™s earnings falling as sales growth eased, management changes within its businesses, a tumbling share price and, at year’s end, another round looming in the courts. The Australian Competition and Consumer Commission has instituted proceedings in the Federal Court against Woolworths, alleging the retailer engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers in a bid to shore up its earnings. The ACCC alleges that in December 2014 Woolworths developed a strategy, approved by senior management, to urgently reduce Woolworths’ expected significant half-year gross profit shortfall by seeking payments from 821 ‘tier B’ suppliers under a program dubbed, ‘mind the gap’. Woolworths is accused of pressuring the suppliers with demands of up to $1.4 million to ‘support’ Woolworths, despite not having any pre-existing contractual entitlement to seek the payments towards a $60.2 million income target for the ‘mind the gap’ program which ultimately captured around $18.1 milion. While the contravention of competition laws occurred in 2014, the court proceedings have only just started in the Federal Court, with the first directions hearing listed for February 1, 2016. The ACCC is seeking injunctions, including an order requiring the full refund of the amounts paid by suppliers under the ‘mind the gap’ scheme, a pecuniary penalty, a declaration, and costs, with Rod Sims, the regulator’s chairman, alleging Woolworths conduct was unconscionable and, incredibly, occurred around the time when the ACCC was resolving a similar conduct dispute with Coles. The proceedings have further tarnished the reputation of Australia’s biggest retailer, expanding on the issues that emerged in 2015 that Woolworths must address in the year ahead. The major focus for a recovery of sales and earnings momentum for Woolworths is in the core food and liquor business, which has been losing market share to archrival Coles and the rampaging Aldi. Gordon Cairns, Woolworths chairman, has called in former CEO, Roger Corbett, to assist in reviewing the business and rebuilding momentum, a task made somewhat harder by the strained relations with suppliers that programs like ‘mind the gap’ have caused, programs designed to plug performance failures by the retailer with unfair demands on suppliers. Cairns has also flagged a fateful decision early in 2016 on the Masters Home Improvement venture which continues to rack up losses that require further capital injections. Woolworths and its joint venture partner, the US retailer, Lowes, have invested more than $2.2 billion in Masters Home Improvement. But the stores continue to struggle with low customer counts and annual sales well below the $30 million per store projections issued when the chain was launched in 2011. With losses unlikely to recede in the second quarter of the current financial year, Woolworths and Lowes must decide whether or not to continue with a business that is unlikely to generate any profits for at least another three to four years and is a significant drag on Woolworths’ accounts and its share price. Decisions on the future of Big W and the leadership of Woolworths after Grant O’Brien are also unresolved as Woolworths enters 2016 with hopes of improved sales and earnings as well as a healthier share price. 7-Eleven Notwithstanding its challenges, Woolworths is certainly likely to have a better year in prospect in 2016 than 7-Eleven, which faces multi-million payouts to franchisees, employees who were underpaid in franchise stores and in legal proceedings. 7-Eleven Stores, the franchisor, has finalised a new franchise agreement with 90 per cent of its franchisees, an agreement that provides them with a higher return but that also provides increased compliance, governance and oversight initiatives. 7-Eleven has set a February 1, 2016 deadline for the remaining franchisees to sign up to the new agreement. But the process is complicated by potential legal proceedings by a group of franchisees, as well as almost 100 stores that are looking for new owners. The wages scandal involving systematic underpayment of employees on student working visas by the convenience store chain has been investigated by a Senate committee which is yet to report its findings but could well lead to recommendations for further changes to franchise laws, as well as legal action by regulatory agencies, continuing the agony for 7-Eleven in 2016. Dick Smith Electronics retailer Dick Smith launched a year-end fire sale with discounts of up to 80 per cent in a bid to sell down bloated inventory that had prompted a $60 million writedown on its accounts on November 30. Dick Smith’s share price has plummeted to around 35 cents with investors losing confidence in the retailer after a profit downgrade in October and continuing uncertainty about the direction of the chain. The fire sale has been viewed as a desperate measure given that Christmas trading might well have provided some impetus to flagging sales and Dick Smith is now regarded as a takeover target with its market valuation plunging to around $87 million, compared to the $520 million float that launched the retailer on the Australian Stock Exchange in December 2013. Dick Smith has moved to shore up its management stocks and to regain investor confidence with the appointment of Algy Pereira, Big W’s head of trade and family entertainment and a former executive in the Myer electrical and entertainment division. The retailer was quick to point out that Pereira was an extra hand on deck rather than a replacement for embattled CEO and former Myer executive, Nick Abboud. But not to dismiss Pereira’s expertise, neither Big W or Myer have exactly been setting the world alight in recent times to the extent that the new appointment would inspire confidence in an improved performance. Harris Scarfe Harris Scarfe and Best & Less are remarkable upbeat about a deteriorating financial performance which has seen net losses more than double to $92.5 million for the 2015 financial year. Jason Murray, MD for Pepkor South East Asia, the Steinhoff International division that owns Harris Scarfe and Best & Less, said the results are all part of a plan. Losing $92.5 million on sales of $896.8 million doesn’t seem like much of a plan, but Murray is focused on a new license deal that will see four or five Debenhams stores open in Australia in the next three years. Murray expects the tie-up with the British department store brand will generate sales of around $100 million a year and lift Pepkor South East Asia sales above the $1 billion mark, both from revenues from the new branded Debenhams stores and adding selected ranges in Harris Scarfe stores. Metcash Metcash, the grocery wholesaler and retailer, is yet another company that will be pleased to see the end of 2015 after carving $640 million from its accounts for the 2015 financial year in writedowns from its food and grocery business. Metcash was forced to sell off its automotive division to Burson Group in a bid to refocus on its core business that generates annual sales of more than $9 billion. While first quarter results in the current financial year were a little more encouraging, Metcash continues to struggle for sales momentum and earnings growth. The current financial year will see a return to profitability after the $384.2 million loss in FY2015, providing some optimism for 2016, albeit the share price remains under pressure after a spectacular dive in recent months. Myer Myer has also shown some encouraging signs in sales momentum in the first quarter of the 2016 financial year with a 3.9 per cent gain – better than it has managed for some years, a result that has lifted an abysmal share price to around $1.10 this week. Myer downgraded its profit forecast in March after appointing Richard Umbers as CEO, just six months after joining the department store group. Umbers has unpicked the business strategy of his predecessor, Bernie Brookes, and has been closing stores and revamping merchandise ranges in a bid to boost sales and lift profitability. Myer failed to attract a full subscription to a rights issue as investors worried about the future of the company with net earnings dropping by 21.3 per cent to $77.5 million for FY2015. Down the line While Woolworths, 7-Eleven, Dick Smith, Metcash, Myer and Harris Scarfe – Best & Less will all be happy to change the calendar to 2016 come January 1, there are a number of other retailers also under pressure in the year ahead after stuttering performances. Those retailers include Target, Collins Foods, Rivers, Kathmandu, Billabong and Quiksilver, all of them in recovery mode after significant problems and all hoping for an improvement in consumer confidence and spending in 2016. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.