing migration, increasing employment due to the expansion of the service sector have actually resulted in increase in income that further enhanced the aggregate demand of the economy. More the aggregate demand, more is the production and greater is the growth of the national economic performance. The economic growth owing to these positive factors has also benefitted the supermarket and grocery services included in the retail that experienced increase in demand and sales.

The globalization and liberal economic policies of Australia  along with a stable exchange rate, the scope of international trade has increased much more in the past decade. As the RBA maintains a stable cash rate, the inflation is controlled in the country. At the same time, the creation of jobs in the economy injects more money into the economy. Thus, people have more money to spend. As the aggregate demand is rising in the domestic market, the production has increased . Exchange rate is AUD 0.80 per USD. This has helped in keeping the economy stable even during large crisis periods, such as, the global financial crisis during 2008 (Mortimer 2013). It also has helped in improving the international trade position of Australia. RBA follows appreciation or depreciation of the currency as per the situation in international trade market in order to response and cater to the international market needs (Baumohl 2012). When exports needed to be increased, RBA has declined the exchange rate and depreciated the currency. It has been able to control inflation and has made the exports of Australia cheaper in the global market. This accelerated the exports and that further generates more competition among the domestic producers. It has helped in increase in production, thereby increasing GDP. The supermarket industry has also benefitted from this economic condition. The increase in demand in the domestic as well as in the international market has helped in the growth of the industry.

The retail industry of Australia is one of the most growing and established industries in the country. It contributes around 29% in the GDP of the country (Dwivedi et al. 2012). Wesfarmers and Woolworths are two leading giants in the supermarkets retail sector of Australia. These two conglomerates attract the maximum market share. Woolworths has captured the highest market share in the supermarket and grocery retail in Australia, followed by Coles, which is the supermarket division of Wesfarmers (Roy Morgan Research 2016). These two companies have captured almost 70% of the market. Thus, if the economy is hit by any shock or recession, the businesses of the supermarkets will be affected too and that would disturb their market shares.

Woolworths Limited owns Woolworth chain operating in the supermarket. It owns position the Australian Stock Exchange as WOW. The company came into operation on 5^th December, 1924. Over 92 years, the company has experienced difficulties and challenges, but in the last two decades, it has captured the leading position in the market. The company operates more than 1000 stores across the country. Among those, 968 stores are supermarkets and 19 are convenience stores. In 2015, the revenue of the company was AUD 42.132 billion, with a number of employees of 111,000 (Woolworths.com.au 2017).

Wesfarmers

The economic growth of the country has contributed in the growth of Woolworths. The company had focused on all the sections of the economy to boost its sales, Hence, as the employment level had increased and wage growth occurred at the level of 1.9%, the aggregate demand had increased in the country leading to a growth in production and as well as level of employment increased too.

It came into operation in 1914 as cooperative firm for the farmers of the West Australia. Currently the company is one of the largest stock market enlisted companies of Australia with ample business companies operating under the umbrella brand. Some of the other industries the company has invested in are: supermarkets, liquor, hotels and convenience stores; home improvement; office supplies; department stores; and an industrials division with businesses in chemicals, energy and fertilizers, industrial and safety products and coal (Lewis and Huber 2015). Since inception the company has gained a lot of support from the internal and external environment of Australia and has grown to be a super power in the recent times

 To deal with the dynamics of the economies and the ever changing policies of the government the company keeps on changing and innovating the process of operation. Sustainability is one of the major changes that have been incorporated by all the industries that Wesfarmers have invested in. Wesfarmers are also a big employer there are almost 220,000 people who get remuneration of $8-9 billion annually which in turn is contributing by giving purchasing power in the hands of the people (Trevena et al. 2015). e. The company’s contribution to the economy in terms of employment, generation of purchasing power and creating of demand for other goods and services is significant. The taxes paid by the company every year are collectively responsible for the betterment of the society and the government (Olstad et al. 2017).

Increasing demand is a direct reason for the company’s growth and rapid expansion since the inflation rate in Australia is at a rate that is not alarming the flowing of goods in the economy is common. Australia competing The Company has invested in industries that face higher demands. Supermarket like Coles being one of the biggest chain in Australian economy, sources that kind of higher demand even amidst existent competition among multinational brands like Woolworths and Aldi etc Hence the supermarket group of Wesfarmers the Coles group is continuously expanding the business and focusing on improving the service and meets the expectations of the consumers Coles group follow a pattern where they are pushed to lease new, usually smaller- arrangement, stores to preserve customer patronage, but moving out of their older sites is rarely feasible. In order to change with the changing economy the company is trying to refurbish their retail locations. This could also mean that the company is opting for a rebranding.  The Coles group  are also adding extensive floor space to a business. To keep up to the changing demand and taste in the customer preference the inventories are continuously refreshed and re stocked which includes a lot of investment (Hatfield-Dodds et al 2015).

