Woolworths Group Limited: Financial, Strategy and Accounting Analysis

This report provides a comprehensive analysis of Woolworths Group Limited, a leading Australian retail company. It begins with an overview of the company's background, including its mission to deliver quality products and services. The analysis then delves into Woolworths' business strategy, utilizing Porter's five forces model to assess industry factors and examining its cost leadership and differentiation strategies. Finally, the report evaluates the accounting quality of Woolworths by assessing its key accounting policies, such as consolidation, revenue recognition, inventory valuation, and depreciation, along with its application of accounting estimates. The report references financial data from 2006 to 2018, providing insights into the company's performance and strategic direction.

Woolworths Group Limited
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Part A: Company Background and Mission
Woolworths Group Limited is a leading company of Australia mainly involved in
carrying retail operations since its establishment in the year 1924. It is a publicly listed company
traded on ASX and conducts its operations within the retailing sector of the country. It has
attained the position of being a second largest company in terms of revenue within Australia and
New Zealand. The company realized major income from its supermarkets and grocery stores
across the Australian retail industry. The core business of the company consists of providing
food, liquor, general merchandise and within the hospitality and gaming sector1. The major
business segments of the company can be stated as follows:
 Australian Food: There are about 1,000 supermarket stores of the company across
Australia
 New Zealand Food: It has about 180 grocery stores in New Zealand
 Endeavour Drinks: The segment is involved in retailing of liquor through its online stores
 Portfolio: Woolworths is also involved in conducting hotels and gaming operations
across Australia and New Zealand
Woolworths has attained a leading position within the retail sector by developing a
competent workforce that is able to effectively meet the customers’ needs. The strategic priority
of the company is to develop a differentiated position in the food and drink business across
Australia and New Zealand. The mission statement of Woolworths is to deliver the best in
convenience, value and quality products and services to its customers. It has employed
workforce of about 201,000 team members for serving its 29 million customers through its
brands on weekly basis2.
Part B: Business Strategy Analysis
The strategic analysis of company involves providing an assessment of its strategy or
direction and examining its decisions on allocating resources for achieving its determining long-
term goals and objectives. The Porter five forces model can be effectively used for strategic
planning by the company. The Porter’s five force model can be used for examining the industry
factors that can impact the strategic position of Woolworths that is discussed as follows:
1 Woolworths Group Limited. 2018. Overview. [Online]. Available at:
https://www.ibisworld.com.au/australian-company-research-reports/retail-trade/woolworths-
group-limited-company.html [Accessed on: 14 May 2019].
2 Woolworths Group. 2018. About Us. [Online]. Available at:
https://www.woolworthsgroup.com.au/page/about-us/our-approach/strategy-and-objectives/
[Accessed on: 14 May 2019].
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 Threat of New Entrants: The presence of strong threat of new entrant within the food
and retailing sector of Australia has caused Woolworths to place emphasis on developing
the wand innovative products for maintaining its competitive position. It also focuses on
achieving economies of scale for reducing its price and providing high value proposition
to its customers
 Bargaining Power of Suppliers: The presence of large number of retailing companies
within Australia has lead to developing high bargaining power of suppliers and thus they
can extract high price from Woolworths. This can lead to negatively impacting the
profitability of Woolworths within and thus the company has to develop long-term
relations with the suppliers3.
 Bargaining Power of Buyers: The high competition within the food and retailing sector
of Australia is causing to increasing the barging power of buyers as they can put pressure
of Woolworths for reducing the price and thus impacting its ability to realize sustainable
profits. The more powerful is the customer base is causing Woolworths to reduce the
price. As such, the company is required to increase its customer base for reducing the
bargaining power of buyers and thus streamlining its sales and production process.
 Threat of Substitute Products or Services: There is higher risk of substitute products or
services within the retail and apparel sector and therefore Woolworths need to continually
invest within its R&D sector for developing innovative products and services. Also, it
emphasizes on becoming a service printed company instead of being a product oriented
for achieving customer satisfaction
 Threat of Rivalry: There is high threat of rivalry among the food and retailing sector
and therefore it can impact the profitability of Woolworths in the long-term. The
company can meet the intense competition by creating its differentiated position within
the retail industry and developing its unique image in the mind of the customers4.
Thus, the analysis of the Porter five forces model has enabled in developing an understanding
of the business strategy that Woolworths implements for developing and maintaining its
distinctive place within the food industry. In addition to this, Woolworths Group Limited also
employs the use of strategies such as cost leadership and differentiation for achieving a
sustainable competitive advantage. The strategies used by the company can be discussed as
follows:
3 Woolworths Limited Porter Five Forces Analysis. 2017. [Online]. Available at:
http://fernfortuniversity.com/term-papers/porter5/asx/627-woolworths-limited.php [Accessed on:
14 May 2019].
4 Clegg, S., Carter, C. and Kornberger, M. 2011. Strategy: Theory and Practice. Australia:
SAGE.
