Transcript Australia - Private Label Manufacturers

Equity Research
Industry Report
Morgan Stanley Australia Team
Australia
The Private Label Payoff
Is Private Label worth the effort? Will retailers stay
the course?
August 2005
Morgan Stanley does and seeks
to do business with companies
covered in its research reports.
As a result, investors should be
aware that the firm may have a
conflict of interest that could
affect the objectivity of this
report. Investors should
consider this report as only a
single factor in making their
investment decision.
Ron Sargeant / Ben Stocker
(02) 9770 1582 / 1578
[email protected]
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Background – Ron Sargeant
Morgan Stanley
Australia Research Team
•
Executive Director - Morgan Stanley
•
Responsible for coverage of the ASX listed consumer
stocks
•
Industry experience at Lion Nathan before becoming an
analyst
•
Morgan Stanley has 45 consumer analysts worldwide
•
Extremely interested to talk to industry contacts
2
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The Private Label payoff
Morgan Stanley
Australia Research Team
•
Is Private Label worth the effort? Changing the consumer
is a long term affair.
•
Will retailers stay the course? YES.
•
Discussing the costs & benefits, PL trends overseas and
in Australia in listed companies
•
Feedback from global analyst counterparts, retailers and
manufacturers
3
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What’s changed in 12 months
Morgan Stanley
Australia Research Team
Key Themes
• Oil prices
• Election
130
Consumer Confidence: Westpac-Melb.Institute
• Tax cuts
120
• Low
unemployment
110
• Housing slowed
• Commodity
prices
100
90
80
n04
Ja
n01
Ja
n98
Ja
n95
Ja
n92
Ja
n89
Ja
n86
Ja
Ja
n83
60
n80
• Currency
70
Ja
• China & WTO,
Tariff
Source: ABS, Morgan Stanley Research
4
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Stock price performance - 12 mth returns
Morgan Stanley
Australia Research Team
Key Themes
• WOW +29%
• MTS + 68%
• FOA + 55%
180
170
WOW
CML
MTS
All Ords
160
150
140
130
120
110
100
90
80
Au
g20
04
Se
p20
04
Oc
t-2
00
4
No
v20
04
De
c20
04
Ja
n20
05
Fe
b20
05
M
ar
-2
00
5
Ap
r-2
00
5
M
ay
-2
00
5
Ju
n20
05
Ju
l-2
00
5
Au
g20
05
• CML + 10%
(+22% yr
before)
Relative stock price performance
Source: ABS, Morgan Stanley Research
5
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Pricing for growth
Morgan Stanley
Australia Research Team
Key Themes
COLES MYER
DAVID JONES
23.0
21.0
19.0
17.0
15.0
13.0
11.0
9.0
7.0
5
l-0
Ju
05
4
n-
l-0
Ja
Ju
04
3
n-
l-0
Ja
Ju
03
2
n-
l-0
Ja
Ju
02
1
n-
l-0
Ja
Ju
01
0
n-
Ja
l-0
Ju
n-
00
9
Ja
l-9
Ju
n-
99
8
Ja
l-9
Ju
n-
98
7
Ja
l-9
Ju
n-
97
6
Ja
l-9
96
5.0
Ju
• WOW 20%
above CML
WOOLWORTHS
25.0
n-
• PE reflects
growth
Relative PE of Australian retailers
PE (x)
Ja
• Price = PE x
EPS
Source: ABS, Morgan Stanley Research
6
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Grocery a low growth category
Morgan Stanley
Australia Research Team
Key Themes
• Grocery may be
40% of F&L.
• Supermarket
sales growth
above food
category growth
due to fresh,
general,
merchandise,
liquor and
private label.
$b
Australian food sales
Australian supermaket sales
$b
60
60
50
50
40
40
30
30
20
20
10
10
0
0
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
• Food and
Liquor 85% of
WOW earnings,
60% of CML.
Source: ABS, Morgan Stanley Research
7
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Market share in grocery tight
Morgan Stanley
Australia Research Team
Key Themes
• 10 years ago
mkt
fragmented
• 20% of the
market was
outside of
the majors,
now only 4%
Assumed market share movements
Woolworths
Coles
Metcash
Foodland
Aldi
Top 4/5
Franklins / Pick N'Pay
Other
Ex Top 4
Total
1995
35%
26%
16%
5%
2000
37%
33%
10%
4%
80%
17%
4%
20%
100%
84%
12%
4%
16%
100%
2005
42%
36%
13%
4%
3%
97%
2%
2%
4%
100%
Source: ABS, Morgan Stanley Research
8
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Benefits from Private Label
Morgan Stanley
Australia Research Team
•
Margin upside
•
Differentiation
•
Private Label builds retailer brand equity and customer loyalty
•
Provides increased consumer choice? Can meet consumer
expectations on health, organic, regionality, practicality, value
•
Strengthened bargaining position and control
•
Appropriate given greater price sensitivity of consumers
•
Increasing private label sales in times of economic weakness or
inflation
•
Differentiation for retailers
•
Increasing capacity utilization for manufacturers
•
Improved relations with retailers
9
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Additional margin the key
Morgan Stanley
Australia Research Team
Key Themes
• Pricing
appears to
be at least
20-25% less
than top
branded
products.
