ComSec Week in Preview 25 Jul 16: WOW restructure & upcoming RMD results5:00
CommSec Advisory�s Nicky Kritikos speaks with Tom Piotrowski about plans by Woolworths to cut 500 jobs as part of a $1bn restructure, upcoming earnings results due from ResMed and Thursday�s US FOMC decision.
Woolworths plans to cut 500 jobs as part of a restructure. Picture: Richard Walker
WOUNDED retailer Woolworths is finally closing some of its supermarkets. The great Australian chain has been bleeding for a long time — this week it stepped out of the fight to patch its wounds.
It is going to shut 17 Australian supermarkets that are losing money and open a lot fewer new ones. It will use the savings to try to make the rest of its outlets more profitable. Woolworths has more supermarkets than Coles or Aldi, but it is not doing so well.
Woolworths, the parent company that owns the supermarkets plus Dan Murphy’s, Masters, and Big W, recently got rid of its old CEO. The new management finds the company in a spot of trouble.
The old CEO opened Masters hardware, which lost a lot of money and may have distracted the company at a crucial time. Big W is also being roundly beaten by Kmart (which is owned by Coles parent company Wesfarmers). At the same time, Woolworths supermarkets are losing market share. It has been terrible timing.
RIVAL SURVIVAL
If Aldi had begun its rapid ascent 10 years ago, when Coles was lagging behind, it might have been Coles that got harmed instead. But Aldi’s acceleration came when the Down Down jingle was stuck in everyone’s heads. Woolies took its eye off the ball and so it is the Fresh Food People that feel the sting hardest.
Like the Ford-Holden rivalry before it, the end of the great Coles-Woolworths rivalry is unlikely to come from one side beating the other. It will come as a third contender begins to kick a*se and take names.
(In the automotive industry, that third contender was Toyota, which now sells more cars in Australia than Ford and Holden combined.)
Woolies is closing 17 Australian supermarkets immediately. And that’s not all. It has another 15 that it wants to close but it is stuck with because of the leases. When the leases come up, management says, they will close their doors too.
Of course, Woolies still makes profit and will still open new outlets. It expects to open 15 new supermarkets a year for the next three years.
And a business as big as Woolworths will always make the occasional mistake, putting a store in the wrong place and needing to close it down. But the competitive environment at the moment makes the current closures more than just a blip. They are a sign.
Aldi has opened 423 stores in 15 years and it is still accelerating. It intends to open another 60 stores this year. That’s fast. Woolworths got to 961 stores over 92 years.
At this rate, Aldi could be the biggest supermarket in Australia within another 15 to 20 years.
Aldi’s model requires having very few staff but paying them well (the lowliest employee is making over $23 an hour and the store manager gets up to $117,000 a year). And it keeps customers interested by having a weird array of special items on sale each week.
The thing about Aldi is it’s a really different to our traditional supermarkets. And that point of difference has proved very profitable.Source:News Corp Australia
It sells far fewer basic items than Coles and Woolworths — just over 1000 different lines instead of 10,000 to 20,000. It doesn’t go in for fancy shelving — many items are stacked on the floor in the boxes they shipped in. It’s all designed to help make things cheap.
BE MORE GERMAN?
Woolworths is renewing it stores and trimming the number of products it offers to compete with both Coles and Aldi.
But is it thinking creatively enough? Why stick to big supermarkets when that sector is already saturated with more than 1000 Coles and Woolworths stores? Why not take on Aldi directly?
Surely Woolworths could open a few stores that fight Aldi on its own terms — low price, low range, but good quality. The Germans have already proven that is what Australians want — why let the Germans be the only ones to exploit that?
Taking on Aldi directly could give Woolworths a lot of lessons for how to run its traditional supermarket business more efficiently and might also help stop Aldi making the big profits that helped it expand so quickly.
Aldi has been so successful recently that it is sure to collect a competitor soon enough. If Woolies leaves the gate open, the competitor is likely to be another German retailer, Lidl.
If Lidl comes to Australia, Woolworths will have two discounters nipping at its heels. And who knows how long it will be able to outrun them then.
Jason Murphy is an economist. He publishes the blog Thomas The Thinkengine. Follow Jason on Twitter @Jasemurphy
