Woolworths will have reduced the footprint of its Fashion, Beauty and Home (FBH) segment by 11% or almost 50,000 m2 by June next year (from where it was in 2019) as it steps up efforts to reverse its struggling clothing business.
Read: Exit Aus and List Woolworths Food Separately, Top Retail Analysts Say
The amount of space taken up by clothing will actually have shrunk more than 11% at that point as it allocates more space to the beauty and home categories.
The number of FBH stores is expected to decrease from 216 in 2019 to 192 next June (currently 202). By June 2024, you see this number at 184, a 15% drop from 2019.
Surprisingly, in 2018, it was expected to trade below $ 446 billion2 of space in this unit by June 2021. At the end of its financial year (June 27), this unit occupied 407,000m2.
The cuts began in 2019 when it became clear that trading in this unit was under more pressure than previously thought. The group says the 6.4% space reduction over the past year is “driving improved business densities,” in other words, sales per square meter.
The turnover in FBH of R12.9 billion is a total of R1 billion lower than in 2019, where trading was not interrupted by the Covid-19 pandemic. This represents a decrease of 7.5%. Sales in the Beauty and Home categories grew 18.2% on average and stores in the rest of Africa comprise more than 10% of FBH sales (with higher margins).
Together these two factors give an idea of how much trouble the main local fashion business is having.
Efforts to fix the apparel business have been underway for some time and management describes this change as “the greatest opportunity to restore value to the group.”
You have made two well-documented strategic mistakes in your fashion business. First, he tried to launch David Jones clothing in South Africa (and introduce his South African brands in Australia). Both efforts were rejected by consumers.
Second, it tried to be too trendy in its local brands, at the expense of its main customer, who relies on Woolworths for the basics and essentials.
He says he now has a “more holistic and granular understanding” of his customer and is “clear on where the market opportunities lie and where they intersect with our brand positioning.”
The new strategy sees the ‘Savvy Segment’ (anchored in quality and well-cut and well-made fashion) as its primary focus, with the so-called ‘Trendspotter’ as its secondary focus. He says “a renewed brand and product strategy is underway,” focused on these target customers.
It will be exiting its Studio W and WCollection brands and anchoring the clothing in the Woolworths brand (it is unknown if it will retain its RE denim brand) and will switch to a “more casual offering, which includes [a] Stronger Athleisure proposal ”. Woolies overlooked this trend almost completely in recent years.
Finally, you will introduce so-called third-party “category authentication” marks.
The first of these is apparently Levis, who was introduced to their online store this month. This introduction comes as no surprise, given new CEO Roy Bagattini’s strong relationship with the global powerhouse of denim.
Whether this strategy will be successful is an open question. Woolworths attempted to introduce the Puma athletic brand to select stores a few years ago, a move that quickly failed and unraveled.
The group says the beauty business is “building as a category of destination.” It has taken advantage of Edgars’ weakness in recent years and has taken most of that market share.
Woolies also sees “room to gain market share in the home,” something Bagattini identified early in his tenure, and is considering leveraging its “food formats in a ‘food + home’ concept.” Shoppers can certainly expect to see this in a more meaningful way in their larger ‘Market’ stores soon.
Food glorious food!
Trading in your Food business could not have been more different, with turnover increasing 6.9% compared to last year and 18% compared to 2019. However, inflation must be taken into account. Comparable sales growth (from existing stores) increased 5.7% year-on-year, with inflation of 4.9% (and a price movement of 5.2%). This translates into very low real growth.
The business has to fend off Checkers’ aggressive move to the higher end of the market, particularly with its Fresh X stores.
See “more room to grow [its] customer and wallet engagement by remaining aspirational but becoming more accessible in price, channel and format ”and will continue to focus on“ easy and accessible convenience ”.
It promises a “major rollout” of its Woolies Dash delivery service, which remains in trial (at just 18 stores) and is understood to face a number of initial issues as it prepares it to scale. It will continue to test new formats, such as its independent liquor store WCellar, the first of which opened at Nicolway in Johannesburg in May.
Woolworths says its initial ‘price bump’ of R250 million, where it slashed the prices of commodities, including chicken, is producing a positive internal rate of return. It says it will invest an additional price of R750 million over the next two years; this is an increase from the original R500 million he had planned.
The profit margin before interest and taxes (Ebit) of the food business (excluding the impact of IFRS 16) was 7.6% for 2021. In comparison, it was 6.2% in FBH. His medium-term goal (three years) is 7-8% for food (in other words, maintain this position) and more than 12% for FBH.
It will take a lot of work to double the income at FBH from this level.
The determined push to power Australia through David Jones has moderated and “decisive action” has been taken to halt Ebitdar’s losses (earnings before interest, taxes, depreciation, amortization and restructuring or rental costs).
The group has closed the loss-making smaller-format food stores and is coming off its esplanade trial with BP.
Read: Woolworths recovers dividends
Online on the rise
Online sales at FBH increased 114% compared to last year, which already saw some impact from Covid, and now accounts for 4.1% of FBH sales in South Africa. In the Food business, online sales also more than doubled (118% more) and contribute 2.3% to its Food sales in the country.
It will spend almost R700 million on technology next year, almost double the amount in each of the last three years, on a “significant shift from physical facilities to digital, data and online to support strategic growth priorities” .
Capital spending on store development will be reduced from R 1.6 billion in 2019 to R 913 million this year.
The objectives of online sales are clear
Woolworths expects online that the South African food unit is in the “upper single digits” (in other words, three times the current level), and wants this to “reach double digits” in the FBH business (around 2.5 to three times).