Chief executive officer
chief executive officer’s report
overview
The year to June 2008 has seen one of the sharpest downturns in consumer spending for many years. This impacted upper-end mass retailers around the world, many of whom experienced a “flight to price”.
In South Africa, the combination of high and growing interest rates, high fuel and food prices and growing political uncertainty affected the confidence of the Woolies customer base significantly.
The Australian retail market also tightened up but not to the extent that we saw in South Africa. Country Road within that, continued to perform well.
During the year we announced that Absa had acquired 50% plus one share of our financial services business. This deal will make Woolworths a pure-play retailer and will fundamentally alter the balance sheet of the company as the debtors’ book is removed from the balance sheet. This transaction not only brings Absa’s considerable banking expertise to this business, but, with the introduction of the Barclaycard brand, extends the existing Woolworths Financial services brand into an even more compelling and attractive proposition with existing and new customers.
Woolworths
Sales for the first quarter had remained strong and the downturn in sales came from September 2007 onwards. The emphasis of the buy had been on mid- and upper-priced product on the back of our recent success at this end of the market – not the right product balance for an increasingly pressured customer base.
Clothing sales on a comparative 26 weeks grew by 5.8% in the first half and 3.5% in the second half, which meant that by winter, Woolworths lost share of market in clothing. A similar pattern followed in food, where sales grew by 16.4% in the first half and 15.0% in the second half on a 26 week comparative basis. By the first quarter of the new financial year, the food business too had started to lose share of market. Customer feedback was consistent in that in both clothing and food we were seen to be expensive. The muted economic environment also affected our financial services growth and the marginal growth in customer credit was countered by a decline in credit usage. Bad debts too grew strongly throughout the first half.
The business started to react to these messages from December 2007 onwards.
The first touch point to address was bad debt which had been climbing steeply since January 2007. On top of the National Credit Act restraints, Woolworths further tightened its credit granting and accelerated its collection effort. Bad debt growth for the second half was therefore virtually flat and somewhat against current market trends.
Costs – the second touch point – ran in the second half at 10.6% ahead of last year, a significant improvement on the first half ’s growth of 18.4%. This lower cost growth will be driven further in the year ahead.
The business set about a full-on programme to relook the price architecture of the merchandise offer, particularly in food where it is possible to take action more rapidly than in clothing with its longer lead times. This had to be done without compromising our core quality standards and innovation thrusts and has necessitated a more sophisticated view of product sourcing and greater leverage of the significant volumes that Woolworths can sell in its major items.
a year of change
The year too, had been set up to be a year of significant change for Woolworths. Management changes have enabled the company to rethink much of its core strategy, in particular the clothing and general merchandise offer. This business is now far more segmented by customer type and is at the start of a journey towards a more customer-driven merchandise offer. The buying process has been restructured into two core teams of buying and planning and then further segmented according to the various customer profiles and catalogue segments.
There is now greater emphasis on the core product offer, its quality and its price points. This, combined with a number of new product ranges and brands exclusive to Woolworths, brings an innovation and direction to the sales floor which has been missing for some time.
There have been a number of leadership changes throughout the business and the recent significant investment in IT infrastructure and process changes, particularly on the buying side, have driven a different view on how to run the business.
The Woolworths food business has grown significantly over the past seven years. This year’s shift in spending patterns has been timely in the progression from a top-up delicatessen to the unique position the company is seeking – the mind of a supermarket and the soul of a delicatessen. This business is predicated on outstanding quality, ongoing innovation, healthy food and real value for money. It is in the last year that we have had to rethink our pricing positioning, particularly at the growing commodity end of the business.
Prices have now been sharpened significantly, and the business is now highly competitive on these basic necessities.
The year saw the final implementation of the Retek stock management system in food. These changes have not been easy and have not yet shown the benefit in improved availability expected. Consequently, further appropriate changes have now been made and are expected to show an improvement.
The rollout of food convenience stores continues. This has been a successful programme and many stores are now trading at very high returns per square metre. The emphasis now is on fewer but larger stores which have greater dominance and by virtue of their scale, greater productivity.
The major investments in IT and logistics are also bringing good productivity as they bed down in each area. We believe these investments will add significantly to efficiency over the next few years.
The financial services business has had two key focuses – the containing of the bad debt growth and the negotiating and setting up of a deal for Absa to acquire half of this business.
Negotiations with Absa culminated in the announcement in April of the creation of a joint venture business between the two companies. Woolworths has significant experience in store card. This will be much enhanced by Absa and Barclays International customer value management skills and wider product offerings. The combination of Absa’s expertise and a possible easing of the credit environment, should set this business up for good growth into the future.
The two major initiatives launched in the previous year, our staff BEE share scheme and our Good business journey, are bedding down well and are now part of the fabric of our organisation. The company received a number of local and international awards for its work in these areas. During the year we achieved almost 80% of our Good business journey targets and laid a strong foundation for meeting our overall 2012 targets.
Country Road
Country Road continued to trade well in a toughening retail environment. The work done on focusing the offer, on lowering prices and on holding quality standards continues to increase Country Road’s growing dominance in the upper middle end of the Australian clothing market.
The Country Road offer launched in four Woolies stores in South Africa traded above expectation. This offer will be extended over the next twelve months.
summary
Woolworths and Country Road are unique businesses. The rapid downturn in consumer spending in South Africa has sharpened Woolworths in particular. Both companies have remarkable staff and committed suppliers with both of whom we built tough but close and long-term relationships. Both businesses are now leaner on costs and this, combined with clear customer-led product direction, leaves Woolies better positioned to regain profitable market share and meet shareholders’ expectations.
We expect trade to remain tough in both economies, for at least the next year. We feel we are well placed for future growth, when a less pressured consumer increasingly turns back to innovation, to quality and to great value rather than purely to price.
S N Susman