The rise and fall of Woolworths

Woolworths’ rise, rise and fall – where to next?

After listing in 1993, Woolworths (WOW) was a great success story, much like Commonwealth Bank (CBA) and the first few years of Telstra (TLS). WOW really hit the performance trajectory in 2000 to the point where it gained the title as the world’s best grocer. They lost the mantle in 2013 however, leading to a rapid fall from grace. Shareholders were upset and those who are still invested are constantly asking whether WOW can regain their former glory.

In 2000 the WOW management team focused on streamlining the logistics side of the business and sharing cost savings with customers – novel from corporate management, but very successful at the checkout.

WOW’s logistics were helped dramatically by new technologies and the operations went from having inefficient state-based buying officers to revamped new IT and logistics systems.

At the same time, WOW’s management implemented a ‘double-loop’ strategy; focusing on cost saving from WOW’s end and sharing these savings with customers via lower prices.

Suddenly shoppers were buying more, and WOW were making more profit from each item. WOW were the envy of all their competitors because of the perfect win-win scenario which rapidly took WOW forward to become the world’s leading grocer.

In 2007 the WOW management team changed - at the unfortunate time of the GFC. WOW kept reducing their costs but stopped sharing the benefits via lower prices for shoppers. This was the beginning of the end although it took almost another seven years for the wheels to fall off.

Not only was the new management team at WOW keeping the profits for shareholders, but these profits were attracting the attention of global competitors. At the same time WOW’s management were taking the company’s profits to invest in new, uncharted and ultimately unsuccessful areas such as Masters Home Improvement Stores to compete with Bunnings.

With another management change in 2012, WOW saw competitors such as Aldi take 6% market share (10% of the east coast) and Costco 1%, while Coles overtook WOW, now performing better each year since 2010.

In 2015, another management change saw the distracting and money-sucking side-ventures dropped to stop the bleeding of money and a return to the core business of groceries. Masters was dumped, as all shoppers who had ever been to Bunnings, knew it needed to be. At the same time, faithful Big W was losing money for the first time ever and the WOW hotels’ earnings shrunk 10% of their profit in just one year.

Yet another management change occurred in 2016, bringing us to the present day. While vowing to return to the Double Loop success formula of the early 2000’s, there are now international competitors chomping at the bit for more market share; a more resilient and stronger domestic competitor in Coles and from what the history shows, a very long lead-time before the ship can be convincingly turned around.

A lot of this research is an extension from an article ‘Is Woolworths regaining its mojo?’ written by Daniel Mueller at Vertium Asset Management. Thank you Daniel for your thorough insights.