Financial Analysis of Woolworths Limited and Wesfarmers in the Retail Industry

This paper presents a financial analysis of two companies in the retail industry, Woolworths Limited and Wesfarmers, and their contribution to the Australian economy. The analysis includes a top-down and bottom-up approach, analyzing factors such as inflation, interest rates, and economic cycles. The paper also provides recommendations for improving the retail industry.

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Principal of financial management
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
The Date

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Executive summary
The paper presents financial analysis of two companies in the same industry. The
companies described are Woolworths Limited and Wesfarmers belonging to the retail industry.
The contribution of the country to these companies through applying the Top-down analysis was
carried out through analyzing how inflation, currency exchange rates, interest rate, and economic
cycle within the country affect these two companies. The bottom-up analysis was also applied in
the paper to analyze the impact of these companies to the country. These companies contribute a
lot to the country, they provide job opportunities to the citizens of the country because of their
tremendous diversity in production of services and goods as well as rising revenue to the
country.
Introduction
Woolworths Limited and WesFarmers are the largest retail business companies in the
industry of retailing within Australia. The Australian Retail business and industry is
characterized with the following; the industry has over 150,000 retail companies or businesses,
these account for 4.1% contribution to GDP and 10.7% employment in the country (Australian
Government 2011). The industry possesses tremendous diversity by; region, competitions within
the sector, retail format, nature of commodities and services provided, and business size. This
industry has faced many challenges and problems in the past. Entry of newly creative global
retailers and online retailing are just now the latest. Some of the challenges faced by the industry
include; the intensified competitions, the industry cannot be favorably compared to other related
industries in overseas countries in productivity terms, and the gap of productivity is always

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widened overtime. The industry is also characterized with operation of retailers under a number
of regulatory regimes which restrict the degree of competitiveness. Some of these restrictions
that mainly need to be addressed include "Zoning and planning restrictions" and "trading hour’s
regulations”. Australia’s online retail business is lagging behind. It's estimated that the
percentage of online retailing is 6% of Australia's retail sales. Therefore comparing online sales
statistics of Australia and those of other countries, other countries are higher.
Wesfarmers on number of financial years has been considered as the biggest company in
terms of revenue through overtaking Woolworths and other retail companies. It’s also considered
to be the biggest private employer within Australia where its employs an estimate of 220,000
employees (Patrick 2016). The company carries out its services within New Zealand, Ireland,
Bangladesh, United Kingdom and Australia. It was founded in 1914 as just a co-operative with
aim or vision of providing merchandise and services to Australian farmers in the west. It
predominantly deals in retailing as the major service but also deals in fertilizers, chemicals,
safety and industrial products as well as coal mining(Greenblatt 2009). The ASX for the
company is WES. The objective of the company is "delivering satisfactory returns to
shareholders through financial discipline and exceptional management of a diversified portfolio
of business".
Considering Woolworths Limited, it’s not a conglomerate like Wesfarmers; it’s the main
retailing company within New Zealand and Australia (Cummins 2017). It is considered to be the
second biggest revenue earner next to Wesfarmers. This group is the largest take away retailer
within Australia. In the 2008 was considered to be among the largest retailers in the world at a
position nineteenth. It has an operating revenue of $55.669 billion employing over 205,000

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employees making it one the largest employers within Australia. The companies ASX is WOW.
Woolworths aim is stated as "Being at the heart of the community and the best loved retailer for
kids, home and family leisure"(Greenblatt 2009). The objective of the company was "Improving
stock turns and optimizing network efficiency while ensuring that its customers are served by
more than 800 stores that are virtually found on every main street across united kingdom-find in-
stock the value-for-money products they have come to expect".
TOP DOWN ANALYSIS.
The environment of retail business industry in Australia is understudy using Top down Analysis
(Investopedia 2018). The retail industry in Australia comprises of products such as Food
retail/grocery, footwear, Durable goods, hardware stores, furniture, Apparel, beauty products,
goods that are durable, and others (IBISWorld 2018). The retail stores include; convenience
stores, supermarkets and hypermarkets, Discounters stores plus home shopping, and other kind
of stores. This industry in Australia has continued to gain momentum being driven by social and
economic developments (Buiter 2009). The very key factors that are responsible for growth of
this industry are the rising population, robust social and economic growth of the state as well as
the increasing purchasing power in the state. The industry was expected to expand at CAGR of
2% between 2013 and 2018 making it the second lowest growth country in retail within the
region of Asia Pacific (Goodhart 2013). CAGR (Compound Annual Growth Rate) is referred to
as the average annual rate of growth of investment with in a country over a given long time
period of over one year. Australia is characterized with a flexible market which suddenly rises
and falls. In the past years there were low interest rates within the country thus giving a relief to
the industry (Goodhart 2013). Interest rates is defined as loan proportion charged in interest

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format by the lender to the borrower, expressed typically as annual percentage on outstanding
loan. The interest rate in Australia over a given period of time has been hold at 1.5% since 2017
by the central bank thus favoring retailing.
The graph below identifies the different interest rates since 2000 to 2018, source :
( TradingEconomics 2018)
The retail sector in the country is boosted by consumer confidence, the increasing net worth of
individuals, as well as the disposable income that is increasing. The industry contributes a lot of
GDP to the country. GDP also known as Gross domestic product is defined as the total value of
services provided and goods produced within the country over one year. The retail industry is
estimated to contribute 4.1% GDP within Australia.
The graph below shows the distribution of retail sales with in Australia in 2017 and 2018.
source:( TradingEconomics 2018)

