A big turnaround for Big W?
Despite approaches from potential buyers for the 186-store Big W chain, Woolworths decided last year to persevere with business and to map out a turnaround plan that would see it return to growth or, at least, stabilise and exact a higher price if it was to be divested.
The first half results for the 2017 financial year provided little assurance to investors who have seen a parade of managing directors come and go as sales and earnings plummeted.
Big W has posted a fall in sales in 17 of the past 18 quarters covering five financial years.
Woolworths CEO Brad Banducci was happy to talk about the progress of the Woolies turnaround, which has received endorsements in recent weeks from suppliers who are bullish about the business and somewhat less enthusiastic about arch rival Coles.
However, Banducci had little to say about the progress of Big W as sales declined year on year by 6.3 per cent, a trend continued in the latest results for the third quarter ended 2 April.
Banducci will need to have a lot more to say about the troubled discount department store business when the full financial year results are released on 23 August.
At the half year, Banducci conceded that Big W had made disappointing progress in the first half, although seasonal inventory levels were in better shape than in 2016, cost disciplines had improved in the support office and stores and supply chain and customer reaction to new in-house designed apparel and homewares ranges had been positive.
David Walker, who replaced Sally Macdonald as managing director late last year, picked up the threads of turnaround plans that effectively go back five years that Banducci said were expected to show some improvement in the second half of FY17.
Banducci was quick to warn that Big W was a business in transition and a return to sustainable sales and earnings growth would take several years.
He said the first stages of Big W’s strategic plan would be implemented in the current half, a plan that included testing a new format for stores in the fiercely competitive and over-shopped discount department store category.
Building team capabilities and morale was a priority in the half, as was a continued rationalisation of merchandise ranges and an attempt to differentiate from competitors by further developing in-house designed product.
Third quarter financial results have given little cheer to anyone hoping for signs that Big W has a future competing against Kmart, an equally down-at-heel Target, new market entrant TK Maxx, Harris Scarfe, Best & Less and online goliath, Amazon.
Big W sales declined by 8.6 per cent in the third quarter with comparable sales falling by 8.2 per cent, although revenues looked a touch more positive after an Easter timing adjustment (6.7per cent decline in total sales and a 5.7 per cent drop on like for like sales).
Banducci noted comparable sales for the third quarter were impacted by apparel clearance activities, driving deflation as the chain cleared summer inventory to make way for new season apparel – something one would think was hardly unusual in retailing, albeit the discounting probably ran deeper this year following weak womenswear sales.
The key achievement for the chain in the third quarter was the completion of a review of the Big W strategic plan and customer value proposition, which was still to be subject to refinement by Walker and his management team.
While expectations of any rebound in sales and earnings by Big W in the fourth quarter are low, with some analysts suggesting full year losses might exceed $140 million, it does appear that Banducci will be able to report some progress on the implementation of the refined strategic plan.
A new team on board
Walker has restructured the senior management team, recalling two Big W veterans, Teresa Rendo and Joanne Nix, and recruiting from the Woolworths supermarkets business, Amanda Lunn.
Rendo has been appointed as general manager commercial, returning to Big W after a 16 month stint in the supermarket business, managing the perishables business. At Big W, Rendo had held various positions in buying and merchandising over a nine year period.
Nix has been lured back to Big W from Specialty Fashion Group where she was responsible for the Rivers chain’s merchandise planning since early last year. Nix had spent 26 years at Big W and returns to oversee an ‘about kids’ team.
Lunn, who has had previous experience at Tesco in the United Kingdom, has been appointed as head of commercial ‘about everyday and seasonal’, after working in Woolworths as head of trade general merchandise.
Walker has also appointed Big W head of buying for toys, sport, party and do-it-yourself, Shane Carter, as head of commercial ‘about leisure’.
The restructuring of management roles reflects a focus on developing customer universes in stores for major product categories.
According to Banducci, the strategic plan that is now in play (the third new turnaround strategy in four years) has drawn heavily on the experience of the supermarket business turnaround and is heavily focused on the customer experience in stores and the digital space.
Banducci has pleaded with investors for patience in pursuing a turnaround for Big W, but those investors and analysts are looking for some tangible proof that the chain can survive with competition intensifying in the discount retail category.
Analysts point out that Big W is currently an anchor on Woolworths earnings and a major distraction to management at a time when gains in the supermarket business need to be consolidated.
Unkindly, an initial reaction to the Big W ‘universes’ concept and management changes was that the chain is re-arranging deck chairs on the Titanic.
There is a prevailing view that the changes may streamline processes and decisionmaking in Big W and eliminate some costs. However, it doesn’t ensure an evolution, let alone a revolution, in the business model and customer offer that would create excitement and a differentiation to competitors.
Competitors closing in
With Target now under the control of Guy Russo, who rebuilt Kmart, albeit over more than five years and in arguably less challenging retail conditions, Big W looks more vulnerable to the entry of Amazon to the Australian market as well as the potential expansion of the United States discount retailer, TK Maxx.
Big W and retailers in the discount category may also soon face another global competitor, Kaufland, the German hypermart sibling of the Lidl discount supermarket chain, which has reportedly been pursuing sites for stores.
Harris Scarfe also looms as a more notable competitor in the future following its deal with British department store Debenhams to open stores under that brand and to stock Debenham brands in its own stores.
Woolworths made a big call in deciding to turn away potential buyers for the Big W chain last year.
No doubt, the price mooted by the tyre kickers would have been low and would have reflected the distress in the Big W business as well as the costs of fixing the problems.
It would not have been very palatable for Woolworths directors and management to be seen to be sacrificing the Big W chain, after having surrendered value on its divestment of Dick Smith and then making a costly exit from the floundering Masters Home Improvement joint venture.
Notwithstanding the analysts that were calling and continue to call for the divestment of Big W, a sale of the chain at a low price would have generated considerable criticism from those same analysts and investors.
Nonetheless, holding on to the business was a big call, given the costs of the turnaround are sure to result in further losses and market share is imperilled by competitive forces in a category that already has too much floorspace and an increasing lack of enthusiasm by customers for bland mass merchandise store formats.