Woolworths to sell Big W?

BIGWSteinhoff International, the South African based retailer with deep pockets and an insatiable appetite for growth, is actively shopping for further retail opportunities in Australia.

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In Australasia, the retailer owns Freedom, Snooze, Bay Leather Republic, Best & Less and Harris Scarfe and Postie and has been in talks with both The Good Guys and Woolworths about further acquisitions.

Steinhoff International also has a large format home concept, Poco, with two locations in Sydney and is opening Debenhams stores in prime locations under a license to the British department store group.

The Debenhams venture is aligned with the Harris Scarfe chain that was acquired along with Best & Less in 2014 when Steinhoff International snapped up another South African retailer, the Pepkor Group.

The Poco concept is key to the current ambitions of Steinhoff International, which operates through a subsidiary, Steinhoff Asia Pacific Holdings, because the company has been unable to rollout the concept since it was launched in Blacktown in western Sydney in 2013.

The 6000sqm Blacktown Megacentre store was to have been the first of 30 stores around Australia within five years, yet Poco’s rollout in its first three years has been limited to just one more store, at the Casula Crossroads Homemaker Centre in southwest Sydney.

Poco 2Poco started in Germany and has more than 100 stores in Europe, but Steinhoff International’s rollout ambitions for Australia were initially subdued by the need to fine-tune the retail formula for the local market.

However, more problematic has been the difficulty in finding suitable locations for stores as Masters Home Improvement, Bunnings and other large format retailers snapped up suitable Poco sites.

Poco sells furniture, bedding, flooring, electrical goods, lighting, homewares, kitchens and DIY products and aligns with the Steinhoff International market positioning towards value-conscious consumer segments.

Despite its current network of 477 stores across six retail brands in Australasia, Steinhoff International regards its investments in the local market as underweight and is keen to accelerate its growth – through the Debenhams license, opening four or five stores in the short term, with a longer term target of at least 10 – but more significantly through Poco.

The Muir family have had recent discussions about a trade sale with JB Hi-Fi and private equity firms as well as Steinhoff International, but have indicated they are proceeding with the float option with no acceptable trade sale proposal on the table.

While analysts value The Good Guys at between $800-$900 million, the Muir family are understood to want at least $1 billion for the national electrical goods and appliances chain, with one valuation understood to be as high as $1.5 billion.

The Muir family have indicated they would consider alternative trade sale offers for The Good Guys, but most parties are wary of paying over the odds – even JB Hi-Fi, which would have much to gain in scooping up a rival that would further consolidate the electrical goods and appliances market.

While Inside Retail Weekly understands talks with the Muir family are dormant at the moment, Steinhoff International could yet be prepared to pay a premium for The Good Guys. However, it seems such a move depends on more recent talks with Woolworths about the Big W discount department store chain and Masters Home Improvement.

The Woolworths board of directors are scheduled to consider next Monday (July 4) the expressions of interest lodged for the Masters Home Improvement venture and the Home Timber and Hardware business.

Metcash, the listed wholesaler, is the most likely suitor for the Home Timber and Hardware business, although it may face a left-field bid from a private equity investor or one of the other hardware groups who are keen to add more independent retailers and the well recognised brand to their customer lists.

The interest in Masters Home Improvement is understood to be almost entirely in the venture’s properties, both developed and undeveloped, and there are likely to be quite a number of expressions of interest.

The Masters Home Improvement stores represent the equivalent of around four years of large retail format development and would provide Steinhoff International with the land bank and established retail sites it needs for Poco.

There are likely to be several retailers interested in cherry-picking some Masters Home Improvement locations, including rival Bunnings Warehouse, but Steinhoff International would have an interest in a larger slice of the properties, if not them all.

Interestingly, Poco already has DIY and kitchen departments and in its international portfolio of more than 40 retail brands also has the Hardware Warehouse chain of more than 20 stores in Africa, which could potentially co-locate with Poco in the larger Masters Home Improvement store footprint.

Inside Retail exclusively reported last week that Steinhoff International CEO, Markus Jooste, is understood to have held talks with Woolworths about a package purchase of the Big W chain and selected Masters Home Improvement sites.

Neither company has made comment or advised the respective stock exchanges in Australia, South Africa or Germany, but Inside Retail was informed by a reliable source that there have been discussions about the struggling Big W chain as well as the Woolworths and Lowes exit from the failed hardware venture.