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Cost Leadership Strategy
The cost leadership strategy emphasizes on developing a low-cost position of a company
in relation to its competitors. Woolworths has placed increased emphasis on maintaining a cost-
leadership structure over its entire business segments. The company is strongly committed
towards providing high quality products to its customers in comparatively lower prices. The cost
leadership has been significantly achieved by the company by focusing on reducing its cost
through elimination of unnecessary expenses. This has been achieved through creative an
effective base of tangible and intangible resources such as technological competencies and
developing long-term relations with the suppliers that has enabled it to achieve a control over its
operational expenses. As such, it is able to lower down the prices of its products and services as
compared to its competitors5.
Differentiated Strategy
Woolworths has also emphasized on differentiating its products and services as compared
with that of its competitors. The differentiation has been achieved by Woolworths by integrating
the use of sustainable business practices within all its operations to ensure that tits products are
developed in an environment-friendly manner. The adoption of environment-friendly practices
within the business processes also ensures that there is no negative impact of its production
process on the society and communities in which it operates. It has positioned its stores as ‘The
Fresh Food People’ slogan that depicts its differentiated image of quality among its customer
base and that too at affordable price range. In addition to thus, the use of innovative strategies
such as loyalty programs and technological systems have enables it to differentiate its products
and services among the mind of the customers. The differentiated strategy of Woolworth have
enables it to attain a competitive advantage in the retailing and food sector of Australia6.
Thus, it can be said that the development and use of an integrated competitive strategy,
that is, combining both cost leadership and differentiated strategy has enabled the company in
achieving a sustainable competitive advantage over its peers within the retailing sector of
Australia. This is because it is able to attain both cost leadership and differentiating advantages
that enables it to effectively achieve its strategic goals and objectives.
5 Australian Food News. 2015. Woolworths announces new strategies to win over grocery
shoppers, AFN reveals full detail. [Online]. Available at:
http://www.ausfoodnews.com.au/2015/05/06/woolworths-announces-new-strategies-to-win-
over-grocery-shoppers-afn-reveals-full-detail.html [Accessed on: 14 May 2019].
6 Inside Retail. 2016. How game theory can save Woolworths. [Online]. Available at:
https://www.insideretail.com.au/news/food-grocery/how-game-theory-can-save-woolworths-
part-iii-201607 [Accessed on: 14 May 2019].
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Part C: Evaluation of accounting quality of Woolworth Group Limited through assessing
the accounting policies and estimates
C.1: Key Accounting policies and application of accounting estimates by Woolworth Group
Limited
In order to evaluate the accounting policies used by Woolworth Group Limited annual
report has been evaluated of the current year.
C.1.1: Basis of Consolidation
The consolidated financial report of group accounts has been developed on the basis of
principle of consolidation. According to the principle of consolidation business firms should
produce the consolidated financial statements by integrating the financial information of all their
business subsidiaries in order to represent them as one single business entity. Woolworth has
made consolidated financial statement in accordance with the provision provided under AASB
standards, IFRS standards and Corporation Act, 2001.
(Source: Woolworths Group Limited: Annual Report, 2018)
C.1.2: Basis of preparation of financial statements
As per the information provided in the annual report it has been found that Woolworth
has make use of historical cost basis for preparing the consolidated financial statements except
for the financial assets as they are measured as fair value through using the other comprehensive
income statement. Financial derivative assets and liabilities, and certain financial liabilities have
been measured through use of fair value accounting as per the accounting policies used by
Woolworth Group Limited7.
C.1.3: Accounting policies used for various financial items
1: Revenue
7 Woolworths Group Limited. 2018. Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed on:
14 May 2019].
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Revenue recorded in the financial statements of Woolworth has been measured at fair
value of consideration received or to be received. Revenue from sale of goods and services has
been recognised when risks and rewards of ownership have been transferred and it is probable
that revenue value will be receivable and amount can be reliably measurable. As per IAS18,
service revenue has been recognised on the basis of stage of completion method. In order to
estimate the value of revenue received or receivable, management at Woolworth make of use fair
value of consideration received or receivable. It means Woolworth has completely followed the
IAS18 or AASB 15 to estimate the value of revenue8.
(Source: Woolworths Group Limited: Annual Report, 2018)
2: Inventory
Woolworth has measured its inventory as the accounting standard IAS-2 Inventories and
as per this accounting standard company should value their inventory at lower of cost and net
realizable value. It has been seen that Woolworth has make use of Weightage average method to
value the inventory and it has considered that cost such as rebates, bulk purchase discounts and
any other cost incurred to bring inventory at location of sale. So it can be said that Woolworth
has made use of correct accounting estimates to calculate the value of cost of inventory and it is
as per IAS29.
