Why Woolworths can only improve

Posted by AFN Staff Writers on 9th September 2015

SupermarketThe recent disappointing financial results of Woolworths might not appear encouraging, but that is not the view of some expert analysts.


There are numerous factors that may well fall into place. First…


New leadership


Woolworths has seen a number of senior management personnel changes. There was of course the June 2015 announcement that CEO Grant O’Brien will be leaving and a replacement is being sought.  


To the outsider, the O’Brien announcement conveyed the impression of a lame duck leadership with the company hamstrung in the absence of a new CEO.


However, the company appears to be on the right track with the appointment of Gordon Cairns as the group’s new chairman, replacing Ralph Waters. The role of the chairman is critical to the selection of a new CEO and the development of the longer-term strategic plans for the group.


The investment research and management company Morningstar

considers Cairns a good choice for Chairman and a force bringing in positive change.


“Mr Cairns has executive board experience and a good track record, including in the retail and consumer goods sectors,” states a Morningstar 28 August 2015 report.


By contrast, Ralph Waters’ background in retail was not as extensive. He has experience with Fonterra and Fisher and Paykel but his other positions include Westpac New Zealand and CEO of Email and Fletcher Building.


In addition to the Cairns appointment, Woolworths has strengthened its key stake as Australia’s major food supplier by the appointment earlier this year of Brad Banducci as managing director of Woolworths food division.


Previous to the appointment Banducci was managing director of one of Woolworths’ currently successful divisions, liquor. Prior to joining the Woolworths group he held positions with Tyro Payments and Boston Consulting Group.  


Banducci has already spoken of turning around Woolworths food. At an investors day in May 2015 he announced a customer-focused orientation.


“We are placing the customer at the start of everything we do,” said Banducci. “This strategy will result in lower prices, more compelling offers, and greater innovation,” he stated on the day.


Australian Food News reported on a shake-up in the supermarket’s marketing team in May 2015.


The end is nigh for Woolworths’ biggest loss-maker?


The recent financial results confirmed that for 2015 financial year the Masters hardware chain division burnt EBIT $245.6 million in losses, a big hole in Woolworths’ pocket. As Morningstar put it in its 28 August 2015 report, Masters simply is not working.


The Masters’ strategy has been driven largely by CEO O’Brien but is more likely to be resolved as he leaves the helm.


Morningstar believes this is due to poor store location and format. Morningstar believe that a new CEO will not likely stand for the current loss levels and change will either have to come or likely Masters will be sold. This will give the company a much needed company boost if this happens.


Big W to be put on market?


Big W’s biggest competitor, Kmart has had one big turnaround in the past few years. The Wesfarmers chain changed strategy to every-day low prices and it has paid off.


So is it time for the Woolworths group  to throw its hands up and admit defeat?


Morningstar suggests so. “Big W only comprises about 3 per cent of group earnings and continued weakness may have a silver lining in that it will encourage a new CEO to sell the business,” said its 28 August 2015 report.


“Woolworths has enough problems with its core Australian food and liquor division and doesn’t need to be attempting to fix Big W too, especially when their main competitor is an in-form Wesfarmers.”


Meanwhile, in August 2015, Big W’s Managing Director Alistair McGeorge stepped down for announced   health reasons.   


Woolworths successes in online shopping and technology


According to a March 2015 IBIS World report into grocery sales, the total revenue for 2014 –  2015 for online grocery sales in Australia was AUD$2 billion. Not much when compared to the sales figures of physical stores.


However, online grocery shopping in Australia is gaining huge traction. IBIS World expect annual growth between 2015 – 2020 will be 13.6 per cent. It has been at 13.5 per cent annually between 2010 – 2015.


Current profit levels across all online grocery shopping businesses in Australia for 2014 – 15 was $79.9 million, and 431 businesses are involved.


By comparison, Wesfarmers/Coles has a 31.6 per cent share of Australia’s online grocery market according to IBIS World. In 2010 Coles introduced click-and-collect services including a locker-style system. In 2011 it moved its click-and-collect into Shell petrol stations. IBIS World has also stated that Coles has expanded its online presence at a slower pace than Woolworths.


“However, the company is still expected to have gained market share in the past five years,” states IBIS World’s Online Grocery Sales in Australia March 2015 report.


“A revamp of the Coles Online website in 2012-13 led to higher sales volumes.”


Woolworths is doing very well in this sector and already has 40.4 per cent of the online grocery shopping share in Australia.


“Woolworths has invested in expanding its delivery network and click-and-collect presence, with a rapid build -up in the past three years,” said IBIS World


Liquor sales continue to grow


Another positive factor is Woolworths liquor results. Despite overall group profits dropping for the financial year ending the 30 June 2015, liquor sales were up 4.2 per cent on comparative 2014 results.


By contrast, Wesfarmers/Coles reported that its own liquor presence was continuing to underperform and that it was still in the beginning stages of its ‘liquor transformation’.


Woolworths’ Countdown success in New Zealand


Woolworths continues to impress in the form of its New Zealand Countdown supermarket chain.


These stores are performing well, reporting a EBIT for 2015 of AUD $326 million, a 5.2 per cent increase on 2014 results.


Woolworths will continue to open more Countdown stores throughout the 2016 financial year.


The appreciation of the NZ dollar against the Australian dollar has incidentally created additional value from New Zealand business of Woolworths.


Woolworths superiority in store numbers


As currently stands Woolworths has 961 stores in Australia, this can compares with Coles’ 776 stores and Aldi’s expected 476 stores by the end of 2016.
Woolworths is Australia’s largest supermarket chain which gives it the numbers necessary for a strong bounce back.