Too late for a turn around?

Sally MacdonaldSally Macdonald was always a brave, if not unusual, choice by Woolworths as CEO for the struggling Big W discount department store chain and Ezibuy.

The big box discount chain concept is a world away from the aspirational retail concepts she managed at Oroton.

Macdonald’s record for revenue growth was impressive at Oroton over an extended period and included the development of an online business that was highly successful.

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Not everything she touched turned to gold, but Macdonald transformed the publicly listed Oroton from losses to record profits between 2006 and 2013, pursuing a strategy to develop international brands under licences.

Macdonald departed from Oroton rather abruptly in late 2013 after signing a Brooks Brothers licence to replace a terminated relationship with Ralph Lauren.

She was a director of several private company retail boards and founder of Antipodean Group, a private retail investment company, after Oroton and before the Big W appointment.

Big W and Ezibuy were both struggling and Macdonald effectively replaced Alistair McGeorge, who returned to the United Kingdom after just 12 months heading Big W, amid claims of illness and a staff complaint about harassment.

Woolworths had high hopes that Macdonald could turn around the Big W chain of around 1,990 stores, drawing on her experience in consulting and retail through brand and category development and business simplification.

Macdonald was enthusiastic back in December 2013, describing BIG W as a great Australian brand with tremendous scale, offering fantastic value for customers and with potential for growth while EziBuy was also a solid platform for further online growth.

In his cleanout at Woolworths as part of the drive to revitalise the core supermarkets business, CEO Brad Banducci opted to jettison Ezibuy and has hardly been rusted on to the idea of retaining Big W.

Macdonald’s sudden decision to quit Big W after 10 months as CEO should therefore not be all that surprising, even in the context of a likely smudging of her reputation by the scale of the task to turn around Big W.

Banducci was generous in his praise of the departing Macdonald, saying she had made “material progress in restructuring the business, especially in the areas of direct sourcing, product development, supply chain, business simplification and cost reduction”.

“However, despite these and other positive changes, it is apparent that the transformation of BIG W will take three to five years to complete and, unfortunately, this time horizon is inconsistent with Sally’s expectation when she joined BIG W,” Banducci volunteered.

That comment is astonishing, given that it would have taken little investigation by a novice, let alone someone of Macdonald’s background, to work out that a turnaround of a business like Big W would take considerable time.

kmartIn the same discount department store category, it took Guy Russo more than five years to turnaround the Kmart chain and, in doing so, he has left both Big W and Target with declining sales and alarming losses.

As Inside Retail Weekly has previously argued (and analysts are now taking a similar view), the discount department store category is over-stored and it is doubtful that Kmart, Target and Big W can all survive. Indeed there might even be a credible view that only one of the three has a sustainable future.

Woolworths has been sounded out on its interest in selling Big W by at least one private equity firm as well as Steinhoff International, but is understood to have been concerned about the impact of another bargain basement exit after the writedowns it incurred on Dick Smith and Masters Home Improvement.

Banducci is cautioning against a quick transformation in Woolworths’ supermarket business which is in much better shape than Big W, so it would seem that Macdonald’s departure is about more than a sudden realisation that a turnaround for the discount chain is not a quick fix.

An unlikely future

Today’s retail marketplace is tougher than ever and punishes mistakes savagely.

Turnarounds for ailing businesses are taking longer to achieve because competition is fierce, consumers are less forgiving and have many options available and repairs are expensive, especially if they involve store closures.

WoolworthsJust as Banducci is cautioning that the Woolworths reboot will take time and
significant re-investment in the business that will constrain earnings, so too is Richard Umbers, CEO at Myer.

Umbers has been quick to point to improvements in the metrics at Myer for FY2016 and the first quarter for FY2017. He is also indicating the department store chain’s turnaround strategy is at least a four year project.

Myer has addressed some key issues in the business, including critically under-performing stores that were dragging on sales and earnings growth, but the turnaround is consuming large licks of capital expenditure as well as a thinner earnings return.

The increase in comparable store sales actually fell from three per cent for the full financial year in 2016 to just 1.6 per cent in the latest quarter, a figure largely overlooked by most commentators.

Retail results across the board suggest the first quarter was a difficult one for most retailers, possibly hampered by the uncertainty following the federal election, but Myer would have hoped to maintain the three per cent or greater comparable store figure at this stage of its strategy.

The headline sales, which for the latest quarter was a 0.6 per cent increase in revenues, don’t mean as much currently with store closures and other changes in the business but the comparable store sales figure is telling.

Even Myer’s flagship and premium stores fell short of the three per cent FY2017 comparable store benchmark in the first quarter with like-for-like sales up 2.8 per cent.

Myer chairman Paul McClintock told shareholders last week the ultimate test of the ‘new Myer’ is whether it delivers the financial results over the next four years upon which new investment is based.

“Some of those results will take time to achieve and will be seen more clearly at the back end of the program,” McClintock warned.

Myer net profit forecasts of around $60 million require shareholder patience but McClintock said the retailer’s board is of the view that, subject to no significant deterioration in consumer sentiment, net earnings will lift by year end.

MyerMyer is targeting average sales growth greater than three per cent between 2016-2020 so it will need a very strong Christmas and New Year sales result to get close to that target for FY2017.

Apart from the Kmart example or even the steady improvement of David Jones over more than five years but particularly since the South African retailer, Woolworths, acquired the department store chain, there are other examples of specialty retail chains that have required patience with turnarounds.

The publicly listed Specialty Fashion Group is a successful multi-brand fashion retailer but its renovation of the Rivers chain has already taken three years.

Specialty Fashion Group is confident about the prospects of Rivers, which was acquired for just $5 million in November 2013 when it was close to collapse, but it posted an underlying pre-tax loss of $9.9 million in FY2016.

The retailer was quick to point out the loss cut the red ink from the previous financial year by half and that Rivers is expected to start trading profitably during FY2017.

“The Rivers turnaround is on track, and the worst is well behind us,” the company told its shareholders at its annual meeting.

“The Rivers leadership team is delivering strong improvement across the business. Improved product is resonating with consumers across all categories. Cost-effective online marketing is also making a real difference in building customer loyalty, with a big uplift in online sales and repeat purchases.”

Super Retail Group is one of the leading retailers on the Australian Stock Exchange and has a strong retail management team yet it has also struggled to turn around businesses that were ailing.

Super Retail Group acquired Rays Outdoors in 2010 and has yet achieve a sustainable growth platform for the chain, in fact, for the last financial year, the acquisition was still losing money.

The company made a $43 million provision in its 2016 accounts for restructuring costs that were predominantly related to Rays Outdoors and followed an 18 month review that has tweaked the format and rebranded stores as Ray.

Super Retail Group had no better fortune with the 11 store Goldcross Cycles it acquired in


Similarly, Billabong International has demonstrated the difficulty in achieving a sustainable turnaround in a retail business that has been in serious financial trouble.

Billabong International posted a $23.7 million loss for the latest financial year, despite optimism in the past two years about the recovery of the surfwear brand that stumbled after a debt binge to fund acquisitions at a time when consumers stopped spending.

Debt, poor or cumbersome systems and supply chains as well as outdated, bloated  and costly store networks or unsuccessful store formats are expensive and take time to repair.

Ill-conceived expansion by acquisitions or even new category entries, poor leadership and demotivated staff, merchandise range mistakes and market positioning that doesn’t have relevance to customers are also issues that hamper turnarounds, let alone brand damage.

Sally Macdonald has apparently learned after 10 months at Big W, there is no quick fix for retailers struggling to the extent that the discount department store has been for a number of years.

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