This section prepares a bottom-up analysis of the two of Australia’s retail giant companies: Wesfarmers Limited  and Woolworths Limited.

Woolworths Limited is one of the major Australian company operating in retail industry of both Australia and New Zealand. It is the second largest company in the retail industry as per revenue generated. The revenue of the firm being AU$59 billion. (2016) following the Wesfarmers and it is operating in Bella Vista (Parmenter 2015).

Wesfarmers Limited is a retailer conglomerate producing consumer service fro the Australian from 1914, operating in Perth, Western Australia. Other than retail, the company also focuses on coal mining, chemical and fertilizer production, safety products and so on generating revenue of total AU$65.98 billion (2016) owing to the Australian economy as the largest company revenue wise. It is also providing largest employment to Australian population.

Irrespective of the industry and sector operating in, the financial performance of companies depends on several factors that determine the short term as well as long term scenario. The indicators of financial performance of any company can be categorized into two aspect: Financial Key Indicators and Non-Financial key indicators.

The financial indicators of performance include broad range of components like : revenue, net profit, current ratio, debt financing, operating cash flow, net sales, book value per share, return on equity, return on invested capital (ROIC), earning per share and debt-to-net profit ratio (Marr 2012). Based on the indicators the information of the two companies are derived from their respective financial report and analyzed to track the performance trajectory, position in the said industry with prime focus given on the current financial operation of them.

As per the financial year of 2016-17, the firm has managed to generate revenue equivalent to AU$ 65.98 billion compared to the last year, which was recorded to be AU$ 62.44 billion in 2015 (Olstad, Crawford, Abbott,  McNaughton, SMhurchu., Pollard and Ball 2017). There has been 5.6% growth in the revenue from the last financial year. In domain of gross capital expenditure, Strong retention of discipline is captured in the capital expenditure which has been $1,899 million recently. This is was $340 million or 15.2 per cent lower than the figures reported in the last financial year and the fall is owing to the lower expenditure incurred on the newly opened stores (Ghosh and Wu 2012.). The firm has recorded $2440 million as net profit after tax for the 2015-16 financial years. The recent estimate of it is reported to be $2353 million showing a 3.6% fall in the net profit in the recent years. The firm manages to earn 209.5 cents as basic earnings per share. This has been 216.1 cents in the previous financial year (Olstad et al. 2017).  Return on average shareholder’s equity has been 9.6% falling only by 0.2 % as per the 9.8% rate of return in the last financial years. One of the significant indicators of company’s financial performance is return on equity on the investment made by the firm (Damodaran 2016). The importance behind such indicator is that it makes a demonstration of the ability that companies have to generate profit from the equities of the shareholders. This is also termed as net asset, which is received by subtracting liabilities from the asset.

The mode of usability of investment funds by the company is well captured in this indicator and helps in making comparison of the profitability of the company within the industry of its operation. Greater the return on equity, greater the attraction for the investors for the company since higher return is confirmed. The total operative cash flow of the retail firm is reported to be $3365 million as compared to $3791 million in the past year. This has reduced the operating cash flow per share also (Chiew, Graham, Grundy, Harwood and McCallum 2015.). This has been 299.2 cents compared to the previous estimate of 335.1 cents showing a 10% fall in the estimation. The net debt has increased remarkably within just a year $7103 million from $6209 million in the last year. The company has accelerated the net debt to equity by 2.31% compared to the last year (Keith 2012.). The recent figure is captured to be 30.9% contrast to the 25.1% previously. This has led to increased deficit financing of the firm. The major sources of debt and financing have been: bank (38%), US bonds (11%) , euro bonds (24%) and  domestic bonds (27%) (Tennen and Lockie 2012).

The free cash flow of the conglomerate has been $1233 million recently falling from $1893 million in previous financial year marking a 3.5% fall in the indicator. Dividend paid to per share capture the entire picture of the shareholder return of the firm. The firm is focused to deliver increased payment to dividends subject to group’s earnings, cash flows and available credits. The recent estimate of it has been 186 cents compared to 200 cents in 2015-16. 

The firm has been able to generate operating revenue of the firm in recent year recorded at $58.27 million as compared to $59 million in the last financial year. The estimation show negligible decline in the performance of the indicators. Sales of the group have been worth $53.47 million compared to $58.81 million in the past year (Miller and Power 2013). This implies decline in the sales of the company over the recent financial year. Operating cash flow $2,357.5 million falling steeply from the last year figure of $3,345.1 million.

