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Woolworths Group Limited (ASX:WOW) is under scrutiny from investors who advocate for a strategic overhaul, particularly suggesting that the retail giant consider divesting its discount chain, Big W, and its New Zealand operations. These calls come as some investors express concerns about the complexity of Woolworths' operations relative to its primary competitor, Coles Group Limited (ASX:COL), which has recently streamlined its focus to groceries and liquor.
Performance Discrepancies and Strategic Calls
At a recent investor forum in Sydney, Dushko Bajic, portfolio manager at First Sentier Investors, shared his perspective on the current state of Woolworths. Bajic, whose firm holds a modest share in the company, conveyed the sentiment that Woolworths could benefit from simplifying its business structure. He suggested that the new CEO, Amanda Bardwell, might consider divesting Big W, a move seen as potentially eliminating a “business within the [Woolworths] portfolio that’s just destroyed capital.”
Big W, a discount retail chain with origins dating back to 1964 in regional New South Wales, competes with other major players such as Kmart and Target. Despite its long history, the chain has faced challenges in generating strong returns for investors.
Ray David, a portfolio manager at Blackwattle Investment Partners, added that Woolworths’ New Zealand supermarkets, which encompass nearly 200 stores, might also be a candidate for divestment. Woolworths is currently investing NZ$400 million to rebrand its New Zealand operations, formerly known as Countdown. However, earnings in the region plummeted by 57% to NZ$108 million in the 12 months to June 30 compared to the previous year.
Investor Perspectives on Woolworths’ New Zealand and Big W Operations
David highlighted that despite Woolworths' scale and end-to-end online logistics, the company’s New Zealand operations have struggled. He advocated for a more focused approach, emphasizing that sometimes the essence of a successful strategy involves making tough decisions about what not to do.
While some investors, speaking anonymously due to the private nature of their discussions, had previously urged former CEO Brad Banducci to consider selling the New Zealand business, Banducci reportedly cited poor economic conditions as a barrier to finding a buyer.
Contrarily, not all stakeholders agree with the proposed divestitures. A significant Woolworths shareholder suggested maintaining the New Zealand operations due to limited market competition and potential future economic improvements. They also noted the complexities associated with shutting down Big W, considering the broader scale benefits.
Current Management and Strategic Focus
Amanda Bardwell, who has recently succeeded Brad Banducci as CEO, is navigating a period of slower sales growth at Woolworths compared to Coles. Recent data revealed that Woolworths' local supermarket sales—constituting 88% of the company's earnings—grew by only 1.8% over six months, while Coles saw a 5.2% increase in the same period.
Bajic, representing First Sentier, emphasized the need for Woolworths to reinvest in its core supermarket business to capitalize on its strategic locations and improve its competitive edge. He criticized the performance of Big W, citing its modest profitability over the past decade and recommending that existing leases be managed down rather than expecting a rebound in profitability.
Historical Context and Competitor Landscape
The criticism of Woolworths’ forays into new markets is not unprecedented. Bajic referenced Woolworths' previous venture into the hardware sector with Masters Home Improvements, a joint project with Lowe’s, which resulted in significant losses and its eventual closure in 2016.
In contrast, Kmart, a competitor owned by Wesfarmers Limited (ASX:WES), has seen notable success. Kmart’s sales rose by 4.4% to AUD$11.1 billion for the 12 months to June 30, with earnings jumping by 25% to AUD$958 million.
Blackwattle’s David pointed out that Coles’ strategic focus on simplifying its business into two main divisions—food and liquor—has contributed to its performance. Woolworths’ broader and more complex operations, spanning Australian food, New Zealand, department stores, and emerging sectors like pet food and online retail, have led to its recent market share losses.
Bottomline
As Woolworths faces mounting pressure to reassess its strategic focus, the debate among investors highlights divergent views on the company's future direction. The proposed divestitures of Big W and New Zealand operations reflect broader concerns about complexity and performance. With new leadership under Amanda Bardwell, the coming months will be critical in determining whether Woolworths can refocus and reinvigorate its core supermarket business amidst evolving market conditions and competitive pressures.
