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.
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.
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.
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.
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.
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.
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.
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