Top of the food chain

Sus­man, the con­ve­nience king

Finweek English Edition - - Front page - ANA MON­TEIRO

Sus­man. the con­ve­nience king

JO­HAN­NES­BURG’S north­ern sub­urbs of Sand­ton, Rivo­nia, River Club and Bryanston – prime Wool­worths Foods turf.

In th­ese ar­eas, the idea of “man at work to make money, wo­man at home to raise kids” has made way for af­flu­ent and as­pi­ra­tional dou­blein­come house­holds in which the pace of fam­ily and work life has ticked up and left lit­tle time for shop­ping and cook­ing.

Spot­ting the gap years ago,

Wo o l - worths shipped in the trol­leys, ready-packed veg­eta­bles and con­ve­nience meals – all wrapped up in ex­tended shop­ping hours – and has taken rushed-off-its-feet SA by storm.

To il­lus­trate this, look at how Woolies’ story has panned out in Joburg’s af­flu­ent north. The first Wool­worths Food Store in the area opened in Rivo­nia’s Mu­tual Place 15 years ago. Wool­worths then opened a Food Store at Morn­ing­side Wedge – al­most equidis­tant from Rivo­nia and Sand­ton (where Woolies also has one of its flag­ship stores).

Within a year, Morn­ing­side was trad­ing at ca­pac­ity, says Wool­worths’ se­nior ex­ec­u­tive for real es­tate de­vel­op­ment, Paul Simp­son: “There was hardly a mea­sur­able blip in trans­fer of sales in Rivo­nia and the same went for Sand­ton.”

The growth tra­jec­tory con­tin­ued along the same lines as more Food Mar­kets came on­line – on Sum­mit Road, in Bryanston and River Club, and Food Stops in En­gen fore­courts in Sand­ton and Rivo­nia.

And still, there’s room for more. Simp­son says Wool­worths is look­ing at putting fur­ther stores in that fairly tight catch­ment area, which is 15km2 in size, en­com­pass­ing about 2 000 homes.

While the ex­pe­ri­ence in Jo­han­nes­burg’s north­ern sub­urbs can’t be repli­cated ev­ery­where, it il­lus­trates that Woolies Foods’ growth story has been noth­ing short of phe­nom­e­nal.

As Ned- bank Se­cu­ri­ties re­tail an­a­lyst Syd Vianello puts it: “We thought it would grow like hell, but it’s amaz­ing that the level of can­ni­bal­i­sa­tion has been so low and the ac­cep­tance of prod­uct across a con­stantly broad­en­ing con­sumer base so high.”

Woolies food sales have grown at an av­er­age com­pound rate of 22% over the past five years, with food con­tribut­ing the lion’s share – 52% – of to­tal re­tail sales in 2006, com­ing in at R6,9bn of the R14,2bn to­tal.

And the Wool­worths trol­ley is gain­ing mo­men­tum: in the half-year pe­riod to endDe­cem­ber, sales in the food di­vi­sion grew by 25,9%, reach­ing R4,2bn. The per­cent­age growth fig­ure matches lev­els seen five years ago.

For the same pe­riod, com­pa­ra­ble store growth was up 15,1%, com­pared with a 12,2% im­prove­ment in the cor­re­spond­ing pe­riod the year be­fore.

This growth has trans­lated into mar­ket­share gains. “No easy feat in the highly com­pet­i­tive food re­tail en­vi­ron­ment,” says Vianello. Wool­worths has con­sis­tently man­aged to gar­ner cus­tomers from its com­pe­ti­tion, go­ing from 7,3% mar­ket share in De­cem­ber 2003, to 9% by the end of 2006, ac­cord­ing to Wool­worths data.

“It’s a glob­ally unique story,” says Ge­orge Skin­ner, ex­ec­u­tive chair­man of the SA Coun­cil of Shop­ping Cen­tres (SACSC).

“Woolies sensed ear­lier than any­one else that the cus­tomer was chang­ing dra­mat­i­cally

and that the world in which the cus­tomer lived in post-apartheid SA was so dif­fer­ent from what SA was like in the iso­la­tion years.”

In apartheid SA, cus­tomers were stereo­typed – along racial lines – and thus easy for re­tail­ers to de­fine; since 1994, the de­mo­graph­ics have changed dra­mat­i­cally, some­thing that Woolies un­der­stood very well early on, says Skin­ner.

“It’s not nearly as sim­ple for re­tail­ers now,” says Vic­tor Sny­ders, MD of re­tail prop­erty spe­cial­ist, Grey­hawke.

But Wool­worths, he says, de­fined its tar­get cus­tomers for foods early in the game and it’s clearly got the for­mula for reel­ing them in spot on.

