Woolies is cutting space by 11% to turn around ailing clothing business

As food unit powers ahead …
Blunder – the group tried to be too fashionable, disappointing its core customer who trusts Woolworths for basics and essentials. Image: Siphiwe Sibeko/Reuters

Woolworths will have cut the floor space of its Fashion, Beauty and Home (FBH) segment by 11% or nearly 50 000m2 by June next year (from the level it was at in 2019) as it intensifies efforts to turn around its struggling clothing business.

Read: Exit Aus and list Woolworths Food separately, say top retail analysts

The amount of floor space occupied by clothing will actually have been cut more than 11% by that point as it allocates more space to the beauty and home categories.

The number of FBH stores is expected to decline from 2019’s 216 to 192 next June (currently 202). By June 2024, it sees this number at 184, a drop of 15% from 2019.

Astonishingly, in 2018, it expected to be trading under 446 000m2 of space in this unit by June 2021. By the end of its financial year (June 27), this unit occupied 407 000m2.

The cuts began in 2019 when it became clear that trading in this unit was under more pressure than thought. The group says the space reduction of 6.4% over the last year is “driving improved trading densities” – in other words, sales per square metre.

Turnover in FBH at R12.9 billion is a full R1 billion lower than 2019, where trading was not disrupted by the Covid-19 pandemic. This represents a decline of 7.5%. Sales in the Beauty and Home categories grew by 18.2% on average and stores in the rest of Africa comprise more than 10% of FBH sales (at higher margins).

Together, these two factors give some indication of just how much trouble the core local Fashion business is in.

Clothing woes

Efforts to fix the clothing business have been underway for some time and management describe this turnaround as “the single biggest opportunity to reset value for the group”.

It has made two well-documented strategic blunders in its fashion business. First, it tried to launch David Jones clothing in South Africa (and introduce its South African brands in Australia). Both efforts were rejected by consumers.

Second, it attempted to be too fashionable in its local brands, at the expense of its core customer who trusts Woolworths for basics and essentials.

Clothing plan

It says it now has a “more holistic and granular understanding” of its customer and is “clear on where the market opportunities lie and where these intersect with our positioning as a brand”.

The new strategy sees the ‘Savvy Segment’ (anchored in quality, and well-cut, well-made fashion) as its primary focus, with the so-called ‘Trendspotter’ as its secondary focus. It says a “refreshed brand and product strategy is underway”, focused on these target customers.

It will exit from its Studio W and WCollection brands and anchor clothing in the Woolworths brand (whether it will retain its RE denim brand is unknown) and will shift towards a “more casual offering, including [a] stronger Athleisure proposition”. Woolies missed this trend almost completely in recent years.

Finally, it will introduce so-called “category-authenticating” third-party brands.

The first of these is seemingly Levis, which was introduced to its online store this month. This introduction is no surprise, given its new CEO Roy Bagattini’s strong relationship with the global denim powerhouse.

Read:

Whether this strategy will be successful is an open question. Woolworths attempted to introduce athleisure brand Puma to select stores a few years ago, a move that failed and was quickly undone.

Bigger picture

The group says the Beauty business is “being built as a destination category”. It has seized on Edgars’s weakness in recent years and has effectively taken most of that market share.

Woolies also sees “scope to gain market share in Home” – something Bagattini identified at the start of his tenure – and is considering leveraging its “Food formats in a ‘Food+Home’ concept”. Shoppers can no doubt expect to see this in a more meaningful way at its larger ‘Market’ stores soon.

Food, glorious food!

Trading in its Food business could not have been more different, with turnover up 6.9% versus last year and 18% against 2019. Inflation needs to be factored in, however. Comparable sales growth (from existing stores) was up 5.7% year-on-year, with inflation of 4.9% (and price movement of 5.2%). This translates into very slim real growth.

The business is having to fend off Checkers’s aggressive move into the upper end of the market, particularly with its Fresh X stores.

It sees “further scope to grow [its] share of customers and wallet by remaining aspirational but becoming more accessible in price, channel and format” and will continue to focus on “easy and accessible convenience”.

Its promises “further rollout” of its Woolies Dash delivery service which remains in trial (at just 18 stores) and is understood to be facing a number of teething issues as it readies it for scale. It will continue to trial new formats, such as its WCellar standalone liquor store – the first of which opened at Nicolway in Johannesburg in May.

Woolworths says its initial R250 million ‘investment in price’ – where it cut the prices of basics, including chicken – is yielding a positive internal rate of return. It says it will invest an additional R750 million in price over the next two years; this is an increase from the original R500 million it had planned.

Earnings

The earnings before interest and taxes (Ebit) margin of the food business (excluding the impact of IFRS 16) was 7.6% for 2021. By comparison, it was 6.2% in FBH. Its medium-term (three-year) target is 7-8% for food (in other words, retaining this position), and in excess of 12% for FBH.

Much work is going to need to be done to double earnings in FBH from this level.

The determined push into food in Australia via David Jones has been tempered and “decisive action” has been taken to stem Ebitdar (earnings before interest, tax, depreciation, amortisation, and restructuring or rent costs) losses.

The group has closed the loss-making smaller format food stores and is exiting its forecourt trial with BP.

