1-Introduction:
Recent years have seen the issue of sustainability to grow with time, making an impact on the markets and the companies as well. This has become now one of the most important elements for companies and governments all over the world. The retail industry is also witnessing its companies looking to adapt to sustainable activities to make an impact in the market. Retailers in Australia can be seen working hard to compete with each other and gain a competitive edge in terms of their sustainability efforts. There are several ways which the retailers can use to have an impact on the environment and their society.
The retailers usually have to adopt the sustainability activities in terms of their different stakeholders, and they need to witness its impact on their activities. The retailers are needed to fulfill the demands of the market and the stakeholders to participate in sustainable contribution. The companies working on adopting sustainable activities usually incorporate it in their production and operational processes and their products as well. The packaging, logistics, and assortments are all looked at from a sustainable point of view. With the increasing demand of the market and the consumers from the companies to provide sustainable services and products and take part in corporate social responsibility efforts, companies are now forced to adopt it to remain competitive. However, it is still unknown if these efforts provide the company with any competitive edge or not. Companies usually have to find ways to make sustainable efforts look profitable. Shareholders and investors of the companies are looking for returns which arise from the profits earned by the company. However, if a company is not generating profits through its sustainability efforts, it would then be a concern. The concept of sustainability is, however, very broad. Therefore, only one component of sustainability is going to be evaluated in this report. This report is dedicated to finding the relationship between the sustainable social efforts of the retail companies and their profitability.
This report is going to analyze two retail companies in Australia in terms of their sustainability social efforts and will investigate its relationship with profitability of these companies for the period of the last four years. The companies are the leading retailers in Australia and have been working on incorporating sustainable efforts in their operations and processes. It has been known now that this is the new front on which the companies of Woolworths and Wesfarmers is now competing with each other to gain the customers, as customers are putting more pressure on the cutting down waste and improve their sustainability efforts. Therefore, these companies would be the best ones for investigating this relationship. For calculating profitability, this research has calculated profit margin and ROE or return on equity. The section on the research model is going to explain the details on the measurement of the sustainability social efforts for each of the companies.
1.1-Research Aim:
The aim of this research is to investigate if sustainability social efforts have any relationship with the company profitability in terms of the retail industry of Australia. The study will show how sustainability efforts can or cannot lead to the profitability of the company. The relationship of the company financial performance with sustainable social efforts, if proved, can provide important information which could lead to other companies to incorporate sustainable social efforts in their operations to improve their financial performance as well.
1.2-Research Questions:
- There is a positive relationship between the Profitability Measures (Net Profit Margin and ROE) of the Woolworths with its Sustainability social Efforts (%age of EBIT Spent on Community Contribution)
- There is a Positive Relationship between the Profitability Measures (Net Profit Margin and ROE) of the Wesfarmers with its Sustainability social Efforts (%age of EBIT Spent on Community Contribution)
1.3-Research Model:
1.3.1-Measurement of Profitability:
The main aim of the study is to investigate if there is any relationship between the variables of Sustainable social effort and profitability. For the purpose of defining the profitability of the company, it is evident that numeric values would need to be utilized. The company Return on Equity and its Profit Margin are going to be evaluated to find out the profitability of the company. These measures will be evaluated to provide evidence of the improving or decreasing profitability of the company. The data on the ROE and the Net Profit Margin of both companies are going to be extracted from the Annual Report of the company and the official website of Morningstar.com. The period for which these values are used is from 2015 to 2018.
1.3.2-Measurement of Sustainability Efforts:
Other than that, the measurement of sustainability efforts is a difficult and complex task. There are several factors which are included in the sustainability effort. Measuring sustainable effort is one complex task. However, in guidance with the past studies on the measurement of the sustainability efforts, the framework of the ESG factors has been utilized for the analysis of the growth of the sustainability efforts of both companies. The ESG factors are defined as the environmental, social and governance factors of sustainability. These factors are measured in terms of sustainability to investigate the profitability of the company. This framework has been utilized to measure the sustainability of the two companies in this report. In terms of each factor, the specific factors which have been used for the analysis include.
