Woolies aims to master the future

Terry McCrann
July 24, 2012
Herald Sun

WOOLWORTHS CEO Grant O’Brien has challenged his political and regulatory masters to look to the future and not to the past, in their approach to his company, to supermarkets and the retail industry overall.

In doing so he has also very directly challenged himself on the same basis, as he has to grow Woolies into that uncertain and increasingly volatile future.

That’d be a tough ask at the best of times for a company with $55 billion of sales in the latest year — well over $2000 for every single Australian, easily the biggest in Australia and more than double those of Telstra.

Just to grow at a pretty modest 5-6 per cent a year requires Woolies to add the equivalent of a Myer, Australia’s biggest pure department store chain, to its sales base every year.

And these are not the best of times; both the operational and structural challenges are not going to get any easier going forward.

Which is precisely his point. What links the challenge to himself and his team, to that directed at government/regulators, is his assertion that retail generally and supermarkets in particular, are now operating in a very different era.

This is the era of the customer. The era of the customer increasingly in an online, 24/7 world.

And the era, you might reasonably add, for Woolies also, of a prime competitor, which went missing through the 1990s and the first two-thirds of the 2000s.

That allowed Woolies to wax happy with continuous strong growth every year in both sales and margins. And to grow arrogant and complacent.

No more. Woolies had to change the way it did business. But governments and regulators also had to refocus their thinking, according to O’Brien.

Woolies and Coles might be the big two guys on the local block. Aldi and Costco might be tiny in the local scheme of things. But both were part of global groups that were double the size of Woolies.

The flow on from that global scale in an increasingly integrated world gave them greater buying muscle, tiny as they were locally, than Woolies, across a significant part of their product range.

And then there was Amazon — both the Amazon and an (generic) Amazon lurking in every corner of every retailer’s future.

The core dynamics of Woolies’ strategy might remain the same. To continue to pursue top-line growth, with the usual metrics like footprint, density, and financial returns. To also continually aim at cost reduction through greater productivity.

But what Woolworths call the “multi-option offer” is both an imperative and an opportunity, to grow sales into new virtual reality space.

Some 2.3 million of a wide range of group apps had been downloaded. Total online sales, excluding Cellarmasters, were up 48 per cent; including Cellarmasters by 95 per cent.
Its new Masters challenge to the Wesfarmers-Coles market leader Bunnings is fascinating. In some ways it’s like the ‘old Woolies’; in some ways it’s a bridge between old and new; in some ways it captures the future.

Masters offers the first, best and probably last opportunity to record the continual rapid growth of sales that was the hallmark of Woolies through the 1990s, when it was able to grow market share into untouched territory.

Masters sales were up 25 per cent in 2012-13 compared with group sales growth of 3.9 per cent. And given the limited penetration even of Bunnings into the hardware and home improvement space, it could keep growing at that pace for years.

Obviously with sales that were still less than $1 billion inside the group’s $55 billion, Masters is too small to make any noticeable difference to the group’s growth. It lifted the group sales growth figure from 3.6 to 3.9 per cent.

Nevertheless, this year it will post sales about equal to those of the now-discontinued and about-to-be sold Dick Smith consumer electronics chain.

Masters will have got there in two years, while it took Dick Smith two decades; and now has a growth horizon that consumer electronics does not.

It’s also interesting, as O’Brien points out, that Masters has been engineered as a multi-channel business from birth. So the positioning of the store network will reflect that.
The future might be interesting and challenging, the present is tough and getting tougher.

Deflation — falling prices — remained the overriding characteristic in the Woolies numbers.

It got to that modest 3.8 per cent dollar sales growth in food and liquor by actually selling around 8 per cent more actual goods.

Prices fell by 3.7 per cent in the first half, and then by 4.4 per cent in the second half. There were two big factors and one big driver.

The two factors were falling food and veg prices, from the very high storm and flood prices of early-through-mid calendar 2011, and the high value of the Aussie dollar on imported packaged goods (and non-food).

The number of actual bananas sold leapt a staggering 356 per cent, with the plunge in prices. The revenue dollars from selling all those extra bananas, though, were virtually unchanged from the previous year.

This captures, if in exaggerated fashion, the productivity challenge for Woolies (and Coles) of falling prices. It has to pay the costs of shipping and selling more goods out of the same revenue income.

The market and some commentators seemed to like what they saw in the food and liquor numbers. I didn’t see even the beginning of a turnaround. The numbers looked good only in comparison with the third quarter.

That brings us to the one big driver, and the critical test of how those numbers really look.

The driver is the prime competitor. What drove prices down, across the shelves, away from disaster-impacted food, was the fierce competition — now initiated as much by Woolies as Coles.

The critical test will be the Coles numbers on Thursday.