Grant O’Brien – CEO Woolworths Limited Speech to Trans Tasman Business Circle “The Pace of change in Global Retail” Shangri La Sydney – 19 November 2014 CHECK AGAINST DELIVERY Thank you Lisa for the kind introduction. It is great to have the opportunity to speak at the Trans Tasman Business Circle. Apart from a brief hiatus, Woolworths has had a foot on both sides of the Tasman since 1929. Today, through our Countdown business we are the largest employer in New Zealand, employing almost 18,000 Kiwis. In addition to our 180,000 Australian employees, it makes us the second biggest employer across the two countries. Each year, our Australian businesses import around half a billion dollars of New Zealand products, from muesli to chocolate. In fact, Marlborough Sauvignon Blanc is the biggest selling bottled white wine in our Australian liquor business. Woolworths’ strong Trans Tasman links are indicative of the degree to which our economies are integrated. And they highlight the importance of the work that the Trans Tasman Business Circle is championing in respect to the removal of regulatory barriers. This is a theme I will return to. But let me start where every good retailer starts and that is with the customer. The truism of retail is that customers are the driving force of change. When I started with Woolworths in Tasmania 27 years ago; ● shoppers typically turned up to the same shop, ● at the same time of the week, ● and bought roughly the same basket of goods. It is a very sharp contrast to the customer of today who shops an average of 2.5 times a week, across many stores and with wildly varying basket size. Over a given year, just 3% of Australians are "loyal" to a single supermarket chain. For the remaining 97% we are in a constant battle for their affection. A third of the time shoppers will purchase a basket of less than $10. It might be a bottle of soft drink and a packet of chips, or the ingredients for tonight's dinner. 1 The fact is supermarkets today are fulfilling a very different function from that of the past. We provide convenience at low prices, and we are the extension to the household pantry. Additionally, where once customers did a weekly shop between Monday to Saturday morning, Sunday is now the fastest growing shopping day. Nor are they constrained to their local supermarket or shopping centre. The reach of their dollar goes to: ● where they live, ● where they work, ● where they play, ● and increasingly where they want through the internet. Data is the new eyes and ears of the modern retailer. Without it, we are increasingly blind to the modern rituals and habits of consumers, particularly online shoppers. I used to be able to walk around a market and see where customers were and what they were doing because they all shopped in the physical retail space. Now, increasingly customers are going digital and their behaviours are invisible in the retail streets and malls of the market. Without data, you can’t truly see what's happening in the market, but with it, you can participate in the new retail digital era. If you take for example the shopping patterns on Sydney’s North Shore. Shoppers in that precinct spend about $9 billion a year, half in the local area. Of this, just $700 million is spent in Chatswood Chase and Westfield -­‐ the two major shopping centres. A similar amount -­‐ $600 million – is spent right here in Sydney's CBD. However, the figure that will most surprise you is the penetration of online shopping. We all know the internet is revolutionising the way we shop. However, many would not realise the full extent of its impact -­‐ shoppers from the North Shore spent more of their retail dollars online than in either: ● the local shopping centres ● or the CBD. It’s one of the reasons I strongly welcomed the focus the Interim Competition Report placed on the emergence of technology and digital disruption. 2 The great challenge for the modern regulators and governments is that structural disruption is rendering many traditional views and approaches to markets and market definition obsolete. You cannot make regulation looking through the rear view mirror. Continuing this theme of customers being the catalyst for change, let me touch on some of the changes underway in the retail sector. Many of you will recall in 2008 the ACCC conducted a comprehensive review into the grocery sector. It concluded that the industry was “workably competitive”, but... ● price competition was considered unlikely going forward ● and that barriers to entry would impede new players. It shows the danger of soothsaying in a fast changing industry. The intervening six years has seen unprecedented price competition, from dollar milk to 85 cent bread. Prices are cheap cheap and down down. At Woolworths we invested $750 million in lower prices in financial year 2014. And there is more to come. The unquestionable winners have been customers. Over the past five years, the cost of a standard basket of goods has grown at just half the rate of inflation. We calculate that this has delivered $445 in real savings per household per year. There has also been competition with the emergence of new players on the scene. ALDI has accumulated more than 10% of the domestic retail market and has announced plans to expand into South Australia and Western Australia. Costco's has entered the market with a different offer, bringing membership driven big box stores and a new petrol offer, that provide even more choice to Australian customers. In the broader retail market, we have seen the arrival of international retailers like, Zara, H&M, Uniqlo, Topshop, and many more. And this is before I even get to talking about Amazon and increasing number of online marketplaces. The consistent theme of all these new offerings is innovation. They are bringing something new to the market, and Australian shoppers are loving the increased choice. And as has always been the case, no player in the retail market can afford to sit still while consumer preference changes. 3 So, in a world where customers are the catalysts of change, and the market is changing to meet their expectations, what is Woolworths doing? We are doing what we always have, and that’s putting our customers first. In 1924, Woolworths’ founding CEO, Percy Christmas, set out with a simple mission: to provide Australians with ‘a handy place where good things are cheap’. 