“In foods, the philoso­phies of qual­ity, con­ve­nience and in­no­va­tion have per­haps been more deeply and con­sis­tently en­trenched over a longer pe­riod of time,” said Wool­worths CEO Si­mon Sus­man in the com­pany’s 2001 an­nual re­port.

“There is also a clearer un­der­stand­ing of the cus­tomer, who tends to be as­pi­ra­tional and in gen­eral of higher in­come, some­one who seeks high stan­dards to­gether with con­ve­nience.

With masses of peo­ple join­ing the eco­nomic main­stream, and “enor­mous mid­dle and up­per in­come growth” re­sult­ing in peo­ple mi­grat­ing to both what used to be tra­di­tion­ally white sub­urbs and new sub­urbs (such as Midrand, Pre­to­ria East, and the north­ern sub­urbs of Cape Town) in or­der to be closer to work, ev­ery as­pect of South African life is chang­ing, says Skin­ner.

Peo­ple live in smaller homes that don’t ac­com­mo­date large freez­ers, with the con­cept of buy­ing in bulk be­com­ing a thing of the past.

“As a re­sult, peo­ple are stop­ping to buy food on the way home more fre­quently,” says Skin­ner.

And with the num­ber of dou­ble-in­come fam­i­lies on the rise, eat­ing habits are in­evitably chang­ing as peo­ple turn to fast foods and con­ve­nience foods.

All this has shaped the way that re­tail­ers tai­lor their of­fer­ings in stores and how re­tail prop­erty de­vel­op­ers approach new de­vel­op­ment. Skin­ner ex­plains, for ex­am­ple, that small cen­tres now have a higher per­cent­age of fast-food out­lets and fresh food-type stores than be­fore.

“Th­ese fac­tors have placed a lot of pres­sure on con­ve­nience, and Wool­worths has read this well. It’s tak­ing ad­van­tage of the need for fresh but con­ve­nient food,” says Skin­ner.

The com­pany is bring­ing qual­ity and con­ve­nience closer to home by open­ing smaller food-only stores in new and ex­ist­ing sub­ur­ban ar­eas. Simp­son says there are be­tween 150 and 200 Food Mar­kets planned for the next three years (to add to a cur­rent to­tal store base of around 174 owned and 136 fran­chised stores, al­though food stores are all cor­po­rate), equat­ing to ap­prox­i­mately one new Food Store open­ing ev­ery week un­til 2009.

Woolies ap­peals to the all-im­por­tant as­pi­ra­tional qual­i­ties South African cus­tomers seek. “Among South Africans of all races, Woolies is seen to be an ‘as­pi­ra­tion shop’. While ev­ery­body likes it, some can’t af­ford it,” says an an­a­lyst who did not want to be named.

Woolies un­der­stands it of­fers a pre­mium prod­uct and is jus­ti­fy­ing its pre­mium by trad­ing on the “value for money ticket”. Nev­er­the­less, it at­tracts the best brands (and treats its sup­pli­ers well), in line with the top-qual­ity el­e­ment of its own private-la­bel of­fer­ing. “Af­ter view­ing the lack of other brands in stores as a po­ten­tial weak­ness, Woolies started stock­ing branded lines about four years ago. Strate­gi­cally, this was a strong move,” says the an­a­lyst.

While the strat­egy of avail­abil­ity, con­ve­nience and qual­ity aimed at a clearly de­fined cus­tomer was planned and ar­tic­u­lated early on, the ex­plo­sive growth Woolies has ex­pe­ri­enced has placed strain on the avail­abil­ity of prod­ucts at times.

“We’ve learned from the prob­lems ex­pe­ri­enced over Christ­mas,” says Sus­man. “It’s an is­sue that we are ad­dress­ing, and will im­prove in the sec­ond half of fi­nan­cial 2007 [to end-June] as we con­tinue the good work

we’ve done on bed­ding down our new food sys­tems.”

Qual­ity re­mains paramount. “We’ll never let up our qual­ity drive,” says Sus­man. He ex­plains that the num­ber of com­plaints is com­ing down, but when a com­plaint is es­ca­lated, ac­tion is im­me­di­ately taken.

When faced with a qual­ity prob­lem, Woolies would rather deal with empty shelves than con­tend with sec­ond best. A re­cent ex­am­ple re­lates to av­o­ca­dos im­ported from Spain. One sup­plier’s avos were not up to scratch, go­ing brown be­fore the ‘best-be­fore’ date. All were sub­se­quently with­drawn and sent back to the sup­plier in Spain.

Part of the qual­ity propo­si­tion is the growth in the com­pany’s or­ganic food and cloth­ing of­fer­ing, which con­sumers are lap­ping up, ac­cord­ing to Woolies’ num­bers.

