“If someone had told me at the start of the year that for 20% of our trading days… we would not be allowed to let customers into our store, then I would have expected the outcome to be much worse.”
Don’t hide from inflation
Scott can see rising confidence in the Australian economy and thinks high consumer savings and low unemployment point to a recovery that will be accelerated by the end of the omicron wave. “We are seeing far fewer members of our team in isolation. Customers return to our stores. But above all, across most of Australia there is a growing sense of optimism and confidence that we can adjust [to life with COVID].”
But he is candid about the challenge facing the business world and the economy in general:
“We are seeing inflationary pressures at all levels.”
Yes, the reopening of borders should help reduce labor costs and high shipping costs will ease over time, although Wesfarmers warns investors should also expect volatility in the second half of the 2022 financial year.
But Scott is clearly preparing the conglomerate for a time of high costs and, perhaps more importantly, a shift in consumer psychology.
“We expect customers to focus more on price when trying to balance the household budget,” he explains.
“Recent years have been quite remarkable as price has not been such a major factor in customer decision-making, particularly with relatively high levels of household savings, inability to travel, scarcity of products and trade restrictions. But I think in the future, in the years to come, we’re going to see the price become much more important.
It’s an environment that Scott believes will do the band good.
Get out of the peloton
While the reporting season has focused on identifying companies that have the power to set prices to deal with rising costs, Scott clearly thinks this is not the right way to approach the challenge. introduced by inflation.
“Often, when inflationary pressure hits, companies ask themselves the question: how much can they pass on to customers? And on some occasions they get greedy and try to pass even more and capture more margin.
“We take the opposite approach. We say: how can we still differentiate on price? We operate in a competitive market and in times when customers are more focused on price and working harder to balance their budgets, we want to be there to help them. And our unique scale and merchandising capabilities give us the ability to cut costs in ways others might find more difficult.
Will this drive down EBIT margins further? Maybe, but Scott is willing to bet that any margin impact will be offset by higher volumes, resulting in a higher overall profit.
“We focus on margin dollars versus margin rates. First, we want to ensure that our prices are competitive in the market, and we believe there is an opportunity in the coming years to increase our sales by being more price competitive. Hopefully this will lead to growth in margin dollars, even though the margin percentage may be under more pressure.
There is obviously a risk to short-term profits in such a strategy, but Scott looks way beyond that.
In the same way that the short-term benefits of paying staff during COVID shutdowns should drive down longer-term costs through lower staff turnover and higher engagement, Scott is betting that price maintenance low in the coming years will result in market share gains. that can underpin profits over five to ten years.
In a way, he draws inspiration from the same book as BHP chief Mike Henry, who sees inflation as a chance to use his ladder to improve the miner’s position in the market, rather than a problem. just to tone it down.