Upmarket retailer Woolworths will ramp-up investments in its Australian department store chain David Jones in the next nine months, as tough trading conditions have undermined the business’s fortunes.
“There is massive and transformative work going on at David Jones,” says group CEO Ian Moir (pictured) as Woolworths is embarking on a major restructuring of key business processes.
The retailer revealed on Thursday that turnaround initiatives at David Jones include overhauling merchandise and planning systems that will improve buying functions and stock availability.
A big and on-going change is Woolworths’ plans to introduce food services at David Jones – replicating (in part) South Africa’s Woolworths food offering in Australia.
It will sink between A$75 million and A$100 million into the business over the next three years to roll out fine-dining, food halls and restaurant-quality take-home meals. So massive is this move that Woolworths has already warned the market that its food-push at David Jones will see it post losses of A$5 million in 2017, which will continue until 2019.
“Bringing fashion and food together is the future of retail. Consumers want an experience when they go to a store. The combination of fashion and food can give them an experience. There’s nobody else who really does it in the marketplace,” says Moir. Woolworths will work with its South African food suppliers to build the food service business in Australia.
Woolworths is also looking to introduce high-margin private-label brands RE:, JTOne and Studio W into David Jones. The aim is for private-label brands to grow their contribution to profits from the current 10% to 20%, “in time”.
Moir admits that Woolworths had mishandled its private label strategy at David Jones. “We got stuff wrong and we got it badly wrong… The stuff we got wrong was execution. Our systems didn’t speak to each other, we didn’t know where stock was, it arrived late, it was the wrong mix and we spent too much launching brands when the product wasn’t there,” he says.
Private-label brands have worked in Woolworths’ favour in South Africa, allowing it wide pricing architecture for its merchandise and exposure to vast consumer income groups.
Woolworths plans to reduce the number of brands at David Jones in the next three years. Since the R23.3 billion takeover of David Jones in 2014 along with stablemate Country Road Group, Woolworths has dropped about 80 brands and shut down ineffectual retail space it inherited. Woolworths’ recently acquired men’s fashion brand Politix will also be introduced to David Jones.
Disappointing David Jones
Australia’s retail malaise, which has been worsened by slower economic growth due to lower commodity prices and muted consumer confidence, continues to create a difficult environment for Woolworths.
In the 26 weeks to December 25, Woolworths’ group sales increased by 6.7% to R37.8 billion while its operating profit declined by 3.2% to R3.7 billion. Australia and South Africa now contributes 42% and 58% respectively to its operating profit. Adjusted sales at David Jones rose by 4% while Country Roads’ declined by 0.9%, impacted by the timing of the crucial Boxing Day sales, which will now occur in the second half result. This has resulted in its adjusted diluted headline earnings per share declining by 2.4% to 244.9 cents per share.
Market watchers are uneasy about the slow pace at which David Jones is proving itself. When the business was acquired two years ago it was tipped to transform Woolworths into a substantial retailer in the southern hemisphere, giving it a neat rand hedge.
“The David Jones recovery has been a disappointment but no big surprise, as the company guided lower sales in previous periods. One has to bear in mind that these numbers exclude boxing day which is material,” says Anthony Rocchi, portfolio manager at Rexsolom Invest.
Equity analyst at Electus Fund Managers Damon Buss agrees with Rocchi adding that while the long-term strategies of both David Jones and Country Road sound good, “there is a substantial risk of further execution mistakes over the next 12 months” given that management have a number of on-going projects.
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