Westfarmers Group Financial Position

The purpose of the report is to provide a comprehensive examination of Westfarmers Group financial position. The Australian-based conglomerate operates in multiple markets including chemical and energy sectors. The diverse brand portfolio presents numerous challenges for the Groups executive given that strategies must be localized to the external and internal conditions of the divisions to maximize consumer value.

The analysis across various market situations

Although the firm makes efforts to utilize a standard organizational structure and culture, and ensure that the objectives for the shareholders are shared among the various divisions, the products generate different profit outcomes which influence the overall vision of the firm. The analysis therefore cuts across the various market situations such as competition, government restrictions, financial management and strength, and organizational structure to evaluate the position of Westfarmers. The findings suggest that Westfarmers should take advantage of its strong financial position to capitalize on the profit market segments by investing in research and development for the identification, design and implementation of unique and innovative competitive strategies.

Introduction

Westfarmers is a limited firm that deals with diversified brands in the supermarket, hardware, chemical, gas processing, fertilizer, safety product and energy distribution sectors. Founded in 1914 as Western Australian Farmers, the firm has grown to become one of the largest enterprises in Australia with an average market cap of 50.73 and operating income of €68.44 billion. The shareholding base consists of 515,000 members with a dividends reserve totaling $334 million and in 2017, $2,275 dividends were paid out leaving out the firm with $3,790 retained earnings.  As a conglomerate with an operational focus in New Zealand and Australian markets, retaining market visibility and maintaining positive revenues amidst global financial crises and technological disruptions implies that the organization has a strong financial position and market performance. Over the years however, the management of the firm has been forced to take drastic measures such as sale of unprofitable brands to sustain business operations. The firm’s operational model is susceptible to the internal and external conditions that influence business activities and subsequent performance. In this regard, this report examines the financial position and performance of Westfarmers by analyzing the financial rations, market position, organizational structure and relevant factors that influence performance to draw conclusions that will facilitate provision of viable recommendations.  

Financial Position and Performance of Westfarmers

The financial statements, balance sheet, cashflow statements and the trading account provide an overview of financial health of an organization as depicted in Appendix A which provides for Westfarmers financial position as at the end of year 2017. Given that shareholders are more interested in the wealth, profit, and growth maximization prospects of the firm, different factors that are internal or external to the organization are evaluated to assess the current and projected financial position. Of importance is the ability of the organization to report consistent positive outcomes and venture in projects that assure long-term development. Given that there are controllable (internal) and uncontrollable (external) conditions that influence financial position and performance, an examination of Westfarmers market position, organizational structure, branding and products is conducted to assess its industrial performance.

Market Position

Strategic Initiatives and Competitive Environment

In the 2017 report to shareholders, the Chairman, Michael Chaney noted that the changes happening in the industry are faster but the firm considers establishing new innovations to thrive in the market. Given that the company growth has increased 600-fold since it was listed in 1983 from $80 million to $48 billion, it is evident that the operational model is positioned to handle competitive forces while adding value to consumers. The long-term view of the governance structure, dedicated team composed of 232,000 employees across the various subsidiaries, and teamwork culture provides the firm leverage against market threats.

The competitive landscape for Westfarmers remains robust as the main rivals, Incitec Pivot Limited, Mamma Chia and Orica continue to develop new products and market thus giving consumers a higher purchasing power. In the food and grocery sector for instance, rival Aldi has consistently opened new stores. Reporting high profits is now harder compared to the previous year’s given that the firms strategizes on passing efficiency gains such as lower prices to consumer which leads to lower profit margins. 

In an article by Mitchell (2015), the author commented about the slow earnings growth since 2010 and with the entrance of Amazon and other global online retailers, the firms market position was under threat. Notably, the firm is dominant in Australian and New Zealand markets but rivals and as such, global rivals stand a better chance of competing against the brand. In response to the above assertions, the group’s Chief Executive Officer noted that the firm was aware of the market changes but was banking on more than 4000 mortar-bricks stores and the diverse portfolio to defend the firm against new rivals. However, the shareholders are less convinced about the firm’s market position after the share price fell by 3 percent in the close of 2017. Furthermore, analyst Morgan Stanley predicted that the firm’s key businesses could lose more than $400 million annual revenue to Amazon by 2026. The management is however resilient and takes advantage of technology to reduce costs and prices so that its offer to consumers is improvised for sustainable growth and development.

