Australia’s premier retailer Woolworths is struggling, but management and the board hope Coles will make it better.
As a business strategy it’s pretty high risk, hoping that your toughest
rival stumbles or the heat goes out of their momentum. A momentun that,
for the past year, has overshadowed your previously hard-won reputation
for being the country’s premier retailer.

And for years that’s been the secret strategy at Woolies, “Trust Coles to stuff it up or run out of steam.”

It’s a big hope, and you can see and hear it from Woolworths CEO Roger
Corbett. A sort of hopeful desperation that later this year, the big
surge in Coles Myer’s supermarket sales from its Shell petrol venture
will slow, taking the pressure off Woolies own lagging performance.

The tactic from Roger and the Woolworths board has worked so far. The
shares up strongly in the past couple of days since the 2003-2004 sales
figures were released.

A combination of “trust me, I’m a retailer” and the trailed suggestion
that there has been a “pleasing” recovery in comparable store sales in
June and July, has won over analysts and many investors. Of course
Roger didn’t quantify what level of recovery in comparable retail sales
was “pleasing”, but seeing same store sales growth fell to a meagre 1.5
per cent in the June quarter, the lowest since 1999, any figure north
of that would be “pleasing” to a retailer feeling a little hard done
by, as Roger is.

So will the first year surge in sales ignited by Coles Myer’s petrol Alliance with Shell run out of puff later this year?

Good question, and I can’t say. But the initial surge from Woolies own
petrol offer lasted the best part of three years and Woolies Project
Refresh revamp of its logistics chain then kicked in.

Coles too is looking for its logistics revamp to start kicking in later
this year and really continue in 2005-2006. No sign of that being
considered by those now-believers among the analysts.

Coles’ management and shareholders are no doubt wondering if what has
happened to Woolies in the past year, lies ahead for them in the coming
year. Namely a sudden slowdown in top line and same store sales to
levels approaching anaemic.

But what really galls Roger is that John Fletcher, who ran Brambles and
is not a retailer, has bested the Woolies chief in the toughest market
in Australia – supermarket retailing.

Although Roger started with Grace Bros in Sydney when it was an
independent department store, he really blossomed at Big W in Woolies,
and then in supermarkets.

There’s nothing like pride and ego to cloud executive judgement. Hence
that snap call last year when Coles launched its Shell venture that
petrol was something of a sideshow. The main game according to Roger
was in retailing, supermarkets.

He just didn’t stop to consider that someone could follow the trail
Woolies blazed so successfully and emulate it with more oomph.

The Ancient Greeks called that hubris and considered it a flaw of human
character. It’s what got the Old Coles Myer into trouble under
Peter Bartels and Solly Lew. But as a strategy, simply to hope
that Coles runs out of puff and your new, expanded fuel offer gets
going, is not much. It’s a bit lightweight in fact.

As well, reports that Woolies is planning a range of premium house
label products also won’t startle shoppers into spending more.

In the short term, there is some sense in Roger’s hopes for Coles to
run out of puff. In the medium time, it seems Project Refresh, which
was not talked about to any great length yesterday by Roger, is seen as
the one big idea.

Well, something has to be done to turnaround the very sharp slowdown in
same store sales growth. It might look good having a six per cent
growth in top line sales, but you can’t go on adding new stores and
selling space forever. As numerous retailers overseas have found (and
Coles Myer here) continual expansion as a means of driving sales and
earnings is not a viable long-term business plan.

What makes retailers really profitable is high levels of comparable
store sales. They are the best indicators of performance and
profitability.

Roger is basing his optimism on expectations that the boost to Coles
sales will not be as dramatic in the coming 12 months for simple
statistical reasons. That when the first anniversary of the Shell deal
passes the comparison in sales growth for Coles will be smaller because
its made off a higher base.

Roger also says Woolies will have more petrol canopies of its own and
in the slow-building joint venture with Caltex, which will help fight
Coles, make comparisons easier for investors and put help lift
Woolies’s sales figures.