90 years later our mission remains the same; to provide our customers with Australia’s best offer, value and access. However, what consumes much of my time is continuing to evolve Percy Christmas’ original mission to the next generation of customers. We are investing in multi-­‐option retailing allowing customers to shop in store or online, and all of the combinations in between. Orders purchased online can be delivered on the same day, next day or on a day you chose. Alternatively, you can click and collect in the most convenient location. This type of innovation has seen Woolworths emerge as Australasia’s largest domestic online retailer. Across the Group, we recorded $1.2 billion in Online sales for FY14, increasing by more than 50% on the previous year. And we are determined to retain our lead. Recently, we opened Australia’s first full range online fulfilment grocery store in Sydney. This is helping to meet increasing demand for online shopping. But it is also allowing us to fulfil the order with great accuracy and efficiency and to narrow the delivery window. We implemented a ‘Track my Order’ GPS function. Through our new app you can see where the delivery truck is relatively to your house and the estimated time of arrival. This means you have more certainty as to when your order will arrive, so you spend less time waiting around. We are also piloting a cross brand click and collect offer where in 22 Woolworths supermarkets you can collect your BIG W and EziBuy orders. In effect this means we have 22 new BIG W stores in Sydney without laying a single new brick. Another great innovation has been our Dan Murphy’s “Connections” online platform, where customers can select from an expanded range, linking suppliers and customers through the Dan Murphy’s online platform. This is giving consumers an endless aisle of both local and international offerings. So as you can see, Woolworths is not standing still in the fast moving consumer driven environment. I have discussed the changing face of customers, the retail industry and Woolworths. Let me finish with some remarks on the role of Government, a crucial stakeholder in our business. The Federal Government has a clear commitment to innovation and competition, as reflected through its Competitiveness Agenda. This is well complemented by the work being done by the Competition Policy Review. 4 Professor Harper’s interim report was a high quality document that has the potential to provide the foundation for Australia’s next era of micro-­‐economic reform. The challenge, and to some extent the Panel’s legacy, will be the extent to which they go beyond simply identifying opportunities for reform and lay out the roadmap for implementation. Calls for change in areas such as trading hours, planning, liquor licensing laws are not unique. In fact, they have been the constant in every major micro-­‐economic review over the last decade. The case for change is so self evident it barely warrants economic analysis. Can anyone justify South Australia, a state wrestling with economic adjustment and job creation, closing down one of its biggest employing industries at 5pm every Saturday and Sunday night? Or the situation in Western Australia where regulations dictate a petrol station can sell old style film for a camera, but not a digital camera memory card before 11am on a Sunday? In fact, there is a certain irony in the government investing billions of dollars into the NBN, so that Australian businesses and households have 7 days a week 24 hour a day access to the world, but at the same time is forcing local stores to close. Calling for reform to these outdated rules is no longer enough, we need to see action. This is a position that Professor Harper, Rod Sims and I all share in common. However, it won’t surprise anyone that where we have a difference of opinion is in relation to the need to reform s46 of the Competition and Consumer Act. An effects test has been considered in 11 different reviews since the 1980s and rejected on each and every occasion. I do not understand: ● What makes now different? ● What is the compelling and clear case for change? I worry there has been far too little consideration of the consequences of getting it wrong. Lawyers and policy makers are clearly at odds with how the proposed changes would apply in practice. For example, if Woolworths can achieve substantial cost savings in its supply chain and pass these savings to consumers, should I have regard to the impact on our competition? Or, we open a new supermarket in a country town, which brings lower prices because of our national pricing. Is this prohibited because of the potential effect on a local store? 5 Of course these are hypotheticals, however, my point is that if there is not clarity on how these changes might work in practice, and to date that is the case, it automatically follows it will create uncertainty for business. It is uncertainty that will chill investment and negatively impact our economy. The very investment we needed to meet the ever changing demands of the consumer. The very investment we need to drive economic growth and national prosperity. Having said my piece on the effects test, I would hate the take out of today’s speech to be that Professor Harper and I are at odds. It is one of 52 recommendations. On the overwhelming majority of his recommendations we are in furious agreement. I sincerely hope the public debate around competition focuses on the tangible changes we can make for customers, not the processes and institutional settings of Government. These are the important changes. The ones which allow us to drive innovation and meet the ever changing demands of our customers I outlined at the start of my speech. So let me finish where I started. I’ve changed a lot from the young guy who started work at Purity Supermarkets 27 years ago. The retail sector has also changed. We are seeing new entrants to the market and the evolution of existing players. We are seeing the use of technology like we could not have imagined just five or 10 years earlier. We are seeing customers radically evolve in how, where and when they shop. And at Woolworths, we are investing to meet and hopefully exceed our customers’ expectations. Just as I and the industry have changed, I look forward to the Government delivering the environment for the next wave of change. I truly believe that right now Australia stands on the cusp of the next wave of micro-­‐economic reform that will drive innovation and investment. And for us retailers, it must be delivered so that we are free to compete in the global market to better serve our customers. Thank you. 6