| Environmental Factors: | Social Factors | Governance Factors | |
| 1 | Energy Usage/Reduction/Alternative Sources | Supply Chain Concerns | Board Make Up-Diversity and Gender Equality |
| 2 | Recycling | Human Rights/Employee Rights | |
| 3 | Waste Disposal | Diversity | |
| 4 | Emissions Reductions | Pay Equity | |
| 5 | Carbon Footprint | Ingredients or Raw Materials | |
| 6 | Clean Technologies | Workforce Safety |
(Wesfarmers Ltd, 2019) (Sustainabilityhq.com, 2019) (Wesfarmers, 2019) (Woolworths, 2018)
For making this study more specific, only the social factors are going to be analyzed in this report. Percentage of EBIT Spent on Community Contribution for each year would be computed to show how much of the prior income has been spent on the social factor of sustainability efforts. This is going to be analyzed by comparing the social contribution of both companies for the last five years. This will be used to compare with the profitability of the company to show if any relationship exists or not.
Another part of the study is the investigation of any relationship between the profitability of the retail companies and their spending on social efforts. For this purpose, the data on the direct community contribution by both companies in the last four years has been used. Regression and correlation functions are employed for finding if sustainability social spending predicts the profitability of the companies.
2-Literature Review:
Various studies have defined sustainability, but the simplest one is to meet today’s need in a way that future generations do not have a problem to meet their needs (Hahn & Figge, 2011). Sustainability efforts affect the financial bottom line, and it expands one bottom line of the organization. It also included social and environmental aspects into the financial bottom line of the organization (Albertini, 2013). The popularity and relevance of sustainability have been due to the realization of the fact that companies have to do more to be relevant in dynamic market trends. They have to work more than focusing on their financial performance alone (Dixon-Fowler, Slater, Johnson, Ellstrand, & Romi, 2013). A robust and successful business strategy does not contain only economic aspect of it, but it also involves environmental and human aspects of the business strategy (Shank, Shockey, & Financial, 2016).
Despite the growing awareness of sustainability for an organization, research lacks universal agreement in terms of the positive relationship between financial performance and sustainability efforts by a company (Endrikat, Guenther, & Hoppe, 2014). Although, there is a lack of universal agreement on the relationship, simultaneously, several companies and industries are working on sustainability activities (Yu & Zhao, 2015). However, it increases the need to conduct a review of the literature and synthesis on the relationship between the two variables.
There are two theories present in an attempt to establish the relationship between sustainability and its impact on the financial performance of an organization. These theories are called value-creating approach and value-destroying approach to the relationship between sustainability and financial performance (Yu & Zhao, 2015). According to the value creation approach to the relationship, sustainability efforts of an organization lead to reduced risks because environmental and social sustainability efforts help an organization to be safe from risks. On the other hand, value destruction theory states that sustainability efforts of an organization are conducted at the cost of profitability and in a result, shareholders and the company’s prime obligation to earn profit loses its priority. The trade-off theory has also had some reservations about the relationship, and it is in line with value destruction theory. However, it links the negative relationship between the variables when a company undertakes sustainability activities less profitable (Yu & Zhao, 2015).
On the other hand, the resource-based view is in line with the value-creating view that the relationship between the variables is positive. Stakeholder theory is another one which supports the relationship because it focuses on stakeholders and their interests. Resource-based view states that a company has a distinct set of resources, expertise, and abilities which can be utilized for the firm’s performance at a strategic level. In the result, that company can achieve competitive advantage and rely on competitive advantage; a company can yield good financial performance results (Haffar & Searcy, 2017). Stakeholder theory is more straightforward towards sustainability because it states that taking stakeholders with the business and actions lead to an increase in profitability of a company. Thus, resource-based view and stakeholder theory are in line with the value-creating theory of sustainability (Chernev & Blair, 2015).
Slack resources theory has studied the relationship in a reverse way. It means that it states that sustainable activities or efforts of a company do not lead to financial results in a positive way, but it is due to financial results and worth of the company that makes enough slack resources available to pursue sustainable activities. However, this reverse causality or relationship is in line with a positive relationship (Surroca, Tribó, & Waddock, 2010). It may be understandable that an excess of resources may be directed towards sustainability activities, but it also shows the second priority towards these efforts. Thus, there are mixed results of studies which establish the relationship between the variables and both sides of the relationship are present in the literature. Moreover, some research studies have also argued that generalized and unidirectional relationship does not exist which can be suitable for all organizations in all circumstances (Grewatsch & Kleindienst, 2017).
It is noted by some researchers that most of the research studies on sustainability take one dimension of sustainability, but there is need to take two or more dimensions of sustainability. Thus, three dimensions of sustainability should be taken in research so that it becomes more comprehensive and compatible with the dynamic needs of the environment (Yawar & Seuring, 2017).
