Weak results spur change

“We are no longer a niche food company,” says Woolworths retail head Andrew Jennings. “We have to think like a supermarket and act like a deli.”

With an estimated 9% share of the market, Woolies says it is acting to ensure consistency in food availability. It wants to broaden its range of branded groceries, provide a “bigger basket” of price-competitive basic food items, and change to larger-sized stores.

A change seems necessary after last week's disappointing results. Turnover was up 16%, from R8,4bn to R9,8bn, but profits declined 17%, from R567bn to R469bn. Financial services saw profits sliding 36% to R47m from R73m.

Only Country Road did not disappoint — a vindication of CEO Simon Susman's determination to hold onto it while others cried for its disposal. The Australian retailer's profits jumped 54% to R48m.

Late to react

Susman admits Woolworths was late to react to the retail downturn — the sharpest he's witnessed in 40 years of retail trading. The company has expanded aggressively for 18 months and failed to rein in expenditure. “Our investments were too bullish and our opening price points too high,” he says.

Net bad debts increased from 4,1% of debtors book to 7,8%. “Our customers are heavily indebted: research tells us their debt levels are three times the national average,” says Susman.

Of particular concern, says Citigroup retail analyst Dean Ginsberg, is the liability line. “Woolworths has more than R4bn in current liabilities, with a debt:equity ratio of over 100%. The gearing is too high, interest costs are just exorbitant.” Partly as a result of these issues, expenses climbed 28% while gross profit rose 12,8%.

It's believed that cash-strapped Woolies consumers have traded down to other clothing retailers. Similarly, some food shoppers “may have moved away from us”, says Jennings — though the food business still grew by 18,8% (comparable stores: 9,7%).

Huge changes are taking place in terms of design, buying and planning in clothing and general merchandise. “It's the biggest change this part of the business has seen in 15 years,” says Jennings.

The company is also investing heavily in new people. After a year in the job, Jennings — who claims to have spent his time looking in “every orifice of the company” — has hired a new head of clothing & general merchandise planning and a new commercial head of food, both from Tesco in the UK.

Time for strong leadership

Though the company is working hard to curb expenses (“there will be no bonuses for management,” says chief financial officer Norman Thomson), the Woolworths vision through to 2010 means that expansion continues. Capital expansion will cost R660m. Floor space in foods will grow by 21% this year, while space in clothing will grow 4%.

Says Sanlam Investment Management analyst Andrew Kingston, “A key message from Woolworths is that they are looking through the slow period into 2010 and carrying on with expansion plans. It's a time for strong leadership.”

Two other retailers whose strategies have seen them weather this downturn in better shape are Shoprite and Truworths. Both released good results last week on the back of tight cost management and prudent expansion (see page 63).

All three retailers expect the second half of the year to be tougher, and warn that an upturn cannot be expected for 12-18 months.

However, Ginsberg remains optimistic. “People who say that retail is dead in SA are smoking their socks,” he says. “There are more consumers in the market than last year, jobs are still growing, though more slowly than before, and we believe the interest-rate cycle has peaked.”

Source: Financial Mail

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