When Woolworths announced its foray into Australia by acquiring department chain David Jones for R22 billion some years ago, the retailer’s top-management took a cookie-cutter approach to Down Under.
When he justified the acquisition of Australia’s grand dame of department stores, group CEO Ian Moir said consumers in South Africa and Australia are similar in their taste, psyche and retail preferences – inferring that Australia would be an easy win for Woolworths.
After all, just like South Africa, Australia has lots of sunshine, the same seasons and the locals speak English. Other retailers have lived to regret this thinking.
Woolworths, once an investors darling because of its focus on upper income consumers who are apparently impervious to economic cycles, is in the throes of a retail storm in Australia. It recently told shareholders that it faces an impairment charge for David Jones of R6.9 billion – a tenth of its R70 billion market capitalisation.
“It’s a reality check for Woolworths as it is recognising that it has made big mistakes in Australia… it overpaid for David Jones,” said Cassie Treurnicht, portfolio manager at Gryphon Asset Management.
Woolworths is not the only retailer being whipped outside of its home market.
Famous Brands – the operator of eateries including Wimpy, Mugg & Bean, Steers and higher-end tashas and Mythos – is buckling under the weight of its UK-based Gourmet Burger Kitchen (GBK) business.
The R2.1 billion acquisition in 2016 – the biggest deal in its history – was meant to be a game changer for a company that in a decade grew from a family-owned business into an industry leader. Instead, Famous Brands has raked in a loss of £872 000 (about R16 million) from GBK, which is feeling the strain of Brexit uncertainty and intensified competition in the UK’s fast-food market.
The UK is also a problematic region for investment firm Brait, which owns troubled fashion retailer New Look. Tough competition in the UK’s high street has led to Brait writing down the value of New Look to the sum of nothing. Brait bought New Look in 2015 for £780 million (R14 billion at the time).
The big question is whether South African retailers are buying bad businesses or whether they are simply victims of the mega businesses acquired? Wayne McCurrie, senior portfolio manager at Ashburton Investments, reckons it’s the latter. “The real problem is that retailers don’t go small to learn the game, environment and pay school fees,” said McCurrie.
“They become aggressive and brazen when they go in and think ‘look how good I am in South Africa and clearly I can replicate the success elsewhere’. However, it’s a highly competitive market.”
This hard lesson was experienced by Pick n Pay, Truworths, Steinhoff’s Pepkor (the owner of discount chains Pep and Ackermans) and Clicks in Australia.
Pick n Pay bought grocery chain Franklins in 2001 for R500 million; Truworths bought women’s clothing chain Sportsgirl in 1994 for R148 million, and Pepkor bought the clothing and homeware chain Best & Less for R360 million.
Health and beauty retailer Clicks also gambled in Australia by purchasing pharmacy chain Priceline for R177 million in 1998, homeware and kitchenware retailer House in 2000 for R168 million, and haircare franchise brand Price Attack in 2002 for R89 million.
Australia has been a graveyard for Pick n Pay, Truworths and Clicks as the retailers pulled out of their operations.
Edcon – the operator of Edgars, Jet and CNA – narrowly escaped a bloodbath when it walked away from negotiations to acquire David Jones competitor Myer in 2006 in a deal worth about A$1.3 billion (about R5.6 billion at the time).
How to go offshore?
Jean Pierre Verster, portfolio manager at Fairtree Capital, said Woolworths’ woes indicate that when management loses focus and extends their business in far-flung geographies and multiple timezones, chances are that they’ll run into trouble.
“Management teams have a competitive advantage in a market that they know well. Ian Moir may know Australia but a leader alone cannot manage the entire David Jones. A lot of people would have been involved in David Jones but most would be South African and might not know Australian consumers well.”
Delving into offshore markets is not necessarily a bad thing. In fact, shareholders expect a company to diversify its earnings given South Africa’s sluggish economy, hard-pressed consumers, rand volatility and increasing political uncertainty.
So, how should retailers expand in offshore markets? In a small and measured way, said Ashburton’s McCurrie. “Retailers should go small and put their toes in the water for three or five years. If they are successful and think they know what they are doing, then go big.”