In addition to using technology to leverage operations, the firm strategizes on acquisitions and divestments to expand its portfolio owing to the strong balance sheet. For example, the management plans to invest more capital in Coles and its high-returning Bunnings as it focuses on the most printable businesses and refunding the excess capital to shareholders rather than acquire destructive ventures. For example, the Bunnings warehouse is opening new outlets and targeting commercial traders after strategic managers identified new markets worth an approximate $3 billion. The organization is however concerned with the underperforming businesses such as Cole’s liquor category which has been on a downward revenue trend for the past five years. The Industrial and Safety sector is also affected after the management cut profit predictions and restructured the recently acquired workwear business.

Evidently, Westfarmers is at advantage due to its diverse market and product portfolio. A diverse portfolio protects the firm against disruptive market conditions such that there some of the businesses continue to generate profits when others such as Coles and industrial brands lose market value. Maintaining performance is dependent on the Group’s ability to identify and address gaps in each of the divisions so as to strategize on initiatives that foster success. Strategic decision making is essential and depends on the established organizational structure and culture.

Organizational Structure

The firm’s main objective is to deliver satisfactory outcomes to shareholders by maintaining financial discipline and effective management of a diversified product and market portfolio (Westfarmers 2018). To realize the vision and mission statements, the management of the Group focus is ensuring that each division is capable of handling its operations. A divisional board oversees strategies for each division and is composed of a managing director and a chief financial officer that is guided by a standard operational and governance framework.

The organization uses the Westfarmers Way framework as the standard business model. The model highlights core values, growth and development enablers, and value creating strategies that influence attainment of the firm’s vision as depicted in figure 1.

Figure 1: Westfarmers Business Model

The components of the Westfarmers Framework depict the operational structure and culture that support actualization of the firm’s vision. For example, all the workers are supposed to be ethical in all dealings by promoting high levels of integrity. By specifying qualities such as openness, and taking responsibility over mistakes, the model establishes a culture that connects employees to the brand. An entrepreneur spirit that allows the management to take high commercial calculated risks and seek value-added initiatives means that the firm is positioned to take advantage of value-adding opportunities.

Generally, the structure and culture drives the overall objective driven by four primary strategies: development of the current businesses by a focus on operational excellence and satisfaction of consumer needs, taking advantage of growth prospects through entrepreneur approaches, restructuring of the brand portfolio and promotion of sustainability through a responsible long-term framework. At divisional level, strategies are designed and implemented depending on the available opportunities and prevailing market conditions. However, the Westfarmers Way model is the standard framework across the various sectors and divisions given that it contains concepts and provisions are practical in all business fields. With such a structure and organizational culture, it is the expectation of the Group directors that each brand maximizes value for the shareholders.

Supply Chain Management

The Westfarmers Way framework establishes the strategies used for the supply chain network for the different subsidiaries. A standard code of conduct is designed to guide the stakeholders involved in the manufacture, processing, distribution and delivery of the various products. The Groups governance board provides for decentralization of management so that executive at the division level are positioned to make decisions that positively impact the local brand (Westfarmers 2018).

In recent years, the firm has actively reformed its supply chain initiatives in an effort to maximize revenues. In an article by ATN (2012), the company’s net profit increased by 10.6 percent compared to the previous year and the difference being a reflection of the Group’s growing retail networks and the transformation of the supply chain. For example, the financial report noted the supply chain reformation Coles plus the $40 million provision for the restructuring of Targets supply chain network. The restructuring of the supply chains occurred at the same time when the Easy Ordering and Easy Warehousing were completed. The improvements which are done periodically involve on-shelf availability, lower levels of storage materials leading to a reduction in loss, and an improvement in efficiency for Coles and other subsidiaries (ATN 2012).

