In the end, Woolworths Holdings CEO Ian Moir will be judged on a single deal: the R21.4 billion acquisition of Australian department store chain David Jones in 2014.
That investment has been impaired by nearly R12 billion to date, and the overhaul of David Jones (and the R2 billion-plus refurbishment of its flagship Elizabeth Street store in Sydney) is not yet complete. Even adjusting for one-offs, comparable sales are still in decline
But Moir’s tenure (he has been in the top job since November 2010 and was the clear successor to Simon Susman since being appointed to the board in February 2010) was about more than just one disastrous deal down under …
Moir can surely point to the building of a large food business at Woolworths in South Africa as his biggest success.
In FY2009 (prior to him taking the top job), Woolworths Food generated R11.1 billion in revenue through 129 standalone stores. Last year, this number was R32.3 billion from a total of 340 stores.
The food business, albeit at lower margins, has been resilient throughout economic climates. Price perception has improved (on some essential lines, Woolies is cheaper than rivals), its mammoth ‘The Market’ stores are destinations with experiential retail at the centre, and its convenience/concessions strategy continues to deliver.
In many ways, though, Moir’s ambition has been achieved. This is a problem in itself as it is not clear what comes next for the food business.
The popular ‘Eat in for 4’ promotion (then for R100) was showcased a decade ago. Fast forward and Woolies is still plugging away at the same promotional strategy.
Fashion, beauty and home
Until recent years, this was the engine of the group. But a series of serious missteps in the last three or four years has seen sales slip and profits drop even further. Operating margins, once the envy of the entire industry (>17%), are now being guided to “above 14%” in the medium term. Last year, it was just 12.1%.
Moir has had to admit to “poor execution in clothing” more than once. This was particularly pronounced in womenswear in 2018. He told Moneyweb at the time: “We went too young and fashionable with our womenswear. The garments, prints, and fit were wrong. We are a broad church, as our average customer age is 40-plus.”
It had to get back to basics, a process it is still busy with.
The rollout of the David Jones private label in South Africa to replace what you would recognise as Woolworths’s ‘classic’ range fell completely flat. It rolled this back in late 2018.
One positive from the fashion business was the move the group made to buy back its franchise stores in South Africa in 2010. This gave Woolies complete control of the consistency of customer experience as well as margin. It is hard to believe now that the group at one stage allowed franchises to operate stores.
There was never a coherent strategy for the group’s operations in Africa. The segment it targets (upper middle market) is comparatively tiny on the rest of the continent. It quit Nigeria in 2013 and exited Ghana last year. Whether or not it should even be active in many of these sub-scale markets remains an unanswered question.
The distractions elsewhere in the group means the South African business is running an e-commerce platform that trails those of rivals.
Online represents 20.3% of Country Road Group’s total sales, while at David Jones that figure is 7.7%. It doesn’t disclose local figures, just that these increased by 40% (fashion, beauty, home) and 21% (food) last year. These are off very small bases, however. To suggest that online comprises even 2% of South African sales would likely be a stretch. And Woolworths, Country Road and David Jones aren’t just facing competition from traditional rivals; online fashion retail is increasingly chipping away at bricks and mortar sales, and global (traditional) rivals have invested heavily in this space.
There are serious questions to be asked about Woolworths’ omni-channel strategy across the group.
Country Road Group
Taking out the minorities was a costly exercise after Aussie billionaire Solomon Lew ensured a huge premium (A$17 a share versus the market price of A$4) for his 12% of the retailer in exchange for support of the David Jones transaction.
Moir cannot take credit for buying Country Road Group (CRG), but the successful rollout of standalone and stores-within-stores of Country Road, Trenery, Witchery and Mimco in South Africa came under his watch.
The ‘unification’ of the CRG and David Jones head offices into a single Australian corporate structure has been disruptive to say the least.
A year ago, it was rocked by a number of high profile resignations in the region, including that of David Jones CEO David Thomas, and two Australasian board members.
From that point, Moir has been dividing his time between group CEO duties and running David Jones as acting CEO. This was clearly an untenable situation.
On paper, the deal seemed a doozy.
Core was the attraction of scaling up to become a “leading southern hemisphere fashion retailer”. Faced with increased competition in South Africa and Australia from northern hemisphere retailers like H&M, Zara and Topshop, it had to do something.
The problem was the quality of the asset it bought.
Australia might’ve been the correct market to double down on, but David Jones was arguably just too broken (and too irrelevant?) to turn around. And it has way too much trading space.
On paper, the group saw six “value creation initiatives” that would deliver R1.4 billion per year within five years. The reality turned out rather different.
It expected an earnings before interest and taxes (Ebit) impact of between A$70 million and A$80 million (R800 million) from the introduction of Woolworths private label brands such as RE:, Studio W, and JT One.
To an Australian shopper, these were completely unfamiliar. The strategy flopped.
Growing concessions of brands from Country Road Group will do more for CRG than David Jones, but even here there are limitations. Until September, those were not exclusive to David Jones.
The only value unlock has been on the optimisation of the chain’s sprawling real estate portfolio. It is not clear whether Woolworths is even pursuing a group sourcing strategy (which was expected to boost Ebit by A$10 million and A$20 million a year).
Moir cannot only be rated on the acquisition of David Jones, except he will be.
The distractions caused by the acquisition have damaged the group over the last five years, thankfully not irreparably. And David Jones will continue to weigh on new boss Roy Bagattini until it is fixed or sold, as will the group’s R14.4 billion in debt (nearly 10 times the just R1.5 billion in debt it had in FY2009). That tells a story of its own.