(Source: Woolworths Group Limited: Annual Report, 2018)
8 IAS 18 — Revenue. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias18 [Accessed on: 14 May 2019].
9 IAS 2 — Inventories. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias2 [Accessed on: 14 May 2019].
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3: Property, Plant and Equipment
Property, plant and equipment have been measured at cost less accumulated depreciation
or any impairment losses calculated at the end of balance sheet date. Straight line depreciation
method has been used to calculate the value of depreciation and it is calculated on the basis of
expected useful lives of assets10.
(Source: Woolworths Group Limited: Annual Report, 2018)
10 IAS 16 Property, plant and equipment. 2015. [Online]. Available at:
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/
ifrs-factsheets/factsheet-ias16-property-plant-and-equipment.pdf?la=en [Accessed on: 14 May
2019].
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(Source: Woolworths Group Limited: Annual Report, 2018)
4: Application of GST
All the assets, expenses and revenue have been recorded net of GST and in case there is
no applicability of GST, same is not considered while making the accounting treatment. GST is
not shown separately where it is non-recoverable from the tax authorities and GST is treated as
the part of main expense. Receivable and payables have been shown included the GST amount as
they are recoverable from customers or paid to suppliers. So it can be said that Woolworth has
used correct accounting policies for recording the GST in the books of accounts11.
(Source: Woolworths Group Limited: Annual Report, 2018)
C.1.4: Accounting estimates used by Woolworth to apply the accounting policies
Woolworth has made use of three major accounting estimations to value their accounting
items in books of accounts
11 Woolworths Group Limited. 2018. Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed on:
14 May 2019].
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 Estimation of useful life of assets and carrying value of other assets such as freehold
properties: Useful remaining life of assets requires management judgment and life of
assets is reviewed on annual basis. Also, when there is change in life of assets, the
required change in value of assets is performed through using depreciation or
amortization as per the case. Accounting estimation of freehold properties has been
performed by the management through estimating the market value, internal value in use
and valuation report. Woolworth makes use of external valuation to estimating the value
of freehold assets every three year so that correct value of assets should be presented in
balance sheet. Management judgment has been used to estimate the life of intangible
assets wherever it is required12.
(Source: Woolworths Group Limited: Annual Report, 2018)
 Accounting estimation for impairment of non financial assets: Woolworth has
followed correct impairment method to estimate the correct value of impairment to be
carried out for the non-financial asset. IAS36 has been used to make the application of
impairment of non financial assets13.
12 Woolworths Group Limited. 2018. Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed on:
14 May 2019].
13 IAS 36 — Impairment of Assets. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed on: 14 May 2019].
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(Source: Woolworths Group Limited: Annual Report, 2018)
 Estimation of provisions including the onerous leases: Various cost used to estimate
cost of fulfilling the lease contracts have been estimated through using the accounting
standard IAS3714.
(Source: Woolworths Group Limited: Annual Report, 2018)
Overall it can be said that Woolworth has made use of correct accounting estimation to
calculate the estimated life of assets and to calculate the value various financial items.
14 IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias37 [Accessed on: 14 May 2019].
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Biblography
Australian Food News. 2015. Woolworths announces new strategies to win over grocery
shoppers, AFN reveals full detail. [Online]. Available at:
http://www.ausfoodnews.com.au/2015/05/06/woolworths-announces-new-strategies-to-win-
over-grocery-shoppers-afn-reveals-full-detail.html [Accessed on: 14 May 2019].
Clegg, S., Carter, C. and Kornberger, M. 2011. Strategy: Theory and Practice. Australia: SAGE.
IAS 16 Property, plant and equipment. 2015. [Online]. Available at:
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/
ifrs-factsheets/factsheet-ias16-property-plant-and-equipment.pdf?la=en [Accessed on: 14 May
2019].
IAS 18 — Revenue. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias18 [Accessed on: 14 May 2019].
IAS 2 — Inventories. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias2 [Accessed on: 14 May 2019].
IAS 36 — Impairment of Assets. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed on: 14 May 2019].
IAS 37 Provisions, Contingent Liabilities and Contingent Assets. 2019. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias37 [Accessed on: 14 May 2019].
Inside Retail. 2016. How game theory can save Woolworths. [Online]. Available at:
https://www.insideretail.com.au/news/food-grocery/how-game-theory-can-save-woolworths-
part-iii-201607 [Accessed on: 14 May 2019].
Woolworths Group Limited. 2018. Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed on:
14 May 2019].
Woolworths Group Limited. 2018. Overview. [Online]. Available at:
https://www.ibisworld.com.au/australian-company-research-reports/retail-trade/woolworths-
group-limited-company.html [Accessed on: 14 May 2019].
Woolworths Group. 2018. About Us. [Online]. Available at:
https://www.woolworthsgroup.com.au/page/about-us/our-approach/strategy-and-objectives/
[Accessed on: 14 May 2019].
Woolworths Limited Porter Five Forces Analysis. 2017. [Online]. Available at:
http://fernfortuniversity.com/term-papers/porter5/asx/627-woolworths-limited.php [Accessed on:
14 May 2019].
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