Brad Banducci launches review as Woolworths loses ground

A poor result has prompted new CEO Brad Ban­ducci to launch a strategic review of all Woolworths businesses.

Woolworths chief executive Brad Banducci. Picture: Brett Costello

The worst competitive performance by Woolworths’ flagship food and liquor arm in 10 years as well as an expected full-year loss by its struggling general merchandise division Big W has prompted new chief executive Brad Ban­ducci to launch a strategic review of all Woolworths businesses.

The outcome of that review is expected to be known by the release of Woolworths’ full-year profit results in August, but already investors are bracing for potentially costly writedowns and impairments as the retailer directs as much as $300 million into lower prices, loyalty and service.

Some analysts fear that expenditure could be good money after bad.

Despite Mr Banducci already pouring $400m of shareholder funds into lower grocery prices since the second half of 2015, Woolworths has failed to win over shoppers or even lay a glove on arch-rival Coles with the performance gap between the two supermarket giants now opening up into a chasm.

It has also slipped further behind in the $90 billion grocery sector as shoppers shun it for Coles as well as German discounter Aldi and US warehouse format store Costco.

Meanwhile, the bulk of the once high-flying Woolworths retail empire is suffering sliding revenue as petrol sales slump by 8.8 per cent and Big W third-quarter sales fall 4.6 per cent. It was only the tiny New Zealand supermarkets business and its hotels arm that managed a small sales uptick.

Big W is expected to post a small full-year loss as its business systems, operations and sourcing was restructured and fashion apparel discounted to clear. The review unveiled yesterday will be particularly focused at Big W.

Woolworths released disappointing quarterly sales figures yesterday, posting an anaemic 0.4 per cent lift in local food and liquor sales for the third quarter, falling short of market forecasts and placing further pressure on its battered share price. Big W sales slid 4.6 per cent to $865m, while the hotel division rose 2.5 per cent to $368m and NZ supermarkets revenue rose 3.8 per cent to $NZ1.6bn ($1.47bn).

At its core Australian food and liquor division, which delivers nearly 90 per cent of group earnings, sales for the quarter were $10.7bn, and when adjusted for Easter slipped by 0.9 per cent. Analysts were tipping a 0.7 per cent drop in comparable sales.

But the comparison to Coles put the poor performance in an even worse light. The performance gap between Coles and Woolworths is now the biggest it has ever been, with the gap between quarterly sales growth now standing at 5.8 per cent.

Coles posted like-for-like sales growth of 4.9 per cent for the third quarter. It marks the strongest outperformance by Coles over Woolworths since Wesfarmers bought Coles for more than $20bn in 2007.

Investors hoping for a quick turnaround will be disappointed. Mr Banducci repeated his belief that the resuscitation of the supermarkets business where it can match it with Coles is three to five years away, while Big W remained stubbornly stuck in a downward trajectory thanks to poor merchandising, sourcing and adverse weather conditions that left it holding unwanted stock.

New Big W boss Sally McDonald, who started in January, has set about introducing new talent to the retailer including in-house fashion designers, a greater emphasis on home brand products and better sourcing from Asia.

“The sales performance in Australian supermarkets continues to be impacted by high levels of deflation, predominantly from our price investment,’’ Mr Banducci said as he defended the retailer’s poor quarterly sales.

“However, we are encouraged that customers are starting to notice the improvements we are making. It will be a three- to five-year journey to rebuild Woolworths supermarkets, but we are confident we are on the right track.’’

Mr Banducci said Woolworths would invest a further $150m in lower prices and better service in the second half, which would be just under $300m on an annualised basis. Analysts fear this could further deteriorate Woolworths’ once envious margins.

Woolworths shares initially sank nearly 1.5 per cent on the quarterly sales update, but later closed 2c higher at $22.27.

Mr Banducci will also lead a newer streamlined operating model for Woolworths, giving greater accountability in key divisions to executives while also freeing up his time to focus more on the core food and liquor arms.