Unit pricing will cut retailers’ and suppliers’ profits by 5%
Thursday, July 17, 2008/
Large retailers and suppliers of packaged goods could see earnings before interest and tax (EBIT) fall by 5% if mandatory unit pricing is introduced into Australian supermarkets.
The modeling, from Insight Research and Citi Investment Research, comes as the Australian Competition and Consumer Commission considers introducing unit pricing as part of its grocery prices review. Supermarkets are broadly supportive of the move and Aldi already uses unit pricing.
The report authors argue that the impact of unit pricing on profitability will be short term, with customers initially shifting towards more economical pack sizes.
Craig Woolford, of Citi Investment Research, said: “We expect the largest impact to be on Coles supermarkets, given the company’s inefficient cost base. The profitability on packaged groceries could fall by 6% at Coles and 3% at Woolworths.”
The impact on group earnings is, however, expected to be minimal, with Wesfarmers only estimated to see a 0.8% fall in EBIT, Woolworths a 1.8% drop and a 2.1% decline for Metcash.
Packaged goods suppliers may also notice a reduction in profitability as consumers switch away from brand names to cheaper private label goods. Woolford says Coca-Cola Amatil could be susceptible to a 2.6% reduction in EBIT while Goodman Fielder may witness a 0.5% drop.
Consumers will be the big winners from the introduction of unit pricing, according to Insight director Alan Kallir. “We expect an effective implementation of unit pricing to transfer about $810 million of wealth from retailers and suppliers to consumers per year. That is, savings of about $100 on average per family per year.”
Individual consumers could save up to 21% on packaged groceries if they switch from the highest to the lowest unit price package of the branded products. Consumers could save about another 34% by switching to the lowest unit priced private label product, according to a pricing survey completed by Citi at a Coles and Woolworths major suburban supermarket.
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