Woolworths announces closure of 30 Big W stores after slow profit improvement

Woolworths has announced the mass closures of Big W stores after a review of profits revealed a worrying trend.

Woolworths’ chief executive says the group had “no alternative” but to close 30 Big W stores across Australia in an attempt to keep the lights on at the struggling discount department store chain.

The yet to be identified stores will be shut over the next three years as well as two distribution centres (DC), but analysts warn there will be further closures on the horizon as the preference for online shopping continues to weaken the sector.

The process will put a $370 million dent in the company’s profit, the conglomerate announced to the Australian share market on Monday morning.

Woolworths has not yet said which stores will be on the chopping block and is also yet to announce how drastic the loss of jobs will be.

But it did say it would aim to recycle many of the employees back into the business where possible.

A warehouse in Monarto, southeast of Adelaide, will close in the 2021 financial year, with one in Warwick, Queensland, to follow two years later.

The blow to the company’s profits includes $270 million in lease and exit costs for closing about 16 per cent of its department store network, plus $100 million of non-cash asset impairments.

The closures are significantly less than predicted by Macquarie Wealth Management report last month which said the brand would have to shut about 60 stores to ease the pressure of the $2.9 billion in lease commitments.

A Big W warehouse in South Australia will close and another in Queensland.

Woolworths chief executive Brad Banducci said the company will begin end-of-lease negotiations with landlords to assess which stores would be most economically viable to be closed.

This makes it difficult, he said, to anticipate which stores across Australia would be shut and how many people will lose their jobs.

“Our aspiration is to provide as many opportunities as we can for our team and that is what we intend working very hard on,” Mr Banducci told reporters.

“There’s a lot of time for us to plan and engage with our team.”

Big W has struggled to turn a profit for a number of years and operates in a highly competitive market against the likes of fellow discount department stores Target and Kmart.

But Mr Banducci said closing the business altogether simply wasn’t an option.

“We all need to lean in and support the business where we can,” he said.

“There are a lot of people who work there and it’s very important to them and to the community in which we operate.

“There’s no alternative, in truth, for us and we’re all behind it and highly invested in making it successful.”

Following the announcement, Citibank released a note saying Big W would continue to struggle.

“The closure of 16 per cent of the Big W network is unlikely to be the end of the store rationalisation profile,” the note said.

“The physical discount department store footprint is likely to continue to shrink as online sales penetration increases further and the sector underperforms.”

IBISWorld senior industry analyst Kim Do told news.com.au that the chain’s closures was not surprising.

“It is expected that depending on Big W’s performance this could lead to more store closures over the next five years as the brand really focuses on strengthening its position within the department stores industry, especially against its main competitor, Kmart,” she said.

She said the closures announced on Monday was indicative of the power of online shopping.

“While it is unlikely that department stores will move completely online, there will be continued consolidation within the industry.

“The physical department store footprint is likely to continue to shrink as online sales penetration increases further.”

Woolworths chief Brad Banducci doesn’t know yet which stores will close.

In a statement released earlier, the chief executive said the review was undertaken to help Big W become profitable in the longer term.

“As foreshadowed at our half-year 2019 results, while the recovery in trading for Big W is encouraging and there remains further opportunity for improvement, the speed of conversion to earnings improvement is taking longer than planned,” he said.

“This decision will lead to a more robust and sustainable store and DC network that better reflects the rapidly changing retail environment.

“It will accelerate our turnaround plan through a more profitable store network, and simplifying current business processes, improving stock flow and lowering inventory.”

The Macquarie report forecasted Big W would be forced to close one third of its 183 stores at a cost of about $759 million.

It said the ultimate cost would “come down to the lease term remaining on these problematic sites and whether the landlord would accept a discount given potential for alternate use, etc.”

“The market may like the removal of uncertain downside given the challenging industry outlook,” it said.

Macquarie said half of Big W’s stores were located in challenging regional areas. “It is unlikely these locations will enable Big W to regain the momentum required for profitability,” it said.

“In a challenging retail environment, we see a reduction in store count as the most likely outcome from the review. Given the format of Big W stores, we believe it would be difficult to reduce space as Myer is doing and that outright store closure is more likely.”

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Originally published as Woolworths announces closure of 30 Big W stores after slow profit improvement