Executive Summary
Ethical investing has gained a substantial prominence in the past few years. Before investing in a company, an investor should always evaluate the company to determine whether the company includes both profitability and ethical issues in its strategies and objectives. The purpose of this report is to evaluate Woolworths Company so as to find out whether it is good for ethical investing. It is clear from the evaluation that the company does not behave ethically right. This is because the company has in the past squeezed price cuts on investors, an indication of neglecting the interests of its major stakeholders – suppliers. This paper therefore recommends that an investor seeking ethical investing should not invest in Woolworth Company because, like other stakeholders, his/her interests can also be neglected.
Introduction
The purpose of this report is to provide an evaluation of Woolworth Company in order to determine the ethical issues and accounting/business issues experienced in the company. This evaluation will be necessary for the purpose of ethical investing. Ethical investing refers to a kind of investing strategy which seeks to consider both the financial returns and the social good of an investment. Woolworths is an Australian grocer company. It sells the best food products such as fruits and vegetables to its customers across the entire Australia. It is one of the most established food product dealers in Australia facing competition from few firms such as Coles. The company is profitable owing to the fact that it can be able to cut on costs and produce the best product quality to customers.
This paper will involve a good sequence of sections which serve the purpose of providing an analysis tool for ethical investing. The first section will be evaluation of the company in terms of ethical issues. This involves highlighting an ethical issue facing Woolworths. This section will also explain the aspects of the chosen ethical issue. This section further evaluates critically the extent to which Woolworths does not behave ethically regarding the aspects of the chosen ethical issue. The next section of the paper will be the financial/business evaluation of the company. Profitability aspects of the company will be evaluated in this section. This will be done by providing a table from the company’s website to show the company’s profitability. There will also be a clear description and evaluation of the trends in the table so as to determine the profitability and growth potential of the company. The last section of the paper will include a recommendation which involves a decision to be made on whether the company is good for investment. The main reasons for the recommendation will also be summarized in this section.
Evaluation of the Company
Evaluation in terms of ethical issues
The ethical issue related to the company is “squeezing price cuts”. This is done using different mechanisms e.g. passing cost reductions to suppliers or consumers. A price cut is a normal marketing strategy for firms to obtain competitive advantage. Squeezing of price cuts has been occasioned by the company’s price war with its industry competitor Coles. In order to reduce the prices of its products so as to compete well with Cole, Woolworth demanded its suppliers to reduce their terms of trade in an attempt to cut on costs. The suppliers were demanded to find cost savings of between 5 and 10 percent, and lack of compliance to this demand would have repercussions (Hawthorne & Heffernan, 2012). They were then given two weeks to comply with this demand or risk their stock being removed from Woolworths’ shelves (Hawthorne & Heffernan, 2012). This demand attracted critics and support from other stakeholders including the company’s suppliers and Australian Food and Grocery Council.
Woolworth chose to transfer its cost reduction burden to suppliers rather than consumers. Woolworths is justified to take such an action for the sake of profitability. This is because the company could lose customers to Coles if the cost reduction was passed to consumers. The actions of Woolworths can also be considered ethically justified because the upstream price squeeze could help in reducing negative monopoly impact of upstream monopolies that often set extortive monopoly prices (Crocioni & Cento Veljanovski, 2002). However, critics argue that the company does not consider ethical responsibility because it does not take into consideration the interests of all stakeholders including those of the suppliers (Murray, 2005). Hawthorne & Heffernan (2012) suggest that Woolworths has put the suppliers into a vice. Woolworths has also been perceived to be using its large dominance in the industry as a strategic negotiation tool to demand suppliers to reduce their price lists. This is an unethical way of dealing with suppliers who are major stakeholders of the company.
Evaluation in terms of Profitability
The profitability of the company may also be necessary for ethical investing decisions (Crowther, 2000). For this reason, it is necessary to look into the company’s profitability. The profitability of the company may be analysed using the company’s financial positions for the years 2011 and 2012. This is represented in the table below. The table contains figures derived from the company’s website. The figures are the outcome of the company’s annual report and are therefore an indication of the company’s profitability and the potential for profitability growth given the trend of profitability for the two years.
| FY12 52 weeks $m |
FY11 52 weeks $m |
Change |
|
| Group Profit | |||
| Continuing Operations | |||
| Earnings before interest, tax, depreciation, amortisation and rent (EBITDAR) | 5,795.5 | 5,538.1 | 4.6% |
| Rent | (1,559.7) | (1,454.4) | 7.2% |
| Earnings before interest, tax, depreciation and amortisation (EBITDA) | 4,235.8 | 4,083.7 | 3.7% |
| Depreciation and amortisation | (883.7) | (829.3) | 6.6% |
| Earnings before interest and tax (EBIT) | 3,352.1 | 3,254.4 | 3.0% |
| Net financial expenses1 | (283.7) | (261.6) | 8.4% |
| Income tax expense | (885.0) | (869.2) | 1.8% |
| Net profit after income tax | 2,183.4 | 2,123.6 | 2.8% |
| Non-controlling interests | (0.5) | (16.3) | (96.9)% |
| Profit from Continuing Operations after income tax and non‑controlling interests | 2,182.9 | 2,107.3 | 3.6% |
| Discontinued Operations | |||
| Profit after income tax from Discontinued Operations before Consumer Electronics Provision | 17.5 | 16.7 | 4.8% |
| Group net profit after income tax and non-controlling interests before Consumer Electronics Provision | 2,200.4 | 2,124.0 | 3.6% |
| Consumer Electronics Provision after income tax | (383.7) | – | n.m |
| Group net profit after income tax, non-controlling interests and Consumer Electronics Provision | 1,816.7 | 2,124.0 | (14.5)% |
Table 1: Profitability of Woolworths for the years 2011 and 2012 (Woolworths, 2012).
Table 1 above shows the net profit of the company after deducting the company’s operational expenses. The earnings before interest, tax, depreciation and amortization and rent (EBITDAR) were $5,538.1 M in 2011. This profit rose to $5795.5 M in 2012. The net profit after deducting tax, depreciation, amortization and rent was $2,124 in 2011 and 1,816.7 in 2012. The third column of the table above shows the percentage change in the income and expenses of the company over one year. The change in the EBITDAR is positive while the change in net profit is negative.
From the table, the negative change in net profit indicates that the expenses of the company including interests, tax, depreciation, amortization and tax increased in 2012 more proportionately than the increase in profits. However, the most contributing factor in the reduction of the company’s profit is the Consumer Electronics Provision after income tax which indicated a negative value.
Recommendation
From this analysis, Woolworths is not a good company for investors to invest in mainly due to the ethical concern that the company is squeezing suppliers on price cuts. This is because the concern of investors should be based on both accounting/business and ethical issues which are not actually been sufficiently considered by the company. The company does not take the interests of stakeholders at heart, but only seek mechanisms that can earn it profits. The company also had the option of passing the cost reduction to consumers but it did not because this could make it lose customers to its competitors. This indicates that the company is more interested on its competitive position rather than the interests of its consumers. If this is the case, then the interests of investors may also be neglected by the company
