Woolworths: Is it the end of the duopoly in Australian supermarkets?
Australian giant Woolworths, once the envy of the supermarket world, is facing challenges on numerous levels. Its shareholders are feeling the pain. Chris Sheedy reports.
In the supermarket world Australia has long stood out as an over-performer, a bubble waiting to burst.
With profit margins double the UK/European average and one-and-a-half percentage points higher than the US (according to UBS Research), the two dominant players, Woolworths and Coles, have enjoyed a comfortable and profitable duopoly.
But several plot twists have been revealed over the last few years that have put Woolworths on the back foot and led to an almost billion-dollar cost cutting plan, including the closing of at least 30 stores and the culling of around 500 staff. This follows an announcement in its half-year results of a $927 million after-tax loss after a failed venture into the home improvement retail business.
How has such a dramatic reversal of fortune occurred in a relatively short period of time? Why is rival Coles not suffering the same fate? The devil, as always, is in the detail.
Image credit: TK Kurikawa
Masters of none?
Woolworths watched on for over a decade as the Bunnings big-store home improvement business swallowed up smaller players across Australia. A business belonging to Woolworths rival Wesfarmers, which also owns Coles, Bunnings has been a roaring success in Australia’s growing $40 billion home improvement market.
It came as no surprise when Woolworths launched its own brand, Masters, into that market in a gamble worth around $3 billion (with American joint venture partner Lowe’s) in 2011. But according to Emily Stewart, business reporter form ABC News, Masters made several key mistakes.
1. Poor strategy
Rather than running the business as an independent unit, as Wesfarmers did with Bunnings, Woolworths management was distracted from the supermarket game by their foray into home improvement, Stewart says.
2. Choosing the wrong locations
The fast roll-out did not allow Masters time to choose the best sites, most of which were already taken by Bunnings.
3. Wrong products
The US joint venture partnership meant much of what Masters was selling in Australia was out of season.
4. Workplace culture issues
Compared to Bunnings, Stewart says, Woolworths’ strict and rigid workplace culture did not allow for an empowered workforce.
After major losses and increasingly elastic break-even predictions, as well as the loss of their CEO Grant O’Brien and Chairman Ralph Waters, the business finally decided to ditch the Masters business at an exit cost, according to Citi analysts, of $1.6 billion.
The Aldi factor
A comfortable duopoly rarely last long and the Woolworths/Coles period of dominance has lived longer than most. Many would argue that nothing has changed, but European upstart Aldi has made a dent that analysts say is worth around 10% of the market, and they have only just begun.
Rumours of further entries into the market include German chain Lidl. The lower cost of shopping at Aldi and the cut-price retailer’s unique marketing strategy around special-interest products opened Australian customers’ eyes to a new and better value grocery shopping option. While Woolworths’ marketing told customers they were ‘Cheap Cheap’, the supermarket’s price tags suggested otherwise.
Anecdotal evidence suggests Aldi shoppers will now only visit Woolworths for the extras, as opposed to the entire grocery shop.
As Aldi, Costco and Lidl grow in the Australian market, those internationally envied profit margins will be put under further downward pressure.
Create a culture shift
Some experts have pointed to the cultural issues that arise after a duopoly has held power for so long in a market. One of those issues, says The Australian’s Business Spectator columnist Robert Gottliebsen, is the way the retailers treat their suppliers.
While relationships between major retailers and suppliers are rarely filled with joy and happiness, Woolworths and Coles have regularly been challenged over the arrogant way they use power in the relationship.
Gottliebsen wrote, in January this year, of a conversation he had with a nursery man, a former supplier to Woolworths. So disastrous was the man’s relationship with Woolworths, Gottliebsen reported, that when Masters came calling the nursery community agreed on a secret pact of sorts.
“Nurserymen around Australia talk to each other and, very quietly, a lot of them decided they would supply Masters but would give Masters the poor quality plants,” Gottliebsen wrote. “And to their delight the nurserymen discovered that Masters was using a US plant shelving system which was entirely unsuitable for the Australian market because it made plant watering difficult.”
The relationship had become so toxic that suppliers were actively undermining the business of the retailer. There’s a lesson in that for every major retailer.
Why isn’t Coles hurting?
If the market is so tough, why is Coles not also reporting massive losses?
There is the fact that Coles has been in a dominant position for several years, experts say, so has been able to weather the Aldi storm better than Woolworths.
Wesfarmers also allows all of its businesses to operate independently, in silos. So where Masters took people’s eyes off the Woolworths supermarket business, Bunnings will never do that to Coles.
The Masters failure owns a good share of blame for Woolworths supermarkets’ current misery, and of course Wesfarmers has not had to deal with such a loss. Bunnings is thriving.
The near future is not going to be easy for Woolworths and shareholders potentially have more pain to come. But with a decisive plan in place to cut costs and get on with the business of managing a supermarket in an increasingly competitive environment, the worst is likely behind them.