22 Nov 12 Woolies’ aggressive growth path
For over eight decades Woolworths has set the standard for quality in SA’s clothing and food retail sectors. But in terms of scale, it has been in the shadow of its major competitors. That is fast changing. Woolworths is now reaching new heights under the leadership of Ian Moir, appointed MD of retail in January 2010 and group CEO in November that year.
Moir came with a formidable record as the man who had rescued Woolworths’ once-ailing Australian clothing subsidiary, Country Road. His challenge as group CEO was to unlock the full potential of the Woolworths brand and set the retailer on a new growth path.
Moir tackled the challenge head-on and by March 2010 had the go-ahead to pursue his strategic plan. Though the strategy has brought sweeping changes, Woolworths has remained unswervingly focused on its core market: the upper-income 8-10 LSM (living standard measure) consumer segment. “We will never try to be anything else but LSM 8-10-focused,” says Moir.
This commitment is well founded. Moir believes one of Woolworths’ big competitive advantages lies in the growing affluence of black consumers. “They aspire to the Woolworths brand even more than white consumers,” says Moir.
Moir predicts the LSM 8-10 income segment will grow at 5% annually over the next three years and 92% of the increase will comprise black consumers. In Woolworths’ clothing division there is already a 50/50 split between black and white customers, he says.
There is another sound reason for focusing on that niche. “There is less competition in our segment,” says Moir. “Everyone is rushing into the mid-market [LSM 5-7] segment.” With Walmart-owned Massmart added to the rush, he predicts competition in the mid-market segment will become “very fierce”.
Moir’s strategy is now well advanced, having begun with a thrust to drive costs down and lift profitability. As part of this strategy Woolworths acquired 59 of its 74 franchised stores at a cost of R701m. “It was a good move,” says Moir. “It has given us greater control over our brand and improved profitability.” The remaining 16 franchises will be acquired as franchise agreements expire.
In the year to June 2012 conversions added R530m in sales. At pretax profit level, a net R119m was added – 21% of the group’s total pretax profit increase for the year.
The results of Moir’s strategy so far speak for themselves. In the retailer’s three financial years to June 2012 headline earnings per share (HEPS) grew a total of 142%, well over double the 58% total rise achieved in the retail boom years of 2004 to 2007.
Another indicator of success, return on equity (RoE), lifted from 39,4% in 2009/2010 to 47,1% in 2011/2012. This puts it on par with Mr Price’s 47,2% and ahead of Truworths’ 41,1%, Shoprite’s 32% and The Foschini Group’s 27% in their most recent financial years.
“To sum it up, we are a much slicker business than we used to be,” says Moir. Slickness also shows in operating margins across the group.
In the food division, operating margin has been ramped up over the past two financial years from 3,6% to 5,8%, a level fractionally behind the record 5,9% achieved by Shoprite’s SA food retail division in the year to June 2012. “Our target margin is 6%,” says Moir. “It’s a good margin by any standard worldwide.”
Ambitious growth objectives in its R15bn annual sales food division
“We aim to become a far bigger player in the food sector,” says food division MD Zyda Rylands. “I believe there is massive upside potential.”
The challenge is a big one. “We have always been a big, small food store business with a focus on convenience,” says Rylands. “We are now getting into the ring with the big guys.”
Woolworths is now armed with 366 food stores – 152 standalone, 171 full-line and 42 Woolworths Food Stop convenience stores at Engen filling stations. But they are generally small stores. The average trading area, excluding Food Stops, stood at only 484m² in June 2012.
“Limited space does not allow us to provide a full choice of products,” says Rylands. This will change with an expansion programme in which existing stores will be enlarged to accommodate wider aisles and a broader product range and the opening of new, large supermarkets. “We will add 49000m² [31%] of trading space over the next three years,” says Rylands.
Moir sums up the goal: “We want our customers to shift from shopping baskets to trolleys.”
In parallel with its expansion, Woolworths is ramping up the range of food products it offers, particularly groceries and long-life products. An additional 1700 SKUs (stock-keeping units) have been added, bringing the total to about 7500 with a further 1000-1500 to come, says Moir. To do this Woolworths is introducing more branded products to supplement its private-label line-up. Private-label products still make up about 90% of Woolworths’ food sales but this will “fall a bit”, says Moir.
A key factor in the success or otherwise of Woolworths’ growth objectives is price competitiveness. Rylands believes Woolworths is succeeding. “We do a price comparison every week of our basket compared with those of competitors and find the difference over 12 months is under 1%,” she says.
Woolworths made its first definitive move into the supermarket space in April with the opening of its 2440m² Woolworths Nicolway store in Bryanston, Johannesburg. A further nine food stores on the same scale are in the pipeline and full-line stores of more than 9000m² are also envisaged.
“As we get bigger, we won’t lose sight of who we are and our brand values,” says Rylands. “We want to have the mind of a supermarket and the soul of a deli.”
The deli concept is the “real point of differentiation” between Woolworths and its competitors, says Rylands. Another important differentiator, she says, is product mix. “About 70% of our business is in fresh products, compared with a norm of about 30% for food retailers.”
Woolworths’ strength in the fresh produce segment has been built on strict disciplines in its cold chain distribution network. If a fresh produce delivery truck arrives at a store and its load bay temperature is not within strict limits, the load goes back, says Rylands. “That’s a Woolworths tradition,” she stresses. “We are also paranoid about sell-by dates.”
Nor will Woolworths compromise on its standards with branded products, says Rylands. For example, products containing tartrazine or MSG will never be acceptable.
Despite introduction of branded products, she says, the focus remains on building Woolworths’ private-label range. The close relationship Woolworths has with private-label suppliers allows Woolworths to control quality better than any other food retailer, she asserts.
“We have an amazing relationship with our suppliers and work closely with them in planning production and developing new products,” she says. “Some have been with us for 75 years and we see them as partners. We are almost a fully vertically integrated group.”