Has Woolworths hit the wall? Bill Eclairs reports.

The cliche says a day is a long time in politics. Well, in retailing it’s just as dangerous. Yesterday Crikey pointed out the positive impact on Woolworths of Jack Shewmaker, Walmart director and former President of the world’s biggest retailer. Check it out here.

Now, a day later with the weak third quarter sales out, that influence and guidance is needed desperately otherwise Jack’s mate, Roger Corbett, might find his tenure as CEO of the country’s most profitable retailer could be under pressure.

Despite claims that the stalling of the company’s petrol alliance with Caltex has played a major part in the sharp drop in sales – annual growth in the third quarter was less than half the rate of a year ago – it’s clear the company’s powerhouse, supermarkets, has gone very cold.

From being the hottest performing business in Australia to doing no better than inflation on a ‘like for like’ basis, the Woolies board should now be asking some tough questions of Roger and his management team.

In the third quarter to March, reported yesterday, Woolies supermarkets grew sales 3.7% but on a comparable like for like basis, which excludes petrol, the growth was only 2.3%. For the year to date Woolies sales grew (on a like for like basis) only 3%.

For the same quarter of last year the supermarkets division lifted sales by a gross 8.3%, with like for like sales for the quarter up 6.0%. The company said a year ago that ‘sales accelerated’ during the quarter, now they are declerating when you compare the third quarter this year to the preceeding two quarters.

Food and liquor sales grew by 5.7% gross in both the second quarter and the first half. On a like for like basis the increase was 3.8% in the second quarter and 3.3% for the half year.

Clearly a deceleration and one the market is unhappy with, selling off the company’s shares sharply on Tuesday, with expectations that this situation will continue until the end of 2004. While Woolies still expects to meet its guidance, its period of outperformance is over.

Blaming the stalling of the Caltex petrol joint venture isn’t enough, even though you can see the benefits of Coles Myer getting its act together in petrol with an acceleration in its sales growth in supermarkets. That will continue for the rest of this year, according to analysts, putting further pressure on Roger and his team to stop the rot.

The Caltex joint venture has stalled because of growing distrust within the Caltex dealer network, especially the franchisees, about the company’s motives. There has been legal action threatened. A silly memo from the previous MD of Caltex worsened relations by suggesting franchisees should be discriminated against and the selection of sites for the joint venture has added further strains.

Crikey knows of one story where a Sydney franchisee was encouraged to take over another site that was underperforming, only to find that the company-owned site nearby because a Woolies’ joint venture canopy, with a four cents a litre cheaper offer. Needless to say the franchisee was not very impressed. And while this is a problem for Roger, other more structural problems need to be addressed.

The “Everyday Low Prices” concept is struggling as the basis for a consistent pricing stratergy. That’s a Roger idea, a re-working of the Walmart slogan that continues to power that company to bigger and bigger things.

The benefits from ‘Project Refresh’ , the plan to revamp the company’s distribution and logistics chains, have either slowed or are the only profit drivers in supermarkets. The idea is that the cost savings from Project Refresh will be shared roughly 50-50 with shareholders and customers through lower prices. This hoped for synergy has slowed dramatically.

The position of Tom Flood as head of supermarkets must now be a little difficult. He has been there about a year or so, has featured in Woolies ads for “everyday Low Prices” leading to suggestions that he’s the successor for Roger. Probably not given the slowing of sales growth in supermarkets since he took control.

If Tom Flood doesn’t improve things it will be two strikes against Roger in terms of filling the most important operational role in the company. Tom Flood’s predecessor was former Chief Financial Officer, Bill Wavish, who lasted a year or so and left to become a consultant without leaving his mark on the business.

That opens the way for someone else, maybe Marty Hamnett, head of the BIG W business where like for like sales growth is running at well over twice the inflation rate and accelerating.

Roger’s own position must be starting to look a little shaky. He has been coy about when he is due to retire, but it was widely speculated last year than he managed to win an extension from the board.

Roger however has seen his push into pharmacies come to a full stop because of opposition from the pharmacists galvanised an election-wary John Howard into blocking such a move, despite Roger being his sort of Big Businessman.

Wooloworths is at the start of a big shift, moving the entire head office function from the Sydney CBD to the Norwest Business Park in Sydney’s northwestern suburbs. That’s well out of town, although facilities will remain in the city for the board and senior executives.
That will happen by April-May next year and there’s a feeling Roger wants to stay on till then.

Getting through this year might very well be a bigger task than the complicated move. The loss of impetus in supermarkets is not good. No other part of Woolies matters in terms of the greasy pole of success in the company. It’s where the company was saved by the legendary Paul Simons, and where Roger’s predecessor, Reg Clairs came a cropper on costs and was forced out.

And if the market loses faith, so will the board. Chairman James Strong is known for being market-aware, as he was in his time as Qantas CEO. If profits are hit later this year, then Roger’s position will be open to question.