Big W’s decade of decline forces Woolworths to consider strategic options
The overhaul would deliver a “step change” to bring in new customers, win on price again, and make Big W the top choice for Australian families.
“We are clear on how to build the new Big W customer proposition and why we can win,” O’Brien declared at the time.
Fast-forward 10 years, a new Woolworths CEO is promising more of the same for Big W, where earnings are going backwards and sales flatlining.
“We have a strong transformation plan,” Amanda Bardwell said of her problematic discount department store. “We have good foundations in place … but the pace of transformation and consistency of execution has to accelerate.”
It’s been nothing but a lost decade for Big W. In-store sales have gone nowhere, holding at $4.1bn across largely the same sized store footprint. If you factor in inflation, they’ve gone backwards.
Earnings haven’t fared much better – crawling from $114m a decade ago to $180m last year, representing an anaemic annual return of less than 5 per cent before accounting for inflation.
Here’s the shocking stat: return on shareholder funds. Where Big W was delivering about 10 per cent a decade ago, today it is minus 3 per cent after Bardwell slashed $346m from the retailer’s value. Last year it was just 1 per cent. In other words, shareholders would be better off ploughing their cash in a zero-interest bank account.
Since Roger Corbett retired as Woolworths boss in 2006, the underwhelming performance of the discount chain has confounded successive CEOs.
As the figures above show, Big W has continually failed to respond to many multiple reset plans and management overhauls.
It completely missed its moment during Australia’s cost-of-living crisis while revitalised rival Kmart doubled down on value, developed private label ranges, and became Wesfarmers’ golden child.
Reset with twist
Now Bardwell has promised another reset – but this time with a twist. It’s shape up or ship out.
On Wednesday, she outlined a plan in the coming year to put Big W on a fit for purpose, independent tech platform. This doesn’t need to be a significant IT spend, she added.
Bardwell said the move offers “flexibility” so Big W could better respond to pricing and specific demands in the market.
Shortly after taking charge last September, Bardwell put all of Woolies’ sprawling business under review, including Big W.
The review resulted in the closure of the MyDeal website and digital marketplace functions were folded into Big W. The tech plan emerged from the review.
But here’s what she’s really doing: giving herself the option to cleanly cut Big W from the Woolworths mothership. The complex work of isolating IT systems makes a future sale much easier.
Private equity would be the first stop as a buyer, although Woolies’ generally leans towards demergers. Third-placed department store discount chain Best & Less was bought by Allegro, although this was later picked up by retail billionaire Brett Blundy and business partner Ray Itaoui who are driving a turnaround. The performance of Best & Less’ turnaround will be closely watched by the Woolworths board, just as Blundy will be eyeing Big W.
Bardwell wouldn’t be drawn on a Big W sale, but the clock is ticking.
Big W is symptomatic of Woolworths’ recurring problems. By doing too much, the retailer has taken the eye off its core supermarket business that generates the big profits. From Masters hardware chain, Dick Smith, ALH and MyDeal. Woolworths takes the cake at failed Australian retail bets. All at the cost of missing what needs doing in supermarkets.
Supermarkets eat capital and need consistent reinvestment to make returns on skinny margins. It’s harder when capital and management time are spread thin across business.
Under former boss Brad Banducci, the bets into ancillary retail businesses like PetStock, MyDeal, and PFD kept coming. Meanwhile, the core supermarket business that needed attention got starved.
Bardwell knows she has her work cut out on a critical fix of the supermarket’s business that is now seriously misfiring. Australian supermarket earnings are down 8 per cent on the past year to $1.36bn. Margins went backwards and costs went up. Smaller rival Coles is catching up as it continues to push ahead with faster-paced sales growth.
The final insult? Coles’ market value of $31bn is now within striking distance of Woolworths $35bn.
There’s reason for this. Coles is now a more productive business. Its supermarkets are generating $2.2bn of earnings from $40bn of sales (excluding liquor). A pure comparison, Woolies’ Australian supermarkets are doing $2.7bn in earnings from $51.4bn in sales.
This translates to a gross margin for Coles at 5.5 per cent versus 5.2 per cent for Woolies. Woolies should be getting an additional lift from scale where spreads costs across more supermarkets. But its not there.
Bardwell has outlined plans to strip $400m in costs and installed a new management team, but investors want more. Woolworths shares closed down 14.7 per cent, to a fresh six-year low..
The new chief executive has declared she wants to put “Australian food at our core” and build out from there.
This is Big W’s last chance. Get it right this time, or it won’t see out the decade with Woolworths.
Trott’s new Rio
Three days into the job, new Rio Tinto boss Simon Trott hasn’t wasted any time.
He’s outlined the widely-anticipated overhaul of the mining giant’s outdated structure. Rio will move from a hybrid geographical and product line business to a leaner executive team focussed on just three key units - iron ore, copper, and aluminium and lithium combined into a single unit.
The overhaul was pushed back after Trott changed his plans for his first week in order to make a sudden trip from London to Guinea, after a fatality last Friday at the remote Simandou iron ore mine Rio is building there.
This marks the first fatality at the massive construction site, and Trott met with the family of the contractor on Wednesday while also personally reinforcing the message about safety to workers on site.
The new structure offers “clearer lines of accountability” Trott says while also allowing the $160bn miner to move faster where it needs to.
However, the changes mean there will be two executive exits from Trott’s Rio Tinto, and both are among the miner’s highest profile females.
Kellie Parker, the Australia boss who had oversight of all of Rio’s governance issues here will leave in coming weeks, as well as Rio veteran Sinead Kaufman whose minerals business will no longer exist under the changes.
Kaufman was an early contender in the leadership stakes.
Meanwhile the one time front-runner for the CEO role, Bold Bataar, remains in the chief commercial officer job.
A newcomer into the top executive ranks is the promotion of Trott’s trusted iron ore deputy Matthew Holcz, who is an Australian who has also worked at BHP prior to a long stint at Rio.
Holcz will become Rio’s most powerful line executive by also assuming oversight of Simandou, where Rio is spending nearly $10bn, as well as iron ore operations in Canada and the Pilbara.
Trott has defended the exit of two of Rio’s most senior women, pointing out his record as a strong advocate of diversity during his time as iron ore boss and this will continue as CEO. Rio already has a lot of development work underway in lithium, where former boss Jakob Stausholm has invested billions, but it’s not big enough to be its own standalone unit.
Trott points out the combination with aluminium reflects both are heavy processing businesses and will operate under existing aluminium boss Jerome Pecresse.
Katie Jackson meanwhile will continue to drive copper which is Rio’s biggest growth bet with the giant Resolution mine in the US now expected to move ahead under Donald Trump.
The changes come as Trott set out his five guiding principles as CEO, outlining his expectations around safety and humility for the miner’s 60,000 strong global workforce. They build on his predecessor Jakob Stausholm’s cultural reset but also introduce operational expectations including results matter. This is a clear sign Trott wants to reclaim Rio’s status as the lowest cost and most reliable operator.
The principles “will enable us to make the most of the huge opportunity we have ahead of us,” he said in an internal memo.
Trott says Rio Tinto is well positioned, while there are “clear opportunities to do better”.
“My aim is to accelerate this momentum to help us reach our full potential,” Trott told staff.
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