chief executive officer’s report
overview
Woolworths has delivered yet another year of solid performance, continuing our commitment to give shareholders sustainable annuity income growth. Operating profit for the group increased by 21.0% to R1.5bn and operating margin improved from 9.5% to 9.8%.
This has arguably been the year of biggest change within the group for some time. Our systems architecture is being fundamentally renewed and peak implementation began during this financial year. We have overhauled our clothing buying processes and at the same time delivered the largest number of new stores in our 75 year history. Given the quantum of this change and its impact on our daily operations, we were particularly pleased to deliver a good set of results.
The South African consumer economy has remained healthy but the signs of a slow down in the growth curve we indicated last year, have been realised. This has been more evident in the fashion clothing sector where growth of formal retail has slowed markedly against last year. In this sector inflation has been low, driven by ongoing international improvements in manufacturing productivity.
The impact of the proposed quotas to be introduced shortly on Chinese imports has yet to be fully assessed. These quotas will undoubtedly be inflationary and are likely to lead to malpractice through the value chain. The real issue of bringing productive work practices and fresh investment to the South African clothing industry has not been addressed by this extra protection over and above the existing 40% tariff barrier. We welcome the Department of Trade and Industry’s decision to delay the implementation of the quotas and will be engaging with them to find a best solution which supports our passion to source locally but to remain competitive for our customers in doing so.
Growth in the food sector has continued strongly. This has been aided by inflation creeping in on the back of firmer maize oil prices.
Interest rate rises and the ongoing higher levels of consumer debt have given rise to an increase in the level of bad debt in the country.
In Australia, consumer spending growth has also softened on the back of interest rate rises and house price declines. Despite this, this market too has a resilient feel about it and we expect expenditure to continue growing but at a similarly slower pace.
woolworths
The degree of change during this year has been significant. The period saw the first heavy implementation of our five-year R500m systems renewal. The year ahead will be similarly pressured. Thereafter we will be able to focus on extracting real benefit from a far simpler operating environment.
The year saw strong underlying growth. Volumes of product sold were up 15% and our financial services books grew by 22.3% to R4.5bn. Bad debts were, however, higher than projected and together with at times, lack of core availability and extra store opening expenses, did impact profit growth.
During the year we undertook a full strategic review of Woolworths potential leading up to 2010. We have a powerful brand with enormous appeal in a growing aspirational market. The opportunity to grow the business as a consequence is therefore considerable.
Our ethos of providing the best taste, accessible to all, will remain the driver of our product development strategies.
We will continue to drive the cross-shop within our business – tempting more of our food customers to buy clothing through our W Collections and through the introduction of international beauty brands. At the same time we will tempt our clothing customers to buy our food through more convenient real estate, sharper pricing and an extended main shop. This objective will be aided by the expanding use of our financial services products.
The challenge of good retailers as always lies more in the ability to execute good strategies than in the creation of a constant flow of fresh strategies. We are gearing our business accordingly.
sustainable strategies
During the year Woolworths was proud to be recognised on a number of fronts for the work it does in building a sustainable South Africa. We continue to give more than R150m of product away annually to those less fortunate. The R16.3m our loyalty program has donated to the MySchool project is now helping hundreds of schools around South Africa. We are proud of our association with Food and Trees for Africa which does such sterling work in educating school children on the simple benefits of producing and consuming their own fresh produce.
We are pioneers in organic and bio-friendly farming techniques and now sell more organic-content product in clothing than we do food.
We believe, as responsible retailers, not only that our own impact in the greater environment needs to be sustainable, but so does that of our supplier base and supply chain. This spreads far wider and we are encouraging these businesses to develop their own sustainable strategies. We are convinced this makes good commercial sense and is deeply in tune with our customers’ sense of the world today.
Sustainability is an integral part of our business. In order to report more fully to stakeholders on our commitment and strength within this arena, we have separated our sustainability report report from our annual report.
product
clothing
The year in review is the second of our three year turnaround programme for this business. We have boosted our design and technical capacities, have re-engineered price points, particularly in key areas such as childrenswear and lingerie, have strengthened our W and upper tier collections and have restructured our sourcing. Like-for-like volume growth on negative inflation remained strong at 8.2%, despite shortages of core product during winter, which were caused by a combination of over-cautious buying combined with bedding down changes.
New systems, structures and in key cases, new people have not meant new positioning in the market. The ethos that Woolworths clothing represents – quality, value and innovation, readily available for our customers – has been strongly re-enforced throughout this change process. Woolies is at its best when its core product is up to date, bought in volumes that drive highly competitive prices. Our fashion ranges then add a layer of delight onto this strong base.
We are confident that these strategies are on track and look forward to our performance relative to the market improving steadily.
home
Our home business has shown good growth for the year. Prices have been lower than in the previous year, driving 22.8% volume growth. Our ranges at both ends of the spectrum, from opening price points to our W Collection offers, have been well received. The two new lifestyle stores which offer a powerful range of home products, anchored by food sections, have opened up a new format for us. We are currently working on three more of these and expect that the market has potential for up to ten of this flagship format. Our home business is patronised by both our food and clothing customers and is seen to be a highly aspirational part of our offer.
beauty
Much of the effort this year has been in setting up the launch of a full Beauty World in October 2006. Our private label offer has been fundamentally re-engineered and we will, for the first time, introduce a strong range of those powerful international beauty brands that match our brand principles.
