After reporting yet another weak quarterly sales result today, Woolworths shareholders must be wondering when the pain will end.
While sales fell for the fourth consecutive quarter, management have undertaken a number of initiatives in recent months to address this. They have decided to sell Home Improvement division, which was bleeding more than $220 million in annual losses. A new CEO has been appointed after a painstaking global search. And today he announced an additional $150m will be spent in the second half of the year becoming more competitive on “price, customer service and loyalty”, The company will also conduct a comprehensive review of the underperforming General Merchandise segment (mostly Big W), which is expected to make a loss in 2016.
Yet despite taking these steps, the overseas experience suggests it will be a long road back.
Global comparisons suggest Woolworths was earning unsustainably high profits. This attracted competition, which has been the catalyst for a fall in operating margins from more than 7% last year to 5% in the most recent half year year. But, as seen in the UK and France, once margins begin to decline, the path to reliable profitability is not a smooth or short one.
While management are taking the right steps in addressing recent earnings weakness, they now face the most competitive environment in the Australian supermarket industry for decades. Aldi is appealing to the frugal consumer, while Coles is going from strength to strength under Wesfarmers ownership. Any stabilisation in Woolworths’ margins is a ways away yet.
Daniel Mueller
Isn’t the margin decline intentional? They’re lowering prices to compete and win back customers, so naturally margins will also fall. However, I do agree with the statement “as seen in the UK and France, once margins begin to decline, the path to reliable profitability is not a smooth or short one”. Tesco managed to fool Buffet and learning from his experience there is mandatory before taking a position in Woollies.
Hi Ben. Agreed, the decline is intentional but they don’t have much choice. The issue is how far margins need to fall before they win back customers and how long this takes. Thanks, Daniel
Excellent food for thought, although I think that even with the new competition, Australian grocery retailing is still vastly less competitive than the UK or France, and will probably remain so for the remainder of my investing lifetime (I’m 37).
Accordingly, my guess is that Woolies margins won’t fall as far or for as long as your peer comparison would suggest unless the margin contraction is exacerbated by some exogenous factor (a recession/depression would do the trick).
I think the difference between Woolworths and Coles from a customer perspective is really small and customers easily change between the two based on a minor advantage. Coles was really struggling about 10-15 years ago under what seemed like inattentive management, with store problems that resembled some of the ones woolies has now (eg: poorly maintained merchandise) but new management turned it around.
Totally agree with this. We’ve moved house in the past year, previously we always shopped at Woolworths as it was closer. Now we have a Coles and Woolworths in the same shopping centre and I shop at whichever ends up being closest to my car space, and I’m a Woolworths shareholder! IGA gets my business for pick-ups on the way home from work.
WOW earned supernormal profits for years in key divisions due in part to lack of competition and also local planning laws. This attracted competition Davids, IGA etc but were only at the margin. Competitors needed deep pockets and long term differentiated model to disrupt Coles & WOW duopoly = Aldi. It has taken years for impact to play out as they needed to roll out enough stores. Now they have, WOW shareholders need to understand their new margin profile and it is likely going to get tougher (look at UK equivalent margins as a guide). Management are now operating a much lower return business. Good profits are still on the table if they can deliver but a vastly different business model needs to be implemented. Constantly attempting to transfer margin from suppliers is not a long term solution. Also Masters etc are just a side show that continue to suck management time and energy from the core business. WOW could make a start by looking at impact from moving HQ from city to Norwest. How connected are HQ staff to customers?
WOW doesnt seem to be able to get the basic things right.
I went into WOW yesterday and bought some broccolini which was on special. When I tried to find it on the self serve check out, it couldnt be found. The helpful assistant came over and said that you now have to select brocoli and then both brocoli and broccolini come up on the display and then you select the one you want. She said most people were having the same issue.
WOW needs to locate the person responsible for this and terminate their employment as they clearly have no understanding of what they are supposed to do ie make it easy for customers to give their money to WOW not put in place additional steps.
Similary the WOW rewards program is a well documented disaster. Its so complicated that its impossible to understand, I cant even be bothered using my rewards card anymore. What has happended to the executives who approved this. Have they been terminated?
I think Masters is fixable. The systems are hopeless. They dont know what stock is in the stores or the warehouses. They cant tell you when goods are being delivered. When you try to call them you have to call a central number and waste your time on hold and then get put though to the store, which may or may not then answer the phone. I wonder when the Managing Director of WOW last picked up the phone and tried to call Masters.
When I asked to speak to the Managing Director of Masters I was told that I couldnt be put though. When I was asked why I was told by the person that their employment would be terminiated if they did.
The whole managment structure at WOW needs to be cleaned out, and given the current Chairmans performance at David Jones Limited I am sure he is not the right man for the job.
“is a ways away yet” What language is this?
American colloquialism. Forgive us the indiscretion.