Profit drop ‘down to regulations’

Countdown owner Woolworth NZ says its operating profit has fallen 12.5% to $316 million, but the company and Consumer NZ are drawing different conclusions about what that says about competition.

The operating profit drop is despite the Government’s concerns about the profitability of the supermarket sector and consumer concerns over rising food prices.

Woolworths NZ said its sales in the year to June 26 rose by 5.8% to $7.6 billion, but its earnings before interest charges and tax (Ebit) were down by $45m, from $361m the previous year. Its net profit after tax amounted to 1.8% of each dollar spent in its stores, it said.

Managing director Spencer Sonn said price competition ‘‘across the retail food sector’’ was robust and it remained committed to delivering the best value possible.

But Consumer NZ chief executive Jon Duffy said it did not believe robust competition was behind the drop in the supermarket group’s operating profit.

Instead, he believed it was an early effect of moves to tighten the regulation of the industry.

‘‘The Commerce Commission had found that competition in the sector is lacklustre and not working well for consumers,’’ Duffy said.

‘‘We think the increased focus supermarket profitability has been under following the Commerce Commission’s report and moves from the Government to regulate the sector to protect consumers is more likely behind the decline.

‘‘Suppliers may be feeling more able to pass through cost increases than previously, when, as we have heard, the duopoly could force them to absorb those,’’ Duffy said.

The ‘‘increased focus’’ on consumer prices at the tills was also likely to have tempered the duopoly’s willingness to be seen to be passing significant price increases onto consumers, he said.

‘‘Evidence of this can be seen in the price rollbacks and price freezes the supermarket giants have rolled out since May.’’

The Commerce Commission used different metrics to assess the profitability of the supermarket industry earlier this year.

It concluded that Woolworths NZ and Foodstuffs were between them making ‘‘excess returns’’ over their cost of capital of about $430m a year and that their prices appeared ‘‘relatively high by international standards’’.

But Sonn said the financial year just closed was ‘‘undoubtedly one of the most challenging’’ for its business in recent memory.