Read: Woolworths restores dividend

Online on the up

Online sales in FBH were up 114% versus last year, which already saw some impact from Covid, and now account for 4.1% of FBH sales in South Africa. In the Food business, online sales also more than doubled (up 118%) and contribute 2.3% to its Food sales in the country.

It will spend almost R700 million on technology in the coming year, close to double the amount in each of the last three years, in a “significant shift from brick-and-mortar to digital, data and online to support strategic growth priorities”.

Store development capex will be cut from 2019’s R1.6 billion to R913 million this year.

The targets for online sales are clear

Woolworths expects online for the South African food unit to be in the “upper single-digits” (in other words three times the current level), and it wants to get this “into the double digits” in the FBH business (around 2.5 to three times).

Source: Woolworths FY2021 results presentation

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Perhaps rather ask your ex customers why they wont walk into your clothing shops anymore?

Woolies should go back to sourcing clothing from local or regional Southern African garment manufacturers. The previous Woolies men’s chinos made in South Africa were superb compared to the current Chinese made variety. I stopped buying the made in china chino’s some time back.

Your typical Woolies clothing customer is probably middle-aged, middle-classed and in search of good value, quality clothing. Made in South Africa would be an added bonus.

agree. They lost the plot when they went offshore. Two small examples: the quality of socks and underpants: terrible. There was a time you could buy their stuff and it literally lasted forever. No longer. Don’t buy their clothing as a result. Vote with my feet as per usual. Pity I can’t do the same with politicians.

Because when I look for something in size 38 they only have racks full of 28 and 44 – when I query it the response is ‘no stock, it’s a very popular size???’. They have no record of how many unfulfilled customers they have that leave dissatisfied

Ditto experience for me on many occasions.

Simple. They selling cheap Chinese made Junk at premium prices. Quality is terrible. When I walk in their stores… I head straight to the Food Section… to see if there is anything worthwhile.

For their premium prices… I rather shift to branded Clothing. Pay slightly more but you know you getting quality.

Agreed!!

The landlords are charging too much in rental and other costs.

Woolies are charging too much for cheap clothes. The quality of WW clothes is poor. Other tenants seem to be more or less OK with landlords?

You clearly have no idea what all that cleaning, security and running costs amount to…

They’re cutting space because they can’t make it work – not because of landlord rentals.

Besides you dumb comment would’ve meant that they would’ve cut costs and moaned about this before too.

Just as another fyi, these bigger tenants actually pay the least rental per m2 too.

Yes, we know that you smat arse, but how does help the landlord when the best covenants shrink?

“Lost in the Bush”…….

The “core customer” was the working customer in the 90’s now these customers are pensioners who don’t have deposable income….

WAKE UP !!!!!

Woolworths clothing quality & poor, or no response, to complaints means I shop elsewhere now. Seems I am not alone!

I have always been a good customer of WW but I find that the quality has deteriorated and the fit of the clothing is terrible. If I want cheap clothing there are many other stores for me to shop. I just want reasonable quality (not Country Road as its to expensive for me) for a fair price.

Since Woolworths introduced their “no plastic bag” policy,
I only buy what I can carry. And that is not a lot.
How can you tell a customer, “No plastic bags, you should buy
these black bags for R6 each” I rather go to
Spar next door. I see many ladies with a full trolly walking
out from Woolworths, with a long face. They did not buy those
black bags, and will load it straight into their cars. Will they
come back to buy a full trolley again?

I’m the same. Only buy what I can carry at WW now. Whereas before I used to buy two or three bags worth every time I went in there.

I do own some of those bags, but if I leave them in the car, hard luck for Woolies.

I also used to order food from WW online a lot, but the service is terrible. Much prefer Checkers, who usually makes it to my place in about 30 minutes. Now that’s service.

11% might not be enough. Cheaper e-commerce clothing platforms will steal Woolies’ lunch

Looks like their clothing is not sustainable.

I have been a fan of Woolworths for at least a decade.

I moved away from brand names because Woolworths offered good quality at a good price.

Obviously Covid has given sales a knock because people are working from home and are able to get away with spending less on the latest clothing.

But even before that, I noticed that Woolworths had obviously tried to push profits at the expense of quality and some of their clothing had a very Chinese quality feel and styling to it.

They need to get back to their fundamentals of quality clothing – locally sourced and natural fibres. It will take a bit of time for the consumer to come round to that again (unless they market that) but it will at least keep them from going the route of Edcon.

I like the Woolworths market segementation based on their branch locations and mall demographics. They have seemed to mostly get that right – unlike the Mr Price disaster.

Their higher end brands like Trenery and Country Road seem to attract very little interest, though, which would make sense to instead replace those with their natural fibre, SA made value offering of old.

You want good quality food got to Woolies.
You want cheap clothes go to PEP.
You want quality clothes try Fochini

Woolies used to have good clothing and food. The food is still quite good, but the clothing is bad. The delivery service for food is bad.
I recently visited PnP clothing. Quality looked OK, price was right. At the price on display, I can afford twice the clothing. Quality testing takes a bit of time.
Woolies often ask me questions about their food. I often reply. Woolies have NEVER asked about their clothing.
Voting with feet applies.

End of comments.

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