Johannesburg – It will cost Woolworths Holdings [JSE:WHL] less than R1bn to buy out its South African franchisees – and the company has cash available to fund the buyout, CEO Simon Susman told Fin24.com.
"We will negotiate with individual franchisees, but it would be important that we maintain consistency in what we're offering," said Susman.
On Thursday Woolworths announced it had decided to buy out its 76 SA franchisees – the majority of whom are in the clothing division – following an extensive strategic review taken a few months ago. The review concluded it was no longer in the best interests for Woolworths to continue with the franchise business.
Susman said the primary reason was to simplify the complexity of running the business, and the best way to get rid of franchisees. "It was increasingly becoming difficult to manage the business because of the two business models," he said.
Woolworths has also started discussions on what it will do with its franchised operations in Africa, Susman said.
Susman, who is retiring in November, summoned the franchisees to Cape Town for a meeting on Thursday morning to communicate the decision.
He described the meeting as having been "constructive, but emotional and disappointing" to the franchisees when the decision was announced.
Abri du Plessis, chief investment officer at Gryphon Asset management, said Woolies appeared to have been disappointed by the performance of the franchised operations.
Franchisees contribute less than 10% of the Woolies' turnover.
"It's important to protect your brand; if the franchisees are not doing well, it's better to be the captain of your own ship," said Du Plessis.
He said Woolies has been doing some "tests" on how it can grow the business, including the pharmacy project it abandoned earlier this year because it did not fit quite well with the company's business model.
He said it wasn't entirely surprising the franchise project would also be discontinued because unlike Pick n Pay and Spar, Woolies has always preferred to own all of its stores.
Woolies said it has commenced discussions with the franchisees to agree on guiding principles for valuation, but it hoped to complete the process during the course of the current financial year.