KEY POINTS:
Woolworths is losing market share to local cooperative Foodstuffs in the battle of the two New Zealand supermarket operators, according to JPMorgan analyst Shaun Cousins.
The duopoly controls virtually all of New Zealand's grocery market.
Woolworths, which runs the Foodtown, Countdown and Woolworths brands, has seen its market share fall from 45 per cent to 43 per cent, while Foodstuffs has seen its share rise to 57 per cent, Cousins told The Australian newspaper.
Woolworths yesterday reported its NZ sales rose by 3.5 per cent in the fourth quarter when adjusted for new store openings, down from 6.2 per cent in the previous quarter.
It estimated food inflation at its stores was 4.6 per cent, so sales growth was failing to keep pace.
The New Zealand operation lagged the group, whose overall sales rose 10.7 per cent to A$47 billion ($60.5 billion).
Chief executive Michael Luscombe said he always believed it would take three years to straighten up the New Zealand operation.
He said the last quarter result reflected the tighter economic environment in New Zealand and a decline in the overall market in the fourth quarter.
Rising fuel prices and falling house valuations were likely to further degrade consumer sentiment in New Zealand, seeing discount chains such as the Foodstuffs-owned Pak'n'Save win market share from premium supermarkets like Woolies' Foodtown and Woolworths stores, Cousins said.
Woolworths' discount chain Countdown was also likely to lose market share to Pak 'n'Save, which had more effectively promoted itself as a value retailer, he said.
"The moderation in the rate of sales growth, particularly the volume declines, and the possibility of further market share declines, are a concern for Woolworths," he added.
JPMorgan has trimmed its forecast for Woolworths' 2008-09 profit by 2.3 per cent to A$1.84 billion.
UBS analyst Ben Gilbert also downgraded his profit estimate, citing a deterioration of the New Zealand market as a factor.
Merrill Lynch analyst David Errington said Woolworths' entry to the New Zealand market with the A$2.5 billion acquisition of Progressive had only been "moderately successful".
"Woolworths, in our view, is too focused on value in New Zealand, when it doesn't have the quality asset base to offer the best value in the market," he said.
Foodstuffs was "miles ahead" in terms of its customer offer and store infrastructure due to Progressive's previous owners under-investing in the business, he said.
Others analysts have said the Australian owners of Progressive, Woolworths and Foodland Associated before them have found Foodstuffs a far tougher nut to crack than expected.
They believed Foodstuffs, with its old-fashioned cooperative structure, would be no match for Woolworths with buying power equal to half New Zealand's GDP and highly sophisticated distribution channels. That has not proved to be the case.
Woolworths is still awaiting a Court of Appeal decision on whether the Commerce Commission can prevent either or both Woolworths and Foodstuffs from making takeover bids for The Warehouse.
Foodstuffs and Australia's Woolworths each have 10 per cent stakes in The Warehouse and successfully went to the High Court to overturn the commission's decision to block any potential takeover.
The Commerce Commission appealed that decision and the court case was completed in early May. Interested parties expected a decision last month but still no decision has been forthcoming.
Should the court rule against the commission, Woolworths, with its hugely deep pockets, is seen as the front runner, but going on current form, it may be in for another surprise.
- NZPA