So far as sustainability in the retail industry is concerned, there have been some research studies included in this review. The relationship between sustainability and retailers is based on the fact that sustainable retail sales have an impact on the activity and different stakeholders (Whysall, 2008). It is stated that retailers should consider a balance between demand in the market and expectations and benefits of stakeholders. In the result, they may be successful in sustainable retailing business (Maignan, Ferrell, & Ferrell, 2005). Sustainable practices are helpful in the retail business because they are placed between suppliers and consumers in the supply chain. They have the role in pressurizing or suggesting suppliers adopt sustainable practices and they also remain in touch with the expectations of consumers. They can bring improvement in consumer behavior by interacting with them and by taking their views on sustainability (Jones, Comfort, & Hillier, 2012). Therefore, sustainability and retail sector are favorably related to each other, and this favorability may lead to financial gains too. Focusing on sustainability may increase value for retailers and financial performance when many customers may tend to relate them with the values of companies. If companies abide by shared values and social ties along with sustainable activities, it is also aligned with customers as they can come up with retailers (Arvidsson, 2008). The literature review has confirmed that retailers have their role in sustainability efforts, and it has also noted that there is a relationship between sustainability and financial performance of a company. However, there is no universally accepted relationship between the variables because both negative and positive views are present. However, overall benefits have been noted in the relationship between both dimensions of sustainability.
Based on the literature review, the following hypotheses have been developed.
H1: Profitability Measures of the Woolworths are positively related to its Sustainability social Efforts (%age of EBIT Spent on Community Contribution)
H2: Profitability Measures of the Wesfarmers are positively related to its Sustainability social Efforts (%age of EBIT Spent on Community Contribution)
3-Methodology:
3.1-Quantitative Research Method:
This study is going to make use of the quantitative research method. The quantitative research method uses numeric values for the analysis of the data. The company profitability measure of profit margin and return on Equity are the quantitative measures which will be used for the analysis of the relationship. For the analysis of the relationship between the sustainability social efforts of the retail companies and their profitability, regression and correlation functions have been used.
3.2-Secondary Data Sources:
The research is going to be using secondary sources of annual reports and sustainability reports for the gathering of data. The company Woolworths and Wesfarmers Sustainability Report for 2018, 2017 and 2016, 2015 are used along with the Annual 10K reports.
3.3-Data Collection:
For data collection, secondary data has been used for this research. The data has been taken from sustainability and annual reports of both companies. The data has been analyzed using coding and content analysis methods.
4-Findings & Analysis:
4.1-Profitability of Wesfarmers:
The efficiency measures of Return on Assets, Return on Equity are used for the company measurement of profitability. The graph shows that the company profitability declined in 2016 then improved in 2017 and then declined again in 2018. This is evident in both of the returns rations.
The profitability measures of Gross Profit margin, operating margin, and net profit margin of the company are also shown in the graphs below. The company’s net profit margin declined in 2016 substantially and then improved in 2017 and then declined again in 2018. This is consistent with the efficiency ratios shown above. It is shown that Wesfarmer has a higher return on equity in 2017 but takes a dip in 2016. Again, it was high in 2015 and takes a dip in 2018. In 2015, it was 10 percent and was more than 10 percent in 2017. Similar is the case with return on assets as there has been little more than 5 percent return on asset in 2015 and again, little more than 5 percent was the rate in 2017. It shows that 2016 was not an encouraging year for the company in terms of both indicators of profitability.
4.2-Profitability of Woolworths:
The profitability of the other retail company of Woolworths shows that the company profits declined in 2016 as well and then improved in 2017. In 2018, the company remained consistent as its profit did not decline, but also did not show major improvement.
The company’s return on equity had declined to the extent that it went negative in 2016. However, the company was able to recover its profitability in the next two years. So far as Woolworths’s efficiency is concerned, it is noted that there was 20 percent return on equity in 2015 and less than -10 percent in 2016. 2017 and 2018 saw the same return on equity at 18 percent. Return on assets has also sat fluctuations where it is less than 10 percent in 2015 and negative for the year 2016 while it is close to 10 percent for years of 2017 and 2018.
The profitability of Woolworths in terms of its net margin is shown in the above bar chart. The company net margin was negative in 2016, which then improved in 2017 and remained stable in 2018. The profitability of Woolworths has been positive except in 2016 when net margin was in negative value. The gross margin was highest in 2018 and 2017 with close to 30 percent.
