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Woolworths – From incompetence to wanton destruction

WoolworthsIt is breathtaking just how short-term memories are in this country – and as a result how reactive decision-making leads to long-term consequences. The cyclical nature of business performance is a consequence of this.

In the 1980s, Coles was untouchable as the supermarket leader and Woolworths was broke. Paul Simon and his team brought the business back from a near death experience and through focused, successive management teams it went on to become the market leader. 15 years ago Woolworths was at the height of its success, with Coles languishing badly. The same stakeholders that today are arguing for Woolworths’ divestments were arguing for investments in new businesses back then.

But lets get one thing straight – Woolworths supermarkets is not a disaster. Nor a failure. Nor anywhere near as imperilled as it was in the 1980s. It’s just acting like it is, and has lost sight of the core drivers of its success. Woolworths’ sales and profits from underlying trading are continuing to grow – not as fast as rivals, but ahead of GDP and inflation. My biggest fear right now is that the damage being done to Woolworths in the name of rectification will be irreparable in the longer term.

Let me start by destroying a myth. There is no such thing as shopper loyalty in supermarket shopping. No grocery buyer has ever bought 100 per cent of their entire family food and household needs from one supermarket chain – and never will. By far the most important determinant of foot traffic, and all the economic consequences that flow from it, is and always will be locational convenience.

The biggest single change in market dynamics in the last 10 years has been the clever and systematic rollout of Aldi’s distribution plan. They broke the rules on shopping centre allocation by talking the major shopping centre owners into allowing them in to compete in the same locations as Woolworths and Coles. They cherry-picked sites around the country that allowed them to disturb the foot traffic flows that Woolworths’ and Coles’ suburban supermarkets had established, but failed to defend.

That single change meant shoppers had locationally convenient choice. However shoppers have not and will not commit 100 per cent to any one supermarket – not to Aldi, nor any other chain. Those that shop Aldi do not and cannot buy all their goods from Aldi. Closing Woolworths stores, as evidence of industry, is not a clever response to a locationally driven category.

Nor is trying to undercut the 40 ton gorilla who can leverage an unrivalled international supply chain. The real lesson that Woolworths has to uncover lies in the loss of focus that led to the erosion of what used to be the highest basket dollar profit in the industry. Basket profit that was based on a deeply embedded merchant culture that knew what to contrive to affect that outcome from shoppers.

Woolworths supermarkets have spent outrageous amounts of money on data and systems that have caused it to go backwards. The leadership and culture of the business – once the best in the country – has been decimated. The loss of internal intellectual property is a disgrace.

The turning point in my opinion was the loss of James Strong as chairman. Strong was the last person Woolworths had in that role who actually understood the role of a chairman in a listed retail business. Woolworths, as a group, can be a powerhouse again. But it won’t be from divestment nor shrinking. It will be by re-igniting the merchant culture that made in successful. If it fails to do that, all that the current leadership is doing is preparing it to be more easily swallowed up by a global operator. And that would be a massive loss to Australian retail.

Peter James Ryan is head of Red Communication and can be contacted on (02) 9481 7215 or at peter@redcommunication.com.

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