Woolworths sets up VC arm to target growth

Sue Mitchell

Feb 6, 2020

AFR

Woolworths has set up a venture capital arm as part of chief executive Brad Banducci’s strategy of creating new revenues by investing in disrupters like food delivery businesses and sharing the supermarket giant’s digital, data, logistics and marketing assets.

The investment arm, dubbed W23, was established last April to explore investments in innovative early-stage and growth companies in the food and retail sectors, with a focus on ‘disruptive’ consumer products and services and retail technology.

Its first investment, in June last year, was a $30 million debt and equity stake in meal kit start-up Marley Spoon, which threatens to disrupt supermarket retailing by siphoning off sales of fresh food.

Unlike Commonwealth Bank of Australia and Coca-Cola Amatil, which launched their venture capital arms and investment programs with much fanfare, Woolworths has been keeping details about W23 close to its chest and has declined to say how much capital it plans to invest.

“It’s still very early days for W23 and we’d prefer to have more tangible progress before providing further detail,” a Woolworths spokesman told The Australian Financial Review.

The unit is run by Ingrid Maes, Woolworths’ former director of loyalty, data and digital media, who spearheaded the development of the Woolworths Rewards personalisation engine, regarded as the most sophisticated in Australia.

Investments are overseen by an investment committee which is chaired by group portfolio director Colin Storrie and includes Jason Hew, a former investment banker who worked at Woolworths Rewards and digital arm, WooliesX, for three years.

W23’s mandate is to explore opportunities for Woolworths to invest in partnerships with innovative businesses as part of Mr Banducci’s ‘retail ecosystem’ strategy.

Outside business

Under this strategy, which was unveiled when the proposed demerger of the liquor, hotel and gaming businesses was announced last July, Woolworths proposes to accelerate growth by selling access to its digital, data analytics, e-commerce, supply chain, logistics and marketing platforms to third parties.

Mr Banducci has estimated that between one-third and one-half of the retailer’s growth will come from outside its core supermarket business, including convenience stores, online retailing and providing solutions to other businesses.

Marley Spoon, for example, will start sourcing products from Woolworths’ suppliers and distributors, use the Woolworths Connect logistics arm to distribute meal kits to other states, advertise on digital screens in Woolworths stores, online and in its magazine, and market to Woolworths Rewards loyalty scheme members.

Established supermarket chains are facing disruption from pure play online retailers such as Amazon, food delivery companies such as UberEats and Menulog offering customers “ultra-convenience”, and customers seeking new, more environmentally friendly products.

Agile vehicle

W23 refers to the stages of Woolworths’ group transformation strategy, known as Horizon 2 and Horizon 3.

“W23 has been set up as an agile vehicle to invest in disruptive innovation that helps support the delivery of our long term strategy,” Ms Maes said.

Woolworths’ W23 VC arm is led by former director of loyalty, data and digital media, Ingrid Maes. 

“Our partnership model aims to give entrepreneurs the freedom to continue doing what they do best, while offering them access to the assets we can bring to the table to help them realise their plans more quickly.

“In return, these partnerships should help us differentiate our offer and accelerate our ability to meet the changing needs of our customers.

“We know there is a lot to learn from the innovators disrupting the market and we look forward to the opportunity to partner with many of them into the future.”

W23’s first investment is already delivering results. The initial capital enabled Marley Spoon to invest more in marketing in the December quarter. Sales soared 50 per cent in Australia, customer numbers jumped 56 per cent and the number of orders rose 54 per cent as more households switched from shopping in stores to having ingredients and recipes delivered to their doors.

Marley Spoon chief executive Fabian Siegel says that under the five-year partnership, Woolworths will also market meal kits to suitable Woolworths Reward customers.

“We’ve structured a relationship with Woolworths where rather than paying upfront we pay a trailing commission for customers that Woolworths is generating for the Marley Spoon brand,” Mr Siegel said. “This is an exciting opportunity to grow in a cost efficient way.”

Mr Siegel said Mr Banducci’s strategy of sharing access to Woolworths’ infrastructure with third parties was “innovative” and “unique” in the three markets in which Marley Spoon operated.

“It’s very component oriented, this Woolworths infrastructure, meaning you can tap into existing services within the Woolworths structure and build services based on individual capabilities,” he said.

“[Mr Banducci is] very innovative in the way he has structured Woolworths and now he’s trying to unbundle and offer this to other companies like us. I haven’t seen anybody yet who has this idea of providing individual components of their business inside their organisation and also to third parties.”