4.3-Comparison of the Financial Performance of Wesfarmer and Woolworths:
The comparison of the profitability of both companies reveals information that both companies witnessed a decline in their financial performance in 2016. Similarly, both companies improved their performance in 2017. However, in 2018, the Wesfarmer was unable to retain its profitable position and declined in terms of its profitability, while Woolworths contained its financial margins of profitability.
4.4-Sustainability Social Efforts:
For the analysis of the sustainability social efforts, the total direct contribution to community is going to be considered as a measure representing these social efforts. As per the data on both companies, the social direct contribution for the years 2015 to 2018 is shown below.
The company EBIT for the last year is used to compute the percentage of the EBIT that was spent on total direct community contributions in the next year. This is then compared with the Net Profit Margin and Return on Equity (Profitability Measures) to investigate if there is any positive relationship among these variables. Correlation and Regression Analysis are conducted to find the status of relationship among these variables.
4.5-Total Direct Community Contribution:
For the purpose of investigation, the relationship between the retail company’s profitability and their investment in sustainability efforts, the measure of the direct community contribution has been used. The table below shows the data gathered from the sustainability and corporate responsibility reports of both firms.
| Woolworths | |||||
| Total Direct Community Contribution | Total EBIT of last year | %age of EBIT Spent | Return on Equity % | Net Margin % | |
| 2015 | AUD 35.97 | AUD 2,795.00 | 1.29% | 9.61 | 3.93 |
| 2016 | AUD 31.30 | AUD 3,759.00 | 0.83% | 1.71 | 0.62 |
| 2017 | AUD 32.60 | AUD 1,346.00 | 2.42% | 12.25 | 4.22 |
| 2018 | AUD 30.80 | AUD 4,177.00 | 0.74% | 5.13 | 1.8 |
| Wesfarmer | |||||
| Total Direct Community Contribution | Total EBIT of last year | %age of EBIT Spent | Return on Equity % | Net Margin % | |
| 2015 | AUD 50.00 | AUD 3,775.00 | 1.32% | 20.35 | 3.53 |
| 2016 | AUD 57.80 | AUD 3,973.00 | 1.45% | -12.79 | -2.12 |
| 2017 | AUD 72.90 | AUD 2,446.00 | 2.98% | 17.04 | 2.75 |
| 2018 | AUD 86.90 | AUD 2,326.00 | 3.74% | 17.23 | 3.04 |
4.6-Correlation:
The application of the Correlation on both companies showed the following results for Woolworths.
| Correlation (EBIT% spent, ROE) | 0.86 |
| Correlation (EBIT% spent, NPM) | 0.79 |
The results show a positive stronger correlation between the data sets predicting the positive relationship among the sustainability social efforts and its profitability for Woolworth Company.
Similarly, the Correlation function resulted in the following figures for Wesfarmer Company.
| Correlation (EBIT% spent, ROE) | 0.44 |
| Correlation (EBIT% spent, NPM) | 0.44 |
The results show a positive correlation between the data sets predicting the positive relationship among the sustainability social efforts and its profitability for Wesfarmer Company, however, it is lower as compared to Woolworths.
4.7-Regression:
The Regression Analysis shows the following results for the variables of
%age of EBIT Spent on Community and Net Profit Margin for Wesfarmers:
| Regression Statistics | |
| Multiple R | 0.435188115 |
| R Square | 0.189388696 |
| Adjusted R Square | -0.215916957 |
| Standard Error | 2.903465926 |
| Observations | 4 |
| Coefficients | |
| Intercept | -0.50752866 |
| %age of EBIT Spent | 97.20282244 |
The results show positive correlation as depicted by the Multiple R figure. However, only 18% of the data falls on the regression line. The Coefficients of 97.20 predicts a positive relationship among the variables of %age of EBIT Spent on community contribution and the Net profit Margin.
%age of EBIT Spent on Community and ROE for Wesfarmers:
| Regression Statistics | |
| Multiple R | 0.439455895 |
| R Square | 0.193121483 |
| Adjusted R Square | -0.210317775 |
| Standard Error | 17.13194746 |
| Observations | 4 |
| Coefficients | |
| Intercept | -3.323401341 |
| %age of EBIT Spent | 580.5095855 |
The results show positive correlation as depicted by the Multiple R figure. However, only 19%
