Woolies woes are a Woolies problem – all homegrown and not caused by the rise of Aldi, Coles rebirth, or anyone else.
The problems at the country’s biggest retailer – especially its supermarkets – is all home grown – Aldi, Coles and others have merely done what all good rivals should do and exploited Woolies stupidity as its board and management (and many big shareholders) allowed it to become an unsustainable high cost operator.
Woolies’ sales in its key supermarkets business fell 0.2% from 2015 to $34.8 billion in 2015-16, while the slide in global oil prices triggered an 18.1% in the value of petrol sales in the year to June.
Together, that saw a 40.8% slide in earnings before interest and tax, to $1.76 billion in its core Australian supermarkets and petrol division, from $2.97 billion a year ago.
Now not all that fall was due to Aldi, Coles, price deflation and other market factors.
It was mostly due to the way Woolies board and management allowed it to become an expensive, high cost retailer, with profit margins completely out of whack with what Coles was willing to grab from sales to its customers.
The key metric here is this: Coles’ supermarket EBIT margin was and unchanged 4.7% in the year to June, while Woolworths’ supermarket EBIT margin fell to 4.47% from greedy 7.33% in 2014-15. That 7.33% margin was the expression of the poor management and oversight at Woolies. It explains everything, from the fall in supermarkets profits.to the silly hardware adventure
In other words Woolies’ 2015 EBIT margin (which along with comparable store sales, are the two most watched metrics in retailing, and not those now being used by Woolies, such as sales per square metre) was 64% higher than that of its major competitor, in 2014-15 and more than twice the estimated Aldi margin of between 2% and 3%.
The EBIT margin fell in 2015-16 because of falling profits as Woolies tried to staunch the leakage of sales to Aldi, Coles and Costco – that meant price cuts that sharply reduced margins, not merely massaged them.
The EBIT margin was allowed to slowly drift higher up to 2014-15 was a conscious business decision made by the company to generate more profits for shareholders, to help underpin the share price, and to try and keep shareholders quiet about the continuing losses from the hardware disaster.
Naturally, shoppers twigged to this and slowly moved to cheaper opposition, such as Coles and Aldi.
It was a decision to extract as much profit as possible from customers and use that to finance schemes such as the hardware expansion, and pay higher and higher dividends to greedy super funds and other investors (and boosting the share price and the bonus and other performance rewards for management).
And what was the driver for this?
Our superannuation system that rewards higher share prices, higher dividends, rather than investment in the future by using some of the surplus cash generated each year. Woolies used to claim it was reinvesting in lower prices, but compared to Coles profit margins, it wasn’t.
It was simply taking the profits and handing them out to shareholders (many of whom were the same shoppers who were leaving Woolies and heading to Coles or Aldi).
It was an arrogance that produced the hardware debacle and billions of dollars of losses for shareholders – who deserve all they get from this story because the soaked up the fat $1.39 a share dividends in 2014-15, even though it was being earned on profit margins that were well above its rivals.
Analysts and big shareholders in particular (but not all analysts – Bank of America’s David Errington was a notable sceptic) are also to blame because they allowed Woolies board and management to get away with its arrogant behaviour for far too long – until the hardware losses proved too much and the CEO, chairman and other board members lost their jobs as new blood was brought in to save Woolies from itself.
And remember that the board, management, big shareholders and investment analysts (all of whom should have known better) allowed Woolies, the country’s biggest retailer and a vital part of the economy and employer – to place itself in danger of collapse at worst, or at best enfeeblement in a tough marketplace. Woolies is not out of the woods by any measure.
The steps this week to cauterise the hardware wound and then outline the rotten results has at least given it and its 100,000 plus employees a chance of regaining ground on its competitors and serving its millions of customers a day. But it is only a chance, not a certainty.