And, no matter what Roger says or does there is another point to
consider. Last week’s management re-shuffle. Why promote Michael
Luscome and Bernie Brooks at the expense of supermarkets chief, Tom
Flood, if there was no reason to and everything will be right later in
the year when Coles’s momentum slows?

If Coles’s momentum slows, Roger will say, “see I was right,” if
Coles’s growth doesn’t slow, or it does and Woolies’s continues to
stagnate, then Roger will say, “see I anticipated this by moving people
around and putting pressure on others who unfortunately failed to
perform”.

As I said, more hope and faith than a strategy, but what ever works for
you! And Woolies shareholders are still a trusting lot.

After all Woolies has been through this in the past three years, with
its petrol offer providing that first big rush of extra business and
powered the retailer past Coles in terms of sales and earnings. Then
the impact of the Project Refresh revamp of Woolies logistics chain
kicked in, providing another boost, and the world looked very warm and
profitable to Woolies as it slashed capital use and lowered costs.

But that’s history. This past year will be one where the wheels
gradually came off the Woolies story. And, unlike previous
announcements, Woolies wasn’t backward in providing the evidence. Roger
was just a bit reluctant to confront the reasons.

For all the rationalisations of Woolies, blaming the Coles Myer Shell
petrol offer isn’t good enough. If the Woolies petrol offer was
attractive, it should have blunted the Coles offer’s impact.

The company’s advertising has been changed to show that staff are a
bunch of fun loving folk, ready to serve you the customer. And hey,
aren’t they the same at Coles, a bunch of fun loving folk talking and
doing supermarket things while Lisa McCune looks on, winks and
generally charms the money out of their wallets.

The country’s best performing retailer for the past decade, has slowly
but surely lost momentum in the past year. And the market is obvious
putting its hopes in Roger, taking him on trust and past performance,
which so far is good news for his dip into sin with Bruce Mathieson in
their joint bid for grog group, Australian Leisure and Hospitality.

Looking at the latest sales figures you get the feeling that Roger is
rushing for a quick fix by bidding for ALH with Bruce Mathieson.
Woolies sold $300 million worth of grog through the link up with
Mathieson and his partner, Andrew Griffiths in Queensland. But these
remain off balance sheet for whatever reasons Woolies board and
auditors have agreed on.

Stiff, isn’t it Roger? Those extra grog sales in Queensland would have
added more than one per cent to gross sales growth in the year, and
perhaps as much as half a per cent to same store sales. The price of
being financially clever, or did Bruce Mathieson and Andrew Griffiths
strike too hard a bargain in MGW Hotels?

Roger believes Woolies liquor sales will reach $2.5 billion next year,
a target he’s expressed now for the past two years. That’s without ALH.

But in fact with the $300 million of sales in the MGW joint venture in Queensland, liquor sales are already there.

Petrol sales could reach $2.5 billion in the next year, but the way
Woolies talked Monday, margins will have to improve. The Coles Shell
offer has been taking its toll and talk by Roger of “managing” the
impact of the Coles offer, seems a touch optimistic if he’s complaining
of lower profit margins in petrol.

And likewise liquor. Increased liquor sales haven’t given supermarkets
a big boost. The 1.5 per cent growth in fourth quarter sales covers
supermarkets and liquor.

Buying ALH will cost the best part of a billion bucks, with all of it
coming from the Woolies balance sheet. That’s a big cost just
when the company has cut capital consumption to help drive profit
growth. That’s why Standard and Poor’s has Woolies on credit watch
negative because of the ALH adventure.

With the management changes, Roger has moved a step to retirement. But
you can bet that he will be around a bit longer for two things. Firstly
to complete the ALH deal if he can, and second, to make sure he’s right
on the impact of the Coles petrol offer with Shell. That will be
apparent by early next year in the first months or so of the third
quarter.

If he goes any earlier than that then you could confidently say that
Woolies board has lost confidence in him because either the ALH deal
has problems, or the Coles petrol offer is hurting Woolies more than
outsiders can see.

It’s a high stakes game still for Roger but success means he will be
able to retire whenever he wants to before shuffling off into corporate
Australia, starting with the Fairfax board.

Peter Fray

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