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These increasing sales as indicated in the graph below are as the reason of low interest rates and
inflation rates with the country. Inflation rate is defined as the rate at which prices of goods and
services within the country increase overtime thus resulting into the fall of the purchasing money
value (Blinder 2012). The inflation rate within Australia is currently at 2.1 which has increased.
This inflation rate increased because of prices on fuel, tobacco, and electricity shooting up
(Stephen 2018).
The graph below identifies the pending inflation rates within the country affecting the two
selected companies’ sales., source:( TradingEconomics 2018)

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The sales of the two companies are enhanced because of the business cycle within Australia. The
business cycle is characterized by economic booms and recession though the economic boom
occupies the largest percentage. Economic boom in the economy refers to economic period
where there are; low inflations and price fluctuations, low taxes within the economy, and low
tariffs on free trade while depression in the reverse where there are high taxes, high tariffs, and
low production of goods and services(The Australian Workforce and Productivity Agency 2014).
In the business cycle of depression there is less sale of goods and services while in the period of
boom the sale of goods and services is at peak. Australia is one of the countries with stable and
good standings at currency exchange. The Australian dollar is not highly affected by inflation
and depression. There are 1.39 $AUD in 1$US which means 1 US$ buys less $AUD thus making
the economy stable (Australian Bureau of Statistics 2017).
According to the above statistics, it’s noted that the selected companies are operating under a
stable economic environment thus leading to their success.
BOTTOM-UP ANALYSIS

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Using the bottom-up analysis the two giant companies are to be described along with
their impact to the country’s GDP and development (Jim 2015). The two chosen companies are
the giant within the retail business as described before, these companies are Woolworths and
Wesfarmers operating retailing under Coles.
Analyzing the financial data of Wesfarmers in 2017, the following key financial indices
were analyzed. Revenue considering ordinary activities in 2017 financial year which ended in
May 2018 was $68.44 billion which increased from $65.98 billion (The Guardian 2018). The net
profits in the same year after tax was 2.87 billion dollars causing an increase from 407 us million
dollars. Net profits is defined as total revenue of the company minus expenses and tax (Abel &
Bernanke 2005). The results in 2018 financial year are not better, there was fall in profits to
$1.197 as the net profits. There was reductions in the profits as stated by the Managing director
because the company was aiming at taking decisive actions to reposition its portfolio so as to
attain a sustainable earning development and growth as well as improving shareholders returns
(Coyle 2014). However in 2018 fiscal year the retail earnings arising from consistent operations
increased by 5.2 percent in the year, where "Bunnings Australia and New Zealand (BANZ)"
Officeworks and department stores had the strongest results. Much of company’s revenue was
obtained from Energy fertilizers and chemical sales (The Sydney Morning Herald 2018). The
Cash generation within the company remained strong, capital disciplines in the year were
maintained which further strengthened the balance sheet of the group having a net financial debt
of $3,580 million different from the $4,321 million in previous year. All the company’s strength
and weakness within the fiscal year were as a result of the economic status within the country
(The Australian Workforce and Productivity Agency 2014).

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Analyzing the financial data of Woolworths, Woolworths Group is a company for the
public having an ASX; WOW, operating in retailing industry. The company in the year of 2017
had a total revenue of $55.669 billion, an operating income of $2.326 billion (The Australian
Workforce and Productivity Agency 2014). Woolworths recorded year profits of $1.53 billion
(IBISWorld 2018), the sales in the food (grocery) increased by 3.6 percent in the fiscal year
compared to the previous year. The company registered a loss of $150.5 million and these results
were described as very disappointing (Emily 2012). All endeavors are undertaken by the
company to reduce on the losses as there is continual improvement in investment. There is also
recorded reduction in sales at the department store where the rate of fall was 5.8 percent leading
to $3.6billion. The major cause of the decline was described as "continued declined in
transaction count" as well as price deflation which were driven by discounting and clearance
(Mark et al 2010).
All the above changes within those companies greatly affect the economic situation
within the country. These companies are very useful in generating revenue to the government
and also provision of employment to the natives. The total number of individuals employed by
these companies is 425,000 people.
Conclusions and summary
Wesfarmers and Woolworths are the considered to be the largest retail companies within
retail industry employing over 425,000 people. These companies have retails distributed whole
over the all-region and in different countries such as in New Zealand. They are one of the major
contributors to GDP of Australia (Dickinson 2012). They operate both online and have physical

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addresses and location where they promote their services. These companies deal in diversified
products, that is to say various products. The total percentage of employment provided by the
retail business is 10.7%. For that reason, these companies are important to the government of
Australia (Mark et al 2010). The retail industry is affected by online ho-hum growth and is the
second slowest in growth in the Asian pacific region. There are also other problems affecting the
companies in retail industry causing decrease in sales. Therefore there is need for
countermeasures to reduce on problems faced by retail business.
Recommendations
These are some of the recommendations to improve on the retail industry by the government.
 One of the fall in sales for the different commodities and rise of inflation to 2.1 was a
reason of rise in fuel and electricity prices, therefore the government should establish fuel
reservoirs and construct enough dams so as to avoid unexpected price rise among these
commodities.
 The different retail companies should educate the masses on the benefits of online
retailing as well as offering price promotions on the individuals who purchase goods and
services through the platform. This would be useful in eradicating ignorance about online
platforms and also increase revenue to the companies.

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