• Overall gross
margins 510% higher
P&L Comparison
Raw materials
Packaging
Variable costs
Fixed costs
R&D
Sales
Advertising & promotion
Transport & distribution
Other costs
Operating profit
Retail price
Manufacturer Brand
30
10
9
5
2
4
10
5
10
15
100
Private Label
30
10
9
Savings
3
3
8
12
75
5
2
4
7
2
2
3
25
Source: ABS, Morgan Stanley Research
10
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UK – Strong margins, Strong Private Label
Morgan Stanley
Australia Research Team
Key Themes
• Competitive
market, yet Tesco
have margins
around 6.2%
• UK - 40% of
sales PL and
Gross Margin
around 30%.
Private Label in Europe
Marks & Spencer
Aldi
Lidl
ASDA
Sainsbury
Tesco
Safeway
Morrison
Ahold
Casino
Metro
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Private Label penetration
Source: ABS, Morgan Stanley Research
11
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Differentiation a key benefit
Morgan Stanley
Australia Research Team
Key Themes
• Private label
crucial for
department
stores
• Helps to
deliver gross
margin and
differentiation
Private Label at Department Stores
JC Penney
Kohl's
Dillard's
Federated
Saks Department Store
Group
May
Nordstrom
Neiman Marcus
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Private Label penetration
Source: ABS, Morgan Stanley Research
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Negatives of private label
Morgan Stanley
Australia Research Team
•
Denigrates brand equity
•
Retailers may question brand premium
•
Can cause conflicts b/w retailer and manufacturer
•
Adds competition
•
May lessen reliance on manufacturer
13
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Negatives not substantiated
Morgan Stanley
Australia Research Team
•
Premium private label may offer manufacturers better
margins
•
PL has grown sales not just through volume but also
price, as much as branded products
•
Tope line growth (Germany vbranded -2%, +10% PL
•
Channel shift - need to be in hard discounters
•
Slowing economic growth
•
Deflation
14
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Retailer comments
Morgan Stanley
Australia Research Team
•
WOW changed strategy last year on PL
•
Wanted to focus on national brands
•
Intending to maintain basic Homebrand Private Label offer improving quality. Introduce premium PL.
•
Must offer value, with quality exceeding expectations.
•
Expect a 10-25% price gap. better margins - some used to
drive overall value equation, across shelf items and icon lines.
•
Woolworths have commented that it will only target around 200
products with its premium range versus around 750 for Home
Brand,
•
It said that it would never want private label to be 30% of sales
15
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Retailer comments
Morgan Stanley
Australia Research Team
•
Nov 2004 John Fletcher said that PL sales would go from
13% of sales to 30% of supermarket sales by 2007.
•
Others feel the margin benefit will be retained
•
FOA targeted 20% PL sales
•
Wal-Mart installed its global procurement office in China
in 2002, CML did the same, WOW now look like they are
about to increase direct sourcing
•
Need critical mass to drive private label, if in a smaller
country need v large mkt share
16
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Why we think PL will work
Morgan Stanley
Australia Research Team
•
Benefits provide strong incentive
•
Highest PL in concentrated markets
•
In-store purchasing decisions increasing
•
In the US the lifting of quotas and increased
sophistication of Chinese factories is expected to lead to
greater PL share
•
Wal-Mart expected to increase PL
17
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Private Label & market concentration
Morgan Stanley
Australia Research Team
Key Themes
• Stronger
concentration =
stronger Private
Label
60
Private Label penetration (%)
• Australia close
to 100% mkt
share in Top 5
grocery retailers
Private Label penetration versus combined market share of top 5 market particpants
50
Switzerland
UK
40
Germany
30
France
Belgium
Denmark
20
Holland
Italy
Spain
10
Portugal
0
0
10
20
30
40
50
60
70
Market share (%)
Source: ABS, Morgan Stanley Research
18
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How far can Private Label go
Morgan Stanley
Australia Research Team
•
Depends upon category and channel
•
Globally PL holds roughly 15% share, $85-100bn of sales
depending on who you ask
•
PL growth greater than branded
•
US limited by Wal-Mart
•
Category management run by promotional activity, not
sales
•
Improved quality of packaging, quality and ranges
•
Most retailers comfortable that CML will get to 30%
19
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Manufacturer impact
Morgan Stanley
Australia Research Team
•
Manufacturers polarizing, either value or best
•
Success driven by increased speed to market and innovation
•
Fine balance between innovation and crowding - this can reduce
brand equity
•
Nestle, Unilever, Danone, L’Oreal derive at least two thirds of sales
from businesses in which they have #1 or strong #2 positions.
•
Colgate-Palmolive, Energizer and Gillette de-emphasized PL
•
Retailers have invested in design and merchandising. Seen as a
threat to branded apparel. Some branded companies now doing
exclusive lines.
•
In some categories retailers have had to go back to manufacturers
•
Exclusive product lines to department stores
20
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Conclusion
Morgan Stanley
Australia Research Team
•
PL is one of the major themes in the global consumer sector
•
In Australia high on analysts agenda for 12 months
•
Retailers willing and able to increase Private Label
•
Global trends suggest that we may see significant upside longer term
for Australian PL share
•
Manufacturing expected to polarize, as are manufacturers returns
21
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Important Disclosures
Morgan Stanley
Australia Research Team
Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they
have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Ronald
Sargeant.
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report: Foodland Associated Limited, Woolworths Ltd.
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Stock Ratings
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Global Stock Ratings Distribution
(as of March 31, 2005)
Coverage Universe
Stock Rating Category
Count
% of
Total
Investment Banking Clients (IBC)
Count
% of
Total IBC
% of Rating
Category
Overweight/Buy
669
35%
267
40%
40%
Equal-weight/Hold
868
45%
299
45%
34%
Underweight/Sell
371
19%
105
16%
28%
Total
1,908
671
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