Woolworths released its 2022 annual results this week, indicating that it is seeing a slowing of its star performer, its premium food business, due to pressure on consumers. But there are green shoots in its clothing and home business. Business Day chatted to CEO Roy Bagattini.
Woolworths makes high operating margins in food, above 7%. Is there room to cut prices further as you face rising competition and slowing growth?
We may not grow well ahead of the market every year, which is something we’ve become accustomed to doing. But what is critical is understanding who we are and what our DNA is. We sell premium food and are an aspirational retailer.
We are sticking to our knitting. We’re not moving downmarket. But we are going to increasingly focus on our value proposition to ensure that there’s more and greater accessibility to the brand.
But your growth is slowing with same-store sales at 3.1% below price growth?
We get about 70% to 80% return on invested capital out of the foods business. Our peer group, at best, might get 20%. So we don’t have to grow significantly faster to [keep] earning that type of a return and profit.
Our approach is to find the right balance between giving our customers the best value proposition and our shareholders the highest return for that business. That’s really where the strategic orientation is for us.
You are investing heavily in your on-demand online delivery to compete with Pick n Pay and Checkers. Tell us more?
We are clearly expanding our penetration and market presence in the next few months. We’re looking at essentially covering at least 80% of our customer base through this expansion.
Our objective is to make sure that our customers can get the convenience and the stuff they get at the store in the same format. Most of business is fresh [food]. [But] we have cold supply chain and back-end capabilities that most of our competitors don’t have with cold-chain compartments on the scooters.
Online delivery often loses money. Won’t this lower your food margins further?
To be absolutely candid, online isn’t a profitable proposition for anyone, even though some might say it is.
You’ve just got to do the basic mathematics of what it costs to process a payment, to place an order, pick the order from the store, put it on the back of a scooter, get the scooter out and pay back the cost of capital.
[We] often [deliver] about 30 items, at some of the lowest margins, a couple of percent. There isn’t enough money to go around.
Why expand delivery then, if it will lower profit margins?
I think it is a very important strategic call because, ultimately, we do need to be accessible, available and convenient.
[However] we want customers coming into our store where we’re going to give them that experience. We’re going to give them the theatre. When you go and shop in a store, you never end up buying only what’s on your shopping list. There is a whole impulse-buy opportunity.
What have you done to improve the clothing business that had been losing market share?
We defined ourselves and our strategy as a broad church. But the structural economics of a business move against you very quickly if you try to be everything to everyone.
[In the turnaround strategy] we identified six [focus] areas that we call must-win categories.
These are wardrobe essentials, athleisure, denim, lingerie, kids and baby. And then the final one is what historically has been called formal wear. We call it work leisure. Because there’s still a smart component to it, but it’s more of a smart-casual component.
Fashion can be hit and miss in a season. Was this improved clothing performance sheer luck or have you started to see sustained improvement?
We are at the beginning of the turnaround. We have been reluctant to talk in these sorts of terms up until now. This is the third or fourth consecutive season that we’re seeing the metrics we use to measure the financial health of this business move in the right direction.
You do get lucky from one season to the next if you throw a whole lot of stuff out there and some sticks. But we've been much more focused. I think the ship has absolutely turned.
David Jones has been controversial after losing the group billions. Will you sell David Jones in Australia now that it is financially stable?
It is a question we get a lot. I think two years ago, we could have just given the key to someone and walked away. Some shareholders might have fancied that. But we laid out a plan. We really wanted to sort out its balance sheet [and] to get the business trading more viably and [ensure it] was self-funding. Now that we’ve now done that, it gives us the option to really consider what is in our best interests.
We now really understand what that business is capable of. We will make a decision that is in our best interests and that of our shareholders. There’s nothing off the table.
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