Woolworths is like being an alcoholic, 'you have to admit you have a problem, and Woolworths has finally admitted it has a problem', according to one analyst quoted in Fairfax media over the weekend.
The analyst, who (understandably!) remained anonymous, was referring to Woolworths Limited's (ASX: WOW) investor strategy day update that was released to the market last Wednesday.
In the update, Woolworths identified six specific challenges facing the business:
- Regaining momentum in Australian Liquor and Food
- Continuing to deliver liquor growth from market-leader Dan Murphy's
- Make clear progress on Masters' path to profitability
- Accelerating the 'reset' of Big W
- Accelerating the 'lean retail' model to compete in a new environment
- Maintain disciplined portfolio management and capital allocation
Woolworths CEO Grant O'Brien and other executives were quoted in Fairfax media as admitting that the supermarket had taken its eye off the ball in recent years by focussing more on profits than consumer experience – a strategy that has come back to bite them. Woolworths' sales performance continuously lags competitor Wesfarmers Ltd (ASX: WES).
Food and Liquor chief Brad Banducci also laid blame on internal metrics, saying that the way Woolworths has measured prices, on-shelf availability and store labour for more than 10 years was wrong.
Whether this is true or just a convenient target for blame is uncertain, but one thing that is sure is that Woolworths has launched sweeping changes to address criticism.
Funded by savings achieved through the 'Lean Retail' and 'Fuel for Growth' initiatives (reducing costs from non-customer focussed areas), Woolworths has announced the following overhauls to the way it does business:
- An additional 58,000 work hours per week to lift customer service levels; to be followed by a further 63,000 hours next financial year
- An extra half-day of stock added to shelves in order to boost availability
- Matching online pricing with store pricing, and boosting the number of 'Click and Collect' stores to improve the online offering
- A major focus on improving the range and freshness of vegetables
- $125 million in cost reductions taking Woolworths' value position to its 'most competitive level since January 2014, with more to come'
- A 12-year partnership with Sydney-based food manufacturer Beak & Johnston to deliver a growing range of ready-to-cook and ready-to-heat meals to Woolworths' customers
It's the announcement that analysts have been waiting for, and marks an important step in the potential return of Woolworths to reliable sales performance.
In addition to the changes above, Woolworth is aiming to improve the number of refurbishments of its existing stores, splitting its capital expenditure between new stores and refurbishments. Senior executives are also potentially to be judged on different metrics like return on capital employed, rather than earnings per share growth.
Interestingly the changes are presented in a way that make them sound mostly cost neutral – funded by savings from 'Lean Retail' and 'Fuel for Growth'. Investors should watch upcoming reports, particularly in Financial Year 2016 to see if this is correct, but otherwise I see a lot of positives and few negatives here for shareholders.
As myself and a number of contributors have been saying recently, right now looks like the best opportunity in five years to pick up Woolworths shares, and I plan to buy some myself once The Motley Fool's exclusivity period (preventing me from trading in shares I write about) expires.
