suppliers becomes more difficult. Despite Coles’ claims that Australian suppliers are living off the fat of the land, all but the largest multi-national companies have limited room to move on rebates and promotional charges to polish the bottom line results of the supermarket chains. A more vigorous Australian Competition and Consumer Commission is monitoring supermarket practices and its legal action against both Coles and Woolworths has emboldened suppliers who believe they have been unfairly treated or even threatened by retailers. The new reality of global competition, mature markets and changing consumer demographics and greater scrutiny of the supplier relationships of the large retail chains are forcing retailers to review and restructure their operations and change traditional behaviours. The ‘build it and they will come’ mentality and the chase for market share above all else has left many retailers vulnerable as they try to support underperforming stores in a competitive marketplace where margins and earnings are under pressure. As an astute grocery retailer once told me, you can’t bank market share, but further today customers don’t actually need to come at all as they can shop online. A key plank of the Myer turnaround has been the closure of stores and, interestingly, the store network downsizing strategy was pushed by Bernie Brookesprior to his departure fr om the CEO chair. Brookes had overseen a rollout of new stores in an expansion of Myer nationally, but he came to realise that that strategy was flawed with inadequate return on investment and higher operating costs not justified by sales gains. In the same vein, Woolworths’ revitalisation strategy is based on the closure of under-performing stores and, of course, an exit from the loss making Masters Home Improvement venture. As part of its turnaround, Coles also jettisoned unprofitable stores, even doing a deal with the independent FoodWorks chain to offload unwanted locations. The deal almost destroyed FoodWorks, as the stores were beyond saving, especially when Coles upped its marketing to lure customers to nearby Coles stores. To its credit, Coles excused FoodWorks from the deal, allowing the independent group to trade out of its debt problems and survive. Shrinking store network to survive Woolworths is now taking the same medicine in its bid to re-invigorate and galvanise against competitors its flagging supermarket business. Woolworths will close 30 under-performing supermarkets before the end of their current lease term, booking exit costs of around $344 million. A further 34 lagging stores are on notice. The retailer has also halved its new store development plan for the next three years, with 45 stores now envisaged, rather than 90 for the period. A Victorian distribution centre will also be closed and 20 development projects will either be deferred or abandoned with Woolworths redirecting capital investment to store renewals with 82 upgrades planned this financial year. Combined with redundancy costs on 500 support office positions and restructuring costs in the troubled Big W business, Woolworths will book a writedown of $ $959 million ($571 million non-cash) in its 2016 financial year results. The bottom line will be further reduced by impairments from the Master Home Improvement chain from which Woolworths has yet to extricate itself. Brad Banducci, Woolworths CEO, claims the operating model review and turnaround measures implemented since he was appointed to head the Woolworths Group in February this year are showing “real momentum”. Banducci said management is working hard to get customers to put Woolworths first, to improve company culture and rebuild momentum. And while it has a long way to go, the early results in supermarkets are encouraging, with transaction and item growth and gains in its trial store renewal program. “We have changed our group operating model and moved more than 1000 team members directly into our businesses to improve accountability and help us better support our store teams and customers,” Banducci said in a recent market update. Brad Banducci, Woolworths CEO Financial markets have responded cautiously, but supportively, to Banducci’s plans despite the fact the 2016 financial year will see Woolworths record a loss after more than $4 billion in writedowns, most of which relate to the failed Masters Home Improvement venture. At least $3.25 billion will be booked as a provision on the Masters Home Improvement venture. Woolworths has forecast earnings before interest and tax for the 2016 full financial year from continuing operations before Significant Items would be in the range of $2.55 billion to $2.57b. Woolworths’ Big W chain will also add to the writedowns tally as new CEO, Sally Macdonald, implements a restricting program that includes at least five store closures ahead of lease expiry and further possible exits on up to 18 more stores where trading results are below expectations. Woolworths is also taking a $309 million hit on Ezibuy, which failed to achieve the synergies the retailer had expected when it acquired the business. Woolworths has separated BIG W and EziBuy and are looking at options to sell EziBuy. The total writedowns on the Big W general merchandise division will be around $460 million before any trading losses of between $25 million and $35 million are taken into account. In his market update, Banducci said that while Woolworths has had to make some tough decisions with ramifications for many staff, management is confident the company is putting in place solid foundations for the future. Banducci said early results have given Woolworths confidence that the company on the right track, but investors will need to be patient with the revitalisation for the flagging supermarket and Big W divisions taking three to five years to achieve. Day of reckoning Woolworths is due to announce its full-year financial results on August 25 and it is likely that a decision on the exit from the hardware venture will be released on that day or just ahead of that day. Woolworths has confirmed that it received bids from a number of parties for the Masters and Home Timber and Hardware assets. It is understood that some of the bids are for the Masters Home Improvement property portfolio. Metcash, the listed wholesaler that owns the Mitre 10 independent hardware stores banner, was given a green light from the Australian Competition and Consumer Commission to bid for the Home Timber and Hardware chain. Market speculation suggests that Metcash could outlay around $250 million for the former Danks Holdings business that Woolworths and its American partner, Lowes, acquired as a platform for the Masters Home Improvement venture. There has been speculation that Metcash might also be interested in some of the Masters Home Improvement stores but Inside Retail Weekly believes this is unlikely. Mitre 10 effectively fell into Metcash’s hands after a disastrous foray into mega stores and there would seem to be limited opportunities for the independent sector to fund and operate large warehouse stores any more successfully than Woolworths. The Woolworths hardware business attracted interest from the South African retailer, Steinhoff International, and from a syndicate headed by two former Home Timber and Hardware executives as well as private equity firms. The ACCC assessment of the Metcash bid was finally approved after the wholesaler gave court enforceable undertakings on its supply arrangements with independent hardware stores. The ACCC received some submissions opposing a Metcash acquisition of the business, but most of the response to the regulator’s inquiries supported a deal that would bring Home Timber and Hardware and Mitre 10 together under one roof. For Woolworths, offloading the disastrous hardware venture will be an important step forward in repairing its reputation and financial results. The final cost of the venture will be determined by the sales of its property portfolio and the Home Timber and Hardware chain and the final payout to Lowes for its one-third stake in the business. The costs of exiting stores and selling off remaining stock will also be part of a final reckoning that will be included in 2017 financial year results, albeit probably resulting in an extraordinary profit gain that will claw back some of the $3.2 billion plus provisions on this financial year’s accounts. In any event, Woolworths has learned that the ‘build it and they will come’ approach to business is flawed, along with the pursuit of market share without  consideration of return on investment and profitability. Going forward, Banducci says Woolworths is focused on new metrics to measure business performance including productivity defined by sales per square metre. Other retailers should take note of the salutary lessons learned by Woolworths, especially in regard to the management of a store portfolio and the temptation of expansion and the retention of under-performing stores that can threaten the health, if not the viability, of the entire business.