As a subsidiary of Westfarmers, Officeworks is committed to ensure that products are sourced responsibly by collaborating with the suppliers to improve social and environmental practices. For example, the Sustainable Packaging Policy stipulates the expectations for the suppliers to promote sustainable packaging and production programs. Such initiatives are fostered across the various divisions and aim at achieving profits while enabling positive and sustainable relationships.

Global and Regulatory Challenges Faced by Westfarmers

Although a diverse portfolio shields Westfarmers gives leverage over rivals given that there are some divisions that produce high returns thus maintaining profit margins, the recent global financial crises continue to negatively affect the firms earning potential since the issue impacts all economic activities. The management is forced to invest more cash in operations with the result being reduced shareholder confidence and lower profits. In the 2017 annual report, the Chairman further commented on the increasing tendency of regulators to adopt populist guideline which is against productive economic returns (Westfarmers 2017). For instance, the recent restructuring of the Competition and Consumer Act and the 457 visa regulations to include tighter rules deprives firms the power to operate effectively (Westfarmer 2017). The high corporate tax, difficulty by the government to pass legislations, and complexity associated with doing business in Australia adversely affects operations. The negative impacts range from loss of productivity, increase in cost of doing business, and consumer inconvenience which drives the buyers to purchase through online platforms that are exempt of the restrictions imposed on brick and mortar stores. The implication of these situations means that the firm will spend more for lower returns.  

Financial Position

Of the three main objectives for establishing a business, profit, growth and wealth maximization, making profits is the most critical function of an enterprise. Finances are needed to run the capital and human functions of the business and as such, periodical review of the financial position of the organization is important to establish whether operations are sustainable in the long-term. The result of such an assessment helps to conduct a cost-benefit analysis of the firms for strategic decision making. In this regards, financial ratio analysis as discussed by Omar et al. (2014) is required in assessing the strength of an organization. According to Omar et al. 2014, financial ratio analysis is an approach is a quantitative assessment of the information contained in a firm’s financial statements. Ratios are used to compare performance in different lines of items including expenditure, sales, and efficiency and profitability as illustrated in figure 2.

Figure 2: Financial Ratios

Source: Brigham et al. 2016

Westfarmer Financial Ratio Analysis

Table 1: Financial Analysis

2017             

2016

Debt to equity ration

Total liabilities/total equity

16174/23941

0.69

17834/22949

0.8

Asset turnover

Net sales/average total assets

68444/40115

1.7

65981/40783

1.61

Debt ration

Total liabilities/total assets

16174/40115

0.4

17834/40783

0.43

Earnings per share (EPS)

254.7

36.2

Current ratio

Current assets/ current liabilities

8681/2039

4.2

9255/1718

5.4

Net profit margin

Net income/net sales

22268/68444

0.33

21937/65981

0.33

Return on equity

Net income/shareholders equity

22268/23941

0.92

21937/22949

0.96

Source: Westfarmers Annual Report (2017)

Table 1 is an illustration of some of the solvency, efficiency, profitability and liquidity ratios that are used to depict the financial strength and position of Westfarmers. The figures used for the analysis are obtained from the 2017 annual report that is available in Appendix A. Given that Westfarmers deals with a variety of products, it is not possible to evaluate the financial position of each division and as such, the consolidated data is used. Notably, figures for years 2017 and 2018 are used for comparison purposes.

Earnings per share are a market prospect ratio that measures the amount of net returns per share of stock outstanding. The ratio is a depiction of the profitability of a firm in the perspective of its shareholders. From table 1, if Westfarmers distributed every dollar of income to investors, each share would earn 36.2 and 254.7 in years 2016 and 2017 respectively. The EPS is high in both years with 2017 reporting the highest rate and as such, the organization is profitable.

Asset turnover is an efficiency ratio and measures the capability of an organization to drive traffic for its products using the available assets. Westfarmers improves its efficiency over time given that a higher ratio was reported for year 2017, 1.7, compared to the one reported in 2016 at 1.6. The industry average is 1 and as such, the company is strategically positioned to convert assets into sales and make profits.

