Woolworths’ fresh approach
Australia’s biggest retailer is being outpointed on growth by arch rival, Wesfarmers, in each of its key businesses, including the critical supermarket business.
In third quarter sales growth, Wesfarmers’ Coles business doubled Woolworths growth, posting a 5.4 per cent increase in revenues against just 2.3 per cent for Woolworths.
In actual dollar terms, Woolworths sales for the latest period were $10.6 billion compared to $7.1 billion for Coles, but analysts and investors are becoming increasingly concerned about the loss of momentum in Woolworths sales.
Adding to the concern about the comparative growth rates of the rival supermarket businesses, analysts and investors remain unconvinced of the wisdom of Woolworths’ venture into hardware retailing with the Masters Home Improvement chain and the prospects of Big W.
Woolworths’ third quarter sales were $15 billion, an increase of three per cent on the same period in 2014, excluding petrol sales.
Volatile fuel prices impact on comparisons for sales with Woolworths that including petrol sales delivered an actual 1.6 per cent decrease in sales for that period.
By comparison, Wesfarmers third quarter sales across its retail portfolio were $13.08 billion, up around three per cent with the inclusion of the Coles fuel retail business.
Coles growth engines were food and liquor, with the 5.4 per cent increase in sales, and Bunnings with a 12 per cent lift in revenue. Kmart and Officeworks respectively posted 10.9 per cent and nine per cent increases for the latest quarter.
Wesfarmers is continuing to address an underperforming liquor business and is attempting to reinvigorate the ailing Target discount chain which suffered a 1.6 per cent fall in sales in the February to April quarter, but Woolworths is facing a tougher challenge with its portfolio.
Grant O’Brien, Woolworths CEO, has previously indicated a change in pricing strategy to rebuild momentum in the food and liquor business and is now easing back its new store development to allow more capital investment in refurbishments and upgrades for existing stores.
O’Brien has established a new division, Woolworths FoodCo, to develop new product categories, improve fresh meat supply and processing facilities, and develop relationships with fresh food growers and suppliers.
Woolworths has also entered into a contract with Sydney firm, Beak & Johnston, to enhance its offer of fresh, ready to cook, and ready to eat meals and is increasing staffing levels and expanding inventory to improve customer service levels.
While Wesfarmers is struggling to reinvigorate the Target chain, Big W also continues to be a significant problem for Woolworths, suffering a further 2.1 per cent fall in sales in the latest quarter or 4.1 per cent on a comparable store basis.
O’Brien said the “reset of Big W” is progressing according to a clear strategy, but analysts are uncertain about the prospects of the chain in a category which appears to have too much floorspace, with Kmart, Target, and Big W competing head on, but also impacted by retailers such as Harris Scarfe, Best & Less, JB Hi-Fi, Dick Smith, and the hardware chains.
With more stores added, Masters Home Improvement posted a 21.2 per cent increase in sales for the latest quarter to $217 million.
There are now 53 Masters Home Improvement stores trading throughout Australia, but despite the percentage sales lift, the chain continues to rack up significant losses and is being smashed by Bunnings which managed its 12 per cent sales increase on a mature store network.
O’Brien claims Woolworths is making progress on the Masters priorities outlined last August that include a slowdown in new store development to allow retro fitting of existing stores with a new configuration and look.
O’Brien expects to have 13 stores or 22 per cent of its network trading in the new format by the end of July.
The turnaround strategy for Masters Home Improvement is also tackling problems in the merchandise range, pricing strategies, and marketing.
O’Brien told an investors briefing that Woolworths is focused on a lean retail model, identifying savings of more than $500 million in the next financial year that will allow more investment in the customer offer, including lower pricing and enhanced instore experience.
The initial reaction of analysts and investors to the proposition that the lean retail model will rebuild momentum and overhaul Wesfarmers growth was scepticism, with share prices falling sharply.
The judgement was that the briefing was long on rhetoric but short on detail and provided little evidence that the problems at Big W and Masters can be fixed in the short term, making both businesses an ongoing drain on earnings and a continuing distraction to management.
This story first appeared in Inside Retail PREMIUM issue 2044. To subscribe, click here.