Visit www.woolworthslimited.com.au to refer to The Facts About Grocery Retailing at Woolworths.

KEY ISSUES OF PUBLIC INTEREST

RISING FOOD AND FUEL PRICES

The cost of living and the rising prices of everyday goods are a concern for all families across Australia and New Zealand. As high commodity prices become the “new normal” rather than a temporary peak, we may see this impacting on the way households purchase retail goods.

This trend is occurring worldwide. Since 2000, the price of staples such as maize and rice has doubled, while the price of wheat has tripled. These increases in the costs of basic commodities and growing nervousness about security of food supply are likely to have profound effects on consumer behaviour, on retailer strategy and on the responses of suppliers and primary producers. It’s not only the cost of production inputs that is causing the pressure on prices; there is also the cost of getting products to their destination, the higher energy cost in production, and the increasing cost of operations across stores.

In a competitive market, we recognise that, along with other retailers, we must tackle the sustainable level to which we can absorb these rising costs. At Woolworths, we have invested tens of millions of dollars in order to absorb additional costs associated with transport, energy and water inputs into our business.

Pricing in rural and regional areas

A study undertaken by the Australian Bureau of Infrastructure, Transport and Regional Economics (BITRE) analysed the factors impacting on living costs around Australia, including grocery prices. The study found that, with few exceptions, the level of pricing in major supermarket chains does not appear to be affected by the remoteness of the town or its population. The presence of a major chain store in a town is likely to provide groceries at prices broadly similar to those in similar stores in capital cities.

We have moved to simplify price groups across Australia. There are now only 13 stores that are classified as remote stores with specific pricing policies.

Drought

Australia has experienced the worst drought in 100 years. With over 70% of Australia currently drought declared, the agricultural sector is still feeling the pinch. This leads to failed crops and a reduction of supply.
Source: Bureau of Rural Sciences.

Weather

Other major weather-related events can also have a big impact on prices. Fruit prices rose 64% in the year to June 2006, mainly due to a 330% increase in banana prices following Cyclone Larry, which devastated crops in far north Queensland.
Source: Australian Bureau of Statistics/Woolworths.

Grain

There is a global shortage of grain and its price has increased over the past few years. One reason for the shortage is that many farmers in North America’s wheatbelt are diverting grain from food production to biofuel production. Grain is not only the main ingredient in staple foods such as bread, pasta and cereals, it is also the main source of animal feed.
Source: ABARE, Australian Commodities, March 2008.

Transport

High world oil prices affect our transport costs in Australia. As recorded by the CPI, the cost of automotive fuel has risen by more than 60% over the decade, and by more than 40% over the last five years. For such a large, geographically diverse country, road transport is the only way to move food to remote areas and we are heavily reliant on freight and therefore fuel.
Source: Australian Bureau of Statistics.

Export markets

Prices for Australian farm sector products are strongly integrated with global commodity price movements as it is estimated that around two-thirds of Australian farm output is exported each year.
Source: Department of Agriculture, Fisheries and Forestry (2005); Australian Agriculture and Food Sector Stocktake.

Metals

The world price of tin has increased significantly in recent times and has reached a 19 year high. Tin is an essential packaging commodity for many food items.
Source: London Metal Exchange.

Food inflation

Each month, we calculate our inflation rate on a whole supermarket sized basket of goods. This measures the degree to which our customers’ shopping basket has increased in price, taking into account the changing mix of goods our customers buy. We provide these figures to the Reserve Bank of Australia.

When we compare the Woolworths Food Index to the Consumer Price Index for food, our figures track well below the CPI rate. The reason for this marked difference is that the Woolworths Food Index is expenditure based, reflecting what customers actually buy in our stores at our prices. The CPI measures a fixed basket of goods over time.

ACCC inquiry

During 2008 the ACCC conducted a comprehensive and rigorous inquiry into the competitiveness of retail prices for standard groceries. The inquiry was initiated in response to growing concern over food prices, competitiveness in the retail sector and the perceived widening of the gap between farm gate and check-out prices.

These are all issues that have concerned Woolworths for some time and we acknowledge that there is concern in the community. That’s why we supported the inquiry and fully cooperated with the ACCC in its intensive investigations.

Key findings

In conducting the inquiry the ACCC was able to allay the concerns many people had in relation to the retail market. On the key issues of food pricing, competition and supplier management the ACCC found that:

1. Grocery retailing is workably competitive.
2. The vast majority of grocery price increases in Australia were attributable to factors such as supply and demand changes in international and domestic markets, increases in the costs of production and domestic weather conditions.
3. There is nothing fundamentally wrong with the grocery supply chain and there has not been a widening of the gap between farm-gate and retail prices; farmers and suppliers are not getting less while retailers are getting more.

The ACCC did find a number of factors that currently limit the level of price competition in the food retail sector, including:

1. High barriers to entry and expansion.
2. Limited incentives for major supermarket chains to compete aggressively on price.
3. Limited price competition from the independent sector.

Woolworths is a strong supporter of competition. The Australian food retail sector now includes a variety of new market entrants plus a growing independent and specialist food sector. There has never been more choice about where to shop. It is also noteworthy that the independent grocery sector has overall grown at a much faster rate than the major supermarket chains in the past five years. For example, over the past five years, the increase in store numbers for Metcash/IGA (118) and ALDI (95 stores) has been more rapid than the overall store growth for either Woolworths (73 stores) or Coles (59 stores).

For more information on this issue, please refer to The Facts About Grocery Retailing at Woolworths at www.woolworthslimited.com.au.

As a listed company we release fully audited and publicly available accounts. Our sales, profit and gross margin can be viewed in our annual and interim reports which are available on our website.Woolworths makes about five cents in the dollar before paying interest and tax. Our net operating profit is about three cents in the dollar.