Our customers have been clamouring for this offer for some time. Research too, has shown that customers make special journeys to our competitors to purchase these products as they did before we introduced food brands some years ago. We believe that this launch will have a major impact on our market and will further underpin our clothing growth.
food
Our food business continues to power ahead of the market, delivering retail sales growth of 22.5%. It is now in revenue terms, considerably larger than our clothing business. We foresee ongoing growth for some years to come as we expand the main shop opportunity and populate the rapidly expanding residential areas throughout South Africa with our convenience stores.
The success of this business too, rests on constant innovation and a passion for quality and value. As our suppliers and our own infrastructure derive leverage from our considerable volume growth, so are we able to narrow the price differential between ourselves and our key competitors, reinforcing this virtuous circle of quality, volume and value.
We will continue the aggressive rollout of our convenience stores and are constantly surprised at the appeal that our brand has in middle income markets – historically our clothing only customers, who are now increasingly happy to purchase our food.
financial services
Our financial services business grew profit before interest and tax by 15.5% (23.8% on a comparable basis) during the year, despite the uplift in bad debt. This uplift was caused by teething problems during a systems upgrade and the general underlying tightening of the credit environment.
Our three books, store card, personal loans and visa continue to grow well. We now have a total of 1.7 million accounts operating in this division (17.2% higher than last year).
We have seen particularly rapid growth in our personal loan book and our relatively new visa book. Our loyalty programmes of MySchool and the Woolies World of Difference have now become key in building our growing customer database.
selling
The year saw the largest expansion of new stores that Woolworths has yet undertaken. We added 22 new food stores and 13 new clothing stores.
We have been driving better service, primarily around shortening our till queues where our volume growth has been putting real pressure.
Through our selling team employment proposition (STEP programme), we have boosted our investment directly in our people in stores. We are putting in place clearer career paths, which will offer real growth opportunities to every member of the Woolworths family – our passionate committed retailers. It is they who make the real difference in building lifetime relationships with our customers.
Our franchise stores continue to grow sales strongly in the capable hands of our passionate franchisees. This is now a sizeable business and, in the light of this growth, we are reviewing our processes for managing this business.
operations
information technology (IT)
Our IT teams are now deep in the process of delivering the large suite of new management systems that we have been developing for the past three years. By the end of next year, Woolworths will be a simpler, more streamlined workplace, and we are already beginning to see real improvements in simplicity and stock management both in food and clothing.
logistics
We have seen an exciting year in our logistics division. We have expanded our distribution centres in Cape Town and Durban in anticipation of growth and commenced construction of our new super distribution centre in Midrand, Gauteng. This R400m project will replace our existing City Deep facility and bring together a number of separate warehouses dotted throughout that region. It has been designed from ground up to be strongly environmentally sensitive.
Operationally, our logistics team delivered a seamless year and despite the ongoing capital expenditure, managed to reduce its cost to sales yet again.
people
Woolies is most fortunate in having such a passionate team of retailers throughout our business. To provide added support to them, we have restructured our human resource team to drive better operational service delivery, to build our management processes and strengthen our ability to recruit and develop real talent.
We are delighted to have been able to lure a talented retailer, Andrew Jennings, from Saks Fifth Avenue Enterprises in New York where he was the President and Chief operating officer. We have always wanted to further integrate the selling and buying side of our business and we have taken this opportunity to do so by appointing Andrew as Group managing director for Woolworths retail.
Andrew will take responsibility for all product areas (clothing, home, beauty, food and product technology) and marketing, taking over from Richard Butt who will be retiring at the end of this year. Andrew will also be responsible for the selling side of Woolworths, working closely with Kevin Stanford, Director of selling, to bring our customers a better and more integrated experience in our stores.
I’d like to take this opportunity to thank Richard Butt for his immeasurable contribution to our business. Richard’s impeccable sense of style and strong vision has firmly entrenched our food and clothing business in South Africa. We wish him a happy and relaxing retirement and hope that we will still be able to call upon his expertise in the years to come.
Uppermost in our minds is our ongoing drive to improve our employment equity, particularly in management and senior management, and for the fifth year in a row have increased that proportion which now sits at 40% and rising.
We are currently finalising our plans for a broad based share scheme for our people. Our people are the true builders of our brand and we believe that they should share in our business’s ability to generate wealth as fully empowered shareholders. This scheme will be presented to shareholders for approval at a general meeting to be held in this financial year.
country road
Country Road has had an exciting year, also filled with change. The company has concluded negotiations with a major departmental store chain to move to a concession operating model. The retail business meanwhile continued to show strong growth as the combination of better design and re-engineered price architecture boosted the appeal of the brand.
Wholesale sales did suffer during this period of intense negotiation. We are particularly pleased with the final outcome of these deliberations. They give the company full control of its brand, not just in 46 retail stores, but in a further 39 outlets. This will further simplify the operations within the business and will enable the growth already showing in retail to spread far wider.
summary
This financial year has seen enormous change to the group. In the longer term the South African and Australian economies should continue to grow well and confidently. Our aspirational brands are particularly well placed to cater for this growth. We believe now on all fronts that the business is ever more capable of continuing growth.
The difference we offer our customers rests as always in our people and our suppliers. We are fortunate to have such strength in each and look forward to building our brands sustainably into the future.
In 2006 Woolworths celebrates its 75th birthday and this is a good time to reflect on our heritage and use the lessons and values from the past to take this powerful brand into the future.
S N Susman