The net profit after tax of the group has been $2,347.9 million in 2016 as compared to the $2,137.4 million in 2015. This implies the company has been able to capture profit for the last financial year activities. There has been remarkable decline in the total dividend payment per share. In 2016 it has been captured at 77.0 cents compared to139.0 cents in 2015 (Aldazabal, Ibanez, Quevedo and Uranga 2012).. This is due to fall in the profit margin of the firm in presence of increased cost and decreased revenue. Basic earnings per share has fallen to 97.7 cents in 2016 from the 170.8 cents in the last year owing to the fall in the revenue of the firm as a whole. In 2016, book value per share has been -287.89 cents compared to -271.03 cents in 2015. Current ratio of the company has been 0.39 % in 2016 compared to 0.41 % in the 2015. The company shows growing capital expenditure to EBITDA. The figure in 2016 is 57.96% as compared to the 45.24% in 2015 (Vernon 2012.).

Other than  financial indicators, there are several non financial indicators that impacts the overall performance of any company financially. These companies might not be reported in the financial statement but they do posses much of importance in the growth of the company over time. They don’t impact the cash flow of the company directly but exerts much impact on the type and amount of them (Landier, Sauvagnat, Sraer and Thesmar 2013). The success of business beyond the cash and debt lies in the market share, position, brand image, recognition and quality of services provided to the customers. The relationship maintained with customers along with the services provided earns a company better gear to the production and sales of it.  Most common non-financial aspects or performance are measures of foot traffic, employee turnover, number of customers and repeat customers and other qualitative metrics.

Accounting ratio is the parameter of company’s performance that makes evaluation of the efficiency and profitability of the operations of the company based on the financial statement or report. Also known as financial ratio of the company, the accounting ratio helps in providing a way to express relationship between one data point and other with making provision of useful comparisons. This ratio analysis is major component to form the fundamental analysis of overall performance of the company.  The accounting ratio analysis of  both the company is pretty high owing the facts of being leading firm in the retail industry of Australia.

The above analysis clearly depicts the important position that the firms has been able to gain in the global as well as national retain industry. Owing to their contribution to the GDP of Australia, their performance plays pivotal role in nation’s economic growth.  The contributors to economic growth are the growth of GDP, growth and expansion of the retail market, demand and sales consequently The growth of net export is also one of the important parameter that contributes to the enhancement of overall economic growth. The economic growth and growth of the firms actually reinforces each other (Richards, Lawrence, Loong and Burch 2012). Thus, any economic uprising can favor their expansion and growth just as any negative atmosphere can exert downward influences in their performances. The first recommendation regarding maintaining good health of these firms as well as entire retail sector would be to stabilize economy as much as it is possible (Roy 2016. ). Detection of negativity and stringent macroeconomic policies with microeconomic analyses and detailing can help to ascertain stability in the economy. The global market scenario should be positive and favorable too in order to make them grow. More the demand more is the production and sales which counts into more of consumption expenditure, export revenue that increases the nominal GDP of Australia. The trade volume increase too. The opportunity of foreign direct as well as portfolio investment in supermarket grocery is another important recommendation that Australian government can follow. More investment would help the firms bear the capital expenditures as the cash inflows will rise due to autonomous increase in the capital base made by the investments. Expansion of stores, outlets or even diversification can be din since the firms are much popular in both the domestic and international market. these would help the firms generate more revenue and promote more sales. Some of the fiscal policies and monetary policies can help the firms boost its financial performance. Reduction in tax, flexible exchange rate, lower interest rates ca enhances the financial indicators of the firms. Greater the revenue and lesser the cost in terms of tax, depreciation, higher will be the profit of the firms. This allows the firms to accumulate capital for further business expansionary plan. Moreover the indicators like earning per share, dividend per share would increase that would indirectly consolidate the shareholders trust. This also would allow the firms to create pool of funds.

Conclusion

 The economic indicators are of crucial importance in the growth of retail industry of Australia. If any of the economic indicators goes through a shock or a sudden change, then the business of the supermarkets will be affected. If the exchange rate increases, the currency of Australia will appreciate, making the exports costlier and imports cheaper. In this case, the export revenue of these supermarkets would go down and as the level of imports would increase and would be available to the people, the sales of the domestic products would also go down. This would affect the growth of the economy. Similarly, if the level of unemployment increases, the sales of goods and services would fall and the revenue of these supermarkets would fall too.  From the above discussion and analysis of the financial performance of the firm a common trend of declination has been found in the recent year of 2016 as compared to the last financial year. Both the companies form the maximum share of the total retail transaction of Australia owing much importance to the entire GDP of the nation contributed through growth in the retail sector. Even amidst such performance level, Wesfarmers has been able to take over Woolworth and become Australia’s largest and world’s 21^st largest revenue generator.

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