Banducci’s last shot at righting Woolworths’ wayward course

The scale of the costs associated with rebasing and restructuring Woolworths are a pointer to the scale of the challenge confronting Banducci, and his preparedness to take tough decisions. (Pic: Brett Costello)

Brad Banducci really only had one shot at clearing the Woolworths slate and has taken it, with the group today announcing restructuring costs of $959 million. That’s on top of the $3.3 billion of impairments and losses disclosed earlier this year as Woolworths ended its ill-fated sortie into the home improvement sector.

While a substantial proportion ($460m) of the new losses relate to Woolworths (WOW) general merchandise operations, it is telling that there are also $344m of costs that will be incurred from the closure of loss-making or underperforming supermarkets and a further $155m from a shift to a new operating model.

Woolworths will close 23 underperforming supermarkets in Australia and New Zealand, with a further 18 facing “significant uncertainty” about their future within the group. Seventeen of the supermarkets to be closed are in Australia and there are another 15 Australian stores designated as underperforming and whose future is in doubt.

The supermarkets are the underperforming core of Woolworths and the decision to trim the portfolio and to halve the previously scheduled opening of new stores over the next three years (investing the savings in the refurbishment of existing stores) is both an indictment of Woolworths’ previous management and an indication of Banducci’s preparedness to take tough decisions.

While Banducci did say there had been clear signs of progress in the supermarket business, with positive transaction and item growth, it is obvious that Woolworths, perhaps distracted by the Masters debacle, took its eye off the main game.

Regaining momentum in the face of tough competition from Coles and the fast-growing Aldi isn’t going to a quick or easy task.

A massive investment in price over the past year has yet to ignite sales growth, although the pick-up in staff and customer satisfaction levels being experienced is a positive indicator that the changes Banducci has introduced are gaining traction.

Staff satisfaction is the earliest lead indicator of positive change in a business, while customer satisfaction is an obvious prerequisite for even maintaining existing sales levels, let alone increasing them.

The new operating model, with 1,000 staff moved out of the group office into the operating businesses and 500 in the support office and supply chain made redundant, would suggest that the group became too top-heavy and bureaucratic — and, as Banducci describes it, too seduced by the “beguiling logic” of shared services.

The movement of so many staff out of offices and into frontline customer-facing areas of the business — at a one-off cost of $155m — is quite a powerful statement, both of what is wrong with Woolworths today and its newly-developed customer-centric priorities.

The introduction of sales per square metre and returns on funds employed as long-term performance indicators might also suggest it lost the basic focus on productivity of space and capital it once had.

Woolworths will also concede it has neglected the older stores within its existing network while continuing to add new stores at a rate that has generated some criticism from analysts in recent years.

Banducci’s decision to slow the rate of new store openings and instead invest the funds freed up — several hundred million dollars of investment — in refurbishing existing stores is a sensible one, albeit an implicit admission that existing fleet hasn’t been as well-maintained as it should have been.

Banducci, who was appointed chief executive in February, is fighting fires on several fronts. It isn’t just the misfiring supermarkets that have to be turned around.

In 2013 Woolworths bought the New Zealand-based catalogue and online retailer EziBuy for $309m to bolt onto its Big W business. Today, it said it had taken as $306m impairment charge against that business and was exploring options for the sale of the business. Expected synergies between the two general merchandise brands had not been realised and had in many cases resulted in dis-synergies for both.

They’ve now been separated.

Big W, whose sales and earnings have been an issue for years as the pressure on discount department stores (other than the big disrupter, Kmart) has intensified, will take a $151m charge, as former Oroton CEO Sally Macdonald tries to remake the business.

Between them, at an operating level the two general merchandise businesses are expected to lose between $25m and $35m in the 2015-16 financial year.

The group overall is expected to generate earnings before interest and tax from its continuing operations (before the significant items) of between $2.55bn and $2.57bn, compared with the $3.32bn it achieved in 2014-15.

The scale of the costs associated with rebasing and restructuring Woolworths are a pointer to the scale of the challenge confronting Banducci, and his preparedness to take tough decisions.

There is an interesting question as to how he will finance the costs of the massive changes he is making, including the costly exit from Masters that was left unresolved by today’s announcement. There has been talk of dividend underwritings and asset sales (the ALH hotels business and Big W are the obvious candidates) to protect Woolworths’ investment-grade credit rating.

The best protection, of course, would come from increased cash flows and earnings, with the balance sheet a second-order priority to the effort to reignite growth within the businesses, particularly supermarkets.

There is no quick or cheap fix. Banducci referred to a “three to five-year journey.” He has no option but to sacrifice margin in supermarkets to at least try to protect Woolworths’ market share while searching for the keys to sales momentum.

Big W’s fate is even more open, as Macdonald tries to arrest a decline in sales and earnings that has developed over years and that is as much structural and sectoral as it is due to the business’ own failings.