Woolworths uncertain on Big W

BigWWoolworths has recently declared that it plans to retain Big W and recently appointed former Oroton CEO, Sally Macdonald, as MD for the 190-store chain, which suffered a 5.7 per cent fall in sales, to $4.1 billion, for the 2015 full financial year and a 25.3 per cent freefall in earnings to $114.2 million for the same period.

Prior to Macdonald’s appointment, Woolworths was mulling over the divestment of Big W and spoke with at least one private equity firm, canvassing a sale and, it is understood, a joint venture model that would have injected capital into the ailing business.

Big W sales for the first half of the current financial year fell a further 3.9 per cent from the dismal result posted in the comparable FY15 half, and deteriorated further in the third quarter, dropping by 4.6 per cent against the same period last year.

Big W earnings before interest and tax for the first half of FY16 plunged 38.7 per cent with further disappointing sales and an inevitable struggle for profitability due to heavy clearance activity for merchandise misses in both the recent summer and current winter seasons and a promotional driven Easter period.

With high outstanding inventory levels, Big W faces more clearance pressures in the fourth quarter and will no doubt be forced to absorb other costs associated with Macdonald’s initial turnaround initiatives.

Woolworths faces a tough decision on whether to exit the struggling Big W business, accepting Steinhoff International’s overture, or commit to a long-term rebuild with an uncertain outcome given that Kmart took five years for its turnaround program to achieve results.

Gayle Dickerson, national retail leader, Grant Thornton, told Inside Retail that any turnaround strategy implemented at Big W will need to include store refurbishment, consolidation of underperforming stores and a re-focus on the chain’s core brand offering, which has lost traction with customers.

“Steinhoff may be able to bring new product ranges that offer new overseas trends, good quality at value to Big W customers,” Dickerson said. “Retailers compete in a global market now and Australian retailers need to be able to compete with quality brands and value for money.”

Among retail analysts, there is certainly some enthusiasm for Woolworths divesting Big W and concentrating on its food and liquor business.

DDS category getting squeezed

The real issue for Woolworths with the Big W business, however, is whether there is still room in the category and any real prospect of a return on capital invested in a turnaround strategy and sustainable long-term sales and earnings growth.

The three discount department store chains, Kmart, Target and Big W, have all been squeezed by new competitors, including Bunnings Warehouse, Super Cheap Auto, JB Hi-Fi, Toys-R-Us, The Reject Shop, Adairs and the now Steinhoff International-owned Best & Less and Harris Scarfe.

Myer has also impacted on the category, along with Harvey Norman and The Good Guys, as well as Costco and Aldi.

Even specialty retailers such as Baby Bunting and Howards Storage have crimped the sales and curbed the growth and profitability of the three discount department store chains.

Big W’s current problems result from the overall competitive squeeze as well as supply chain problems and an expansion spike that boosted sales initially but provided virtually no gain in earnings because of over-capacity in the category and the fact Woolworths’ store locations were often inferior to those occupied by the well established Kmart and Target.

Macdonald has been credited with the turnaround of the Oroton Group, having divested three businesses, launched and developed its online offer and expanded into new product categories and overseas markets.

While Woolworths has heralded McDonald’s strong knowledge of retail and consumer branded markets, online experience, management record in category development and business simplification, Oroton’s luxury brand specialty retail experience is a world away from the crowded mass merchandise battleground of Big W.

Wesfarmers has effectively conceded the discount retail category needed consolidation by merging the back of store operations of Kmart and Target and is re-engineering the troubled Target.

Wesfarmers wants to take costs out of the business, sharpen the market positioning of Target, improve product sourcing and ensure the right stores are in the right markets, both in terms of the Target and Kmart brands, but also the size of stores.

While Woolworths potentially faces an uphill battle to reinvigorate Big W if it rejects the Steinhoff International overtures or invites other offers for the business, the South African retailer has more options and the investment capital for a quicker turnaround.

Steinhoff International is obviously not averse to trading under multiple brands and would gain significant operating scale in the general merchandise categories by adding Big W to its existing Harris Scarfe, Best & Less and Debenhams business.

The acquisition could help Harris Scarfe and Best & Less to rebuild profitability, however Steinhoff International could also convert some of the existing Big W stores to Poco to accelerate the rollout of that concept.

Steinhoff International is a viable exit option for both The Good Guys and for Woolworths’ Big W and Masters Home Improvement businesses.

In fact, it has deep enough pockets to snap up both opportunities, albeit Woolworths looks to offer the preferred option for the South African retailer, which currently has more than 6500 stores under 40 retail brands across 30 countries that generate annual sales of close to $A17 billion.

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