Woolworths' quest for southern hemisphere domination loses steam | Fin24
 
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Woolworths' quest for southern hemisphere domination loses steam

Aug 22 2018 20:21
Janice Kew, Bloomberg

Woolworths’ [JSE:WHL] plan to create a southern hemisphere retail giant is being hampered by impairments and slower-than-anticipated growth at its Australian department-store chain David Jones.

The South African specialist in organic food and designer clothing for wealthier customers expanded in Australia in 2014 with the $2bn purchase of the 180-year-old chain. The aim was to revive business and allow Woolworths to challenge fashion retailers Inditex SA, Hennes & Mauritz and Fast Retailing in key markets south of the equator.

But it’s not working out that way - at least not as fast as initially expected by Cape Town-based Woolworths.

Fashion missteps and tough selling conditions in its home market and in Australia - together with a revaluation of David Jones that resulted in an impairment charge of 712.5 million Australian dollars - will result in Woolworths posting its first full-year loss since at least 2002 when it releases earnings on Thursday.

The head of David Jones was fired earlier this year.

“The biggest mistake Woolworths made was failing to recognise that department stores are a dying breed,” said Syd Vianello, an independent retail analyst in Johannesburg. “David Jones was ripe for the picking, but maybe Woolworths was overconfident that they would get it right.”

‘Wholesale changes’

The Australian retail market has been notorious for South African failures, with companies including Truworths and Pick n Pay Stores [JSE:PIK] pulling out of the country. Woolworths chief executive officer Ian Moir was the head of Country Road in Australia for a decade before taking over at Woolworths in 2010.

When Moir, 59, announced the David Jones deal, he knew the chain was well recognised in Australia and he had successfully leveraged the equally well-known Woolworths brand in South Africa. Moir brought in greater cost control and pushed the use of the chain’s own range of premium lines of clothing.

To get more margin in Australia, Moir decided to grow private-label sales at David Jones and sell Woolworths own brands.

“A large part of the turnaround plan required some wholesale changes in the business, particularly the introduction of about 20% of sales being own brand,” Alec Abraham, an analyst at Sasfin Securities.

“The market was fragile as it was, you come with those kinds of changes and it had a tremendous impact on the business. It was a naivety that the extreme trading environment was not going to play a major factor in any turnaround.”

Star performer

Woolworths is also expanding its food offering in Australia. Last year, it opened Bondi Junction food outlet, offering both a restaurant and food store in Australia for the first time. New and expanded food options include sites in Wollongong, Melbourne and in Sydney’s Elizabeth Street store.

The food division in South Africa has been a star performer, rising 8.4% in the 52 weeks through June 24. Even so, Shoprite’s [JSE:SHP] Checkers chain is increasingly targeting the same higher-income food customers.

Excluding the larger format hypermarket stores, Shoprite said on Tuesday that sales at Checkers rose 8.2% in its fiscal year as these “shoppers are spending more and shopping with increased frequency.”

Shares in Woolworths have dropped 22% this year, valuing the company at R54bn. That compares to a 5.6% decline at Shoprite, Africa’s largest grocer, which is valued at R124bn.

Woolworths' shares were trading at R51.19 by at 15:23 on the JSE, down by 0.70%.

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woolworths  |  companies  |  retail
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