How the mighty have fallen. There was a time when Woolworths was regarded as the best retailer in Australia, certainly the most profitable.
All that has changed. In the 13 weeks to April 5, Woolworths delivered total sales of $14.956 billion. That’s down 1.6 per cent on the previous corresponding period. Compare that to Coles which has pulled way ahead of Woolworths. Like-for-like sales at the Woolworths Australian supermarkets business only increased 0.7 per cent for the March quarter. That means hardly any growth at all. Compare that to Coles’ 5 per cent increase in third quarter sales. For the first time, Coles have passed Woolworths on the key metric of sales per square metre.
Woolworths’ response? Shed about 800 jobs to deliver more than $500m in savings across fiscal 2015 and fiscal 2016. That’s on top of the 400 support roles that have already been cut. But this begs a question: what was cut? Waste or expenses?
If it was a mere waste reduction, this won’t solve the problem. Woolworths has to fix its overall business model, as their problems are structural.
If, on the other hand, they cut expenses, this can only make matters worse. Expenses mean the costs one must incur to run the business. If you cut expenses, you impair your business.
Woolworths made a loud announcement about “lean retail” as the cure-all for their business. Now up until then, the term did not exist so Woolworths’ team can be congratulated for the invention. It looks like they have borrowed the term from manufacturing but in retail such a concept isn’t the panacea they are looking for. Lean business is commendable, but this just means well administered operations. It will not cure the consequences of shifting consumer tastes, poor merchandise mix, or decisions to invest in wrong market segments such as hardware.
Merrill Lynch analyst David Errington confirmed my observations when he commented on Woolworths’ efforts to cut costs in its stores.
“We heard from industry sources that Woolworths has given an order to its Supermarket store network (around 950 stores) to cut $2,000 of costs per month (per store),’’ Errington writes further ”This would save around $25m (pa) – however we think the only area to cut costs in Supermarkets on short notice is in its work force.
“Over the past month or so, through visiting a large number of Woolworths Supermarkets, we observed that staffing levels appeared to have fallen, and that shelves are looking relatively depleted…at times of the day when shelves should be full of stock (midday on the weekend).
“A number of food suppliers have also said to us that their products are not being replenished as quickly as they should be…impacting sales of their items.
“To cut costs in stores so that short term earnings targets can be met (if this is what Woolworths, as we believe, is currently doing) is a suboptimal operating strategy in our view, particularly leading up to a critical Christmas trading period.”
The troubles in the supermarket segment started to happen at a time when Woolworths committed itself to Masters. Losses for Masters are getting larger and to make matters worse, cash earnings from the well-established Big W continue to deteriorate.
Errington says the strategy developed over the last five years is just ill-conceived. The company is over-investing in the wrong areas, he says, and ignoring the areas that need attention. And that, he says, is because Woolworths managers are remunerated to focus on the short term.
He has a point. We all know that this is a receipt for trouble. Anyone can achieve short term targets at the expense of important, long term values and assets, such as brand loyalty and consumer perceptions of the business.
So, how could Woolworths tackle the structural problems? And what is at the core of the problems? It’s the loss-making Masters businesses.
To compensate for the losses at Masters, Woolworths had to cut back operations and service at the supermarket to keep the cash flowing in. At what stage will Woolworths accept that their attempt to copy Bunnings and Home Depot has failed?
Dr W. Edwards Deming, who so successfully employed Total Quality Management to achieve Japanese economic miracle in 1960-90s, warned about the dangers of copying. “To copy is to invite disaster,’’ he wrote. It now looks obvious that Woolworths moved into the hardware area without fully understanding what made the business click.
The Masters experiment, combined with the short-term focus of driving up margins to compensate for the losses at Masters and reducing the quality of the customer offering, will erode Woolworths’ long term value. Unless they make some serious changes now.
What’s required now is true leadership, a new vision for the business. Until we see that, Woolworths will continue to suffer pain and watch its value diminish. But, they managed to turn the business around in the past, so I have high hopes that they will be able to repeat this feat yet again.