The Reserve Bank of Australia has been saying for a couple of years that productivity needs to rise in order for Australians to continue to achieve 'real' growth in their per capita income. Productivity is defined by the Australian government as 'the efficiency with which an economy employs resources to achieve economic results'.
In layman's terms, it can refer to the amount of work an employee achieves during a set period of time, or how much extra money a company earns for every dollar it spends (on wages, products, etc). A carpenter using an electric circular saw will cut far more timber in a day than one using a steel handsaw, for instance. A company that automates some of its business functions on the web can serve more customers with the same number of staff. Similarly, companies who outsource staff (such as customer call centres) to the Philippines or India can achieve the same outcomes for a reduced cost, which also boosts productivity.
Many shares on the ASX have been going through various productivity boosters over the past year or two, particularly mining companies like Saracen Mineral Holdings (ASX: SAR) that are coming to grips with lower commodity prices. However, two shares in particular have a long-term record of boosting productivity irrespective of market conditions: Commonwealth Bank (ASX: CBA), and Woolworths (ASX: WOW).
Indeed productivity rises have been a cornerstone of Commonwealth Bank's continued earnings growth in the highly competitive world of domestic banking over the past couple of years. Continual efficiencies in online banking and in-store systems have reduced the amount of manpower required to achieve the same (actually, higher) levels of customer service, while competition for deposits has reduced the costs of loan funding. Its Netbank online banking and CommSec online share-trading websites are among the best in the country, and Commonwealth's highly trained sales staff are awarded bonus shares if the company reaches a certain level of earnings growth each year.
What's more, Commbank hasn't yet begun to tap more novel ways of customer interaction such as Skype and online chat for distant customers that are already being used by some of its competitors. Commonwealth Bank still has scope for growth via improved productivity, which should also help to leverage benefits from increasing financial activity over the coming years. Its focus on productivity is one of the reasons I think Commonwealth is a buy at around its current price.
My other productivity darling is Woolworths, whose innovations most readers will probably be more familiar with. Over the past 20 years Woolworths and competitor Coles, owned by Wesfarmers (ASX: WES) have elevated grocery selling to a precise science. From the most basic productivity boosters such as storing sweets near the checkouts to appeal to the sweet tooth (and their children) to arranging high margin products at the most appealing shelf heights to boost sales, Woolies and Coles have productivity sorted.
Every square inch of these stores generates sales. Have you ever noticed that grocery aisles are exactly the right width required for two people to walk down without feeling claustrophobic, but no wider? More recent innovations include customer loyalty programs and self-serve checkouts. However the primary reason this article features Woolworths and not Coles is because of the former's recent purchase of Quantium, a data mining company.
Woolworths can now analyse and target its products and marketing with scientific precision generated from statistics gathered from millions of sales every day. De-identified sale data on consumer habits broken down into various demographics can then be sold to other businesses, such as banking, insurance and credit card companies. My full thoughts on Woolworths' potential can be read here, in "The Stock Picker's Guide to Woolworths".
Foolish takeaway
Productivity is important for ASX-listed companies, and looks to become even more so as the Aussie dollar weakens. Do the companies you own focus on productivity? Productivity is one of the key factors to mitigating the damage in tough times, and generating outstanding results in the good ones.