Return on equity is classified as a profitability ratio and measures how well a firm is able to generate positive outcomes from the shareholding investments. Notably, the rate reduced between 2016 and 2017 by a margin of 0.04. The implication is that the management is finding is difficult to convert equity to wealth given that the ratio is below industry standards of 1. The above ROE is indicative of the fact that Westfarmers is not optimally effective at using equity financing to fund projects and growth the organization.

Debt ratio is categorized as a solvency ratio by depicting the total liabilities of a firm as a percentage of total assets. According to Brigham et al. 2016, debt ratio is a demonstration of the financial leverage of the firm. Since it is a solvency ratio, a lower rate is favorable. From figure 1, Westfarmers has 3 times as many assets as liabilities and as such, the firm is credit worthy and positioned to pay off its debts.

Current ratio demonstrates liquidity and efficiency levels of an organization by measuring the ability of a firm to pay off its short term obligations with the current assets. Westfarmers has 4 times and 5 times cash equivalents and marketable securities that can be converted into cash when the need to pay off debts arises. Notably, the ratio reduced by a big margin of one between 2016 and 2017 due to the fact that the company had to sell off some of the unproductive assets to increase revenue. Although there is no difference in the profit margin for years 2016 and 2017, the firms efficiency increased as depicted by the asset turnover ratio which implies most of the inventory and other long term assets are productive.  The profit margin is therefore expected to increase in the following trading period.

From the ratio analysis, it is evident that the management is strategic in handling the company’s finances that comprise of short and long term assets, cash equivalents and equity. Given that most of the ratios are above the average industry rate, the conclusion is that Westfarmers has a strong and sustainable financial position.

Recommendation

Westfarmers value maximization ability lies in its ability to satisfy multiple target market through the diverse product portfolio. The organization however faces the threat of constancy given that each of the brands faces distinct competitive pressures from the respective industry. Apart from merging with firms in the same jurisdiction and acquiring other companies to grow market base, Westfarmers should focus on reducing operational costs by applying lean methodologies. As evidenced in table 1, the firm efficiency level increased by a great margin after selling off some of the unproductive assets and products. It is recommended for the brand to evaluate the performance of each division independently and identify the most profitable brands and the underlying market conditions so that investment initiatives are focused on those products.

Conclusion

Non-financial and financial performance components have been used to assess the position of Westfarmers Group in the market. Competitive forces, impact of global crises, organizational structure and culture and challenges facing the organization at an external level depict the status of the organization in the perspective of the various stakeholders. The analysis revealed that Westfarmers Group is strategically positioned to dominate the various markets owing to its strong financial position as demonstrated by the solvency, liquidity, and efficiency and market prospect ratios. Most of the ratios are above industry average and as such, the Group and divisional governance systems are relevant for the various market projects. The organization should take advantage of the strong financial position to innovate new products for the consumers. Buyers have a strong purchasing power and as such, managers should invest in research and development to come up with unique approaches to reach out to the consumers for sustainable profits and subsequent satisfaction by the shareholders. Focus on profitable and sustainable operations is critical for the attainment of growth and wealth maximization prospects.

References

Annual Report , 2017. Westfarmers. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4

ATN. 2012. Supply Chain Reform Starts to Payoff for Westfarmers. Available at: https://www.fullyloaded.com.au/logistics-news/1208/supply-chain-reform-starts-to-pay-off-for-wesfarmers

Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Mitchell, S. 2017. Westfarmers Well Placed to Compete Against Amazon. Available at: https://www.afr.com/business/retail/wesfarmers-well-placed-to-compete-against-amazon-ceo-goyder-20170606-gwlvgk

Westfarmers. 2018. The Westfarmers Way. Available at: http://www.wesfarmers.com.au/who-we-are/the-wesfarmers-way

Appendix A: Westfarmers 2017 Annual Report https://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final.pdf?sfvrsn=4