Brad Banducci starts kicking goals at Woolworths

Banducci has to keep building on today’s tentative signs of recovery if Woolworths wants to regain its blue-chip status.

Woolworths CEO Brad Banducci in Sydney’s Town Hall Woolworths supermarket. (Adam Yip/ The Australian)

Woolworths has finally managed to generate positive comparable stores sales growth in its supermarkets, the key initial goal in Brad Banducci’s game plan for turning the faltering group’s fortunes around. What we don’t know yet is what that achievement cost.

In a sense it’s irrelevant because Banducci and his board know that, without positive sales growth, there won’t be a turnaround. Until Woolworths reports for its first half early next year, however, the cost of achieving that growth, which will show up in margins and earnings, isn’t available.

The 0.7 per cent growth in comparable stores sales reported today, with 1.7 per cent growth in food sales overall, is an achievement in its own right, given that both headline and comparable store sales had been shrinking over the past year.

With Coles reporting 2.9 per cent headline growth in its supermarkets and 1.7 per cent comparable stores sales earlier this week, Woolworths is still ceding market share to its major competitor but the rate at which the growth rates have been diverging in recent years has at least slowed.

Banducci, who had a year in charge of Woolworths’ supermarkets before being appointed chief executive of the group in February this year, has made it clear that he sees the regeneration of the food business as a multi-year task.

A quarter of positive growth is a good start to a strategy that does involve a lot of moving parts, of which price — while perhaps the key element — is only one element in the effort to improve Woolworths competitiveness. Service, in-store and back-of-store execution, relationships with suppliers and the quality of the overall offer, including the store formats, involve greater complexity.

Since Banducci took charge of the supermarkets, Woolworths has invested more than $1 billion in reducing prices and the statistics of its first-quarter performance suggest that program has continued.

The supermarkets had significant growth (2.5 per cent) in comparable transactions and comparable items (0.5 per cent), albeit that basket sizes were smaller. Average prices declined by 1.9 per cent, against Coles’ one per cent, driven by “material price reductions in groceries and bakery.” Excluding tobacco, prices were down 2.8 per cent.

Coles referred to competitor promotions earlier this week in re-stating its commitment to “everyday” low prices rather than promotional pricing. Woolworths appears to be pushing its prices down generally, but with an overlay of promotional pricing.

The impact of those strategies and the extra effort on pricing required from Woolworths to restore top-line growth is great for consumers but, inevitably given the increased competitive intensity as Coles, Woolworths, Aldi and Metcash battle for the volumes required to offset the impact on gross margins, not great for the companies’ profitability.

Banducci hasn’t just been investing in price competitiveness. He has been acutely aware Woolworths needed to improve its service quality and customer satisfaction levels.

On those metrics, too, he would be encouraged. Customer satisfaction levels have spiked quite sharply (from 69 per cent to 76 per cent) relative to their levels a year earlier. The relaunch of Woolworths loyalty offering, which reinstate Qantas frequent flyer points and a much simpler rewards points program than the one it replaced, also appears to be having an impact.

There’s also been a lot of effort going in to staff training and satisfaction, which is a critical leading indicator of eventual sales performance, while Banducci has shifted the emphasis within capital expenditures from opening new stores to refurbishing and reformatting existing stores.

For the supermarkets, the overall conclusion would be that it is off to an encouraging start to the financial year, in terms of the sales growth at least, but Banducci’s team will need to execute really well over the critical Christmas and New Year period to build on the modest momentum generated in the first quarter.

Banducci’s other problem child is the Big W discount department store business which, like Wesfarmers’ Target, has been experiencing existential challenges for several years. Its sales were down another 5.5 per cent to $880m in the quarter. Comparable stores sales were down 5.7 per cent.

Like Target, Big W is under new management — former Oroton CEO Sally Macdonald — and is in the earliest phase of yet another major makeover. Sales in the quarter were impacted by a reduction in the number of products stocked, by clearance activity and by the cessation of unprofitable promotions.

Woolworths forecast a modest improvement in apparel sales in the second half of the financial year as it moved the business to a direct sourcing and design model but said this was unlikely to offset the deflation and strategic clearances that would impact sales momentum and margins and that it didn’t expect any improvement in earnings this financial year.

Arresting the decline in Big W’s performance will be, as it is for Target under Guy Russo’s leadership, a multi-year strategy with no certain end in sight.

With the Masters home improvement business being liquidated and now out of its sales reports and its petrol business on the auction block and likely to be sold before the end of the year, the new Woolworths is emerging as a simpler and more focused group.

Building on the tentative signs of recovery in supermarkets and fixing — or exiting — the Big W business are, given that its liquor, hotels and New Zealand businesses chug along quite steadily, the key to regaining its former blue-chip status and to Banducci’s tenure being deemed a success.