The real problem for Woolworths
WOOLWORTHS chief executive Grant O’Brien, a 28-year company veteran,
became the company’s sacrificial lamb today as the retail giant
continues to struggle with disappointing sales.
Comparable supermarket sales across food and liquor
were down 0.7 per cent in May and June, and Woolworths now expects to post a full-year profit of $2.15 billion compared with $2.45 billion last year.
The
big question now, however, is what will the new CEO do about the
disastrous Masters Home Improvement business? Despite reporting 17.7 per
cent sales growth in quarter four of 2015, it continues to haemorrhage
money.
In the same announcement, Woolworths revealed a further 800 job cuts, bringing the total to 1200. Asked
during an investor briefing
what he would say to the 1000-plus people losing their jobs, “largely
because of problems with Masters”, chairman Ralph Waters said it had
“nothing to do with Masters”.
“It has everything to do with us moving towards a leaner model for our customer-facing issues,” he said.
Whether
or not that’s the case, the business lost $176 million last year, a
blowout of 12.4 per cent on its $156.6 million loss in the 2013
financial year. That number is expected to exceed $200 million this
year.
Those losses are widely tipped to continue, and the company
has offered no clear timetable on when it expects the business to break
even.
Launched in 2011 as a joint venture between US hardware
giant Lowe’s and Woolworths, Masters was a major strategic play to take
on the Wesfarmers-owned Bunnings in the $45 billion home improvement
market.
By any measure, it’s been a spectacular failure. To date,
Woolworths and Lowe’s, which has a one-third stake in Masters, have
kicked in more than $3 billion getting the business off the ground.
Masters is expected to lose more than $200 million this year.
Source: News Corp Australia
The bigger it grows, the more money it loses.
Source: News Corp Australia
Woolworths’ half-year financial report in February
optimistically described Masters as “Australia’s fastest-growing home
improvement offer”, and the company is rolling out an overhauled store
design to win new customers.
The problem is, the bigger it grows,
the more money it loses. Its strategy is to add an additional six to 11
stores every year, but a new CEO could choose to abandon this.
“With
Grant going, if the board is serious about bringing in a new CEO then
all bets are off,” said Peter Ryan, retail analyst with Red
Communication Australia.
“Woolworths makes $2.5 billion a year in
profit. It can sustain $200 million losses in Masters for many years if
it chooses to. But the investment markets are self-determining — it has
to convince the market that that is the best strategy.”
He said
Masters was a “long-term strategy” that needed time to achieve critical
mass. “Everyone’s in a hurry to throw stones at it; no one’s giving it
time to mature as a business.”
But as losses balloon and begin to
become a serious drag on the company’s profitability, Woolworths could
be forced to rethink that strategy.
“They’re caught in a bind,” Mr
Ryan said. “Hardware is a destination purchase, and unless you give me
really compelling reasons why I should retrain myself when I’ve been
going somewhere for years, I’m going to go where I’ve always gone.
“I
don’t see them doing enough to retrain customers, but having said that,
they don’t have the store coverage to justify the marketing.”
Masters
is fighting against an entrenched competitor in Bunnings, which enjoys a
number of exclusive supply relationships. Ryobi, one of the top-selling
power tools in the country, is only available through Bunnings, for
example.
It will take a long time for those supply contracts to
work through, and without greater store coverage, it won’t have the
weight to put itself in a better position to negotiate supplier
relationships.
In short, it has to commit to losing a whole lot more money with no guaranteed prospect of turning a profit.
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