Sus­man says South African con­sumers are ahead of world trends when it comes to the con­sump­tion of or­ganic goods; such is the aware­ness that more or­ganic cloth­ing prod­ucts are sold than food prod­ucts.

Wool­worths is look­ing at ways to tap fur­ther into the emerg­ing mar­ket. Be­sides “fill­ing in a num­ber of gaps in res­i­den­tial ar­eas”, as Simp­son puts it, Wool­worths is start­ing to go back into city en­vi­ron­ments, as it has al­ready done in Cape Town with much suc­cess.

The Jo­han­nes­burg CBD is next. “There are good in­di­ca­tions of the Jozi CBD be­com­ing an ac­tive and cos­mopoli­tan cus­tomer base,” he says.

At the same time, be­cause of the growth in res­i­den­tial ar­eas and ex­pan­sion in ar­eas such as Wood­mead Four­ways and mid­dle-man­age­ment res­i­den­tial ar­eas clos­ing the gap be­tween Jo­han­nes­burg and Pre­to­ria, Wool­worths is look­ing at sites for new small cen­tres and is in­volved in planned su­per-re­gional malls that will be opened up in Gaut­eng.

Th­ese in­clude the much talked-about Zonkiz­izwe project in Midrand, be­ing de­vel­oped by Old Mu­tual Prop­erty In­vest­ments (OMPI, for- merly known as Old Mu­tual Prop­erty Group) – a huge mixed-use de­vel­op­ment that has been on the cards for years – and the de­vel­op­ment of the Franken­wald site at the Buc­cleuch in­ter­change to the north of Sand­ton.

OMPI’s head of in­sti­tu­tional prop­erty in­vest­ments, Colin Young, says OMPI is com­mit­ted to Zonkiz­izwe and has ap­proved R1,2bn for in­fra­struc­ture and Gau­train capex spend. OMPI also has the zon­ing rights in place.

“Be­sides Zonkiz­izwe,” says Simp­son, “there are at least an­other four of this mag­ni­tude on the cards which haven’t been an­nounced, but all are lo­cated at ma­jor nodes and are aimed at mid­dle-in­come earn­ers.”

Skin­ner says there’s def­i­nitely room for more growth, given that the up­ward mo­bil­ity of the black com­mu­nity is un­stop­pable.”

What of the ef­fect of this growth on Woolies’ com­pe­ti­tion – the likes of Sho­prite, Pick ’n Pay and Spar?

An­a­lysts say Pick ’n Pay has been the net loser of mar­ket share as a con­se­quence, al­though it’s dif­fi­cult to come by fig­ures. Given that Sho­prite dis­closes that it has held on to mar­ket share, as has Spar, this is the only con­clu­sion to draw.

“De­pend­ing on the lo­ca­tion, you’ll see us work­ing to­gether and be­ing com­ple­men­tary to our com­pe­ti­tion,” says Simp­son.

Skin­ner notes that the com­bi­na­tion of a Woolies and a Su­per­Spar in a shop­ping cen­tre is a win­ner for both re­tail­ers: “That’s when they do best, as cus­tomers get all they need.”

While cus­tomers fall over their feet for Woolies’ food of­fer­ing, they seem more ret­i­cent about the cloth­ing propo­si­tion, a fact sup­ported by re­search by OMPI, which has Woolies as a ten­ant at many of its malls, in­clud­ing Men­lyn Park Shop­ping Cen­tre in Pre­to­ria and Cavendish Square in Cape Town.

OMPI’s Young – an ex se­nior em­ployee of Woolies – says the brand has enor­mous pull in the mar­ket. “Woolies mod­elled its busi­ness on Marks & Spencer in the UK, which has sim­i­lar prob­lems in that its food of­fer­ing caters for the up­per end of the mar­ket, while the cloth­ing is more mid­dle mar­ket.”

Young sup­ports the W Col­lec­tion strat­egy, but says that the lack of ex­clu­siv­ity in its other ranges forces him to buy else­where. “I am def­i­nitely a sup­porter of its food of­fer­ing but can’t say the same of cloth­ing. This dis­con­nect needs ad­dress­ing, and Woolies may need a shift in its strat­egy through growth by ac­qui­si­tion, sim­i­lar to Tru­worths’ pur­chase of Young De­sign­ers Em­po­rium.”

The suc­cess of the food busi­ness also has pos­i­tive spin-offs for Woolies’ cloth­ing busi­ness, as Woolies is find­ing ways to boost its cloth­ing sales by lever­ag­ing off its food stores.

“In Her­manus we are tri­alling stores that com­prise both a Food Store and a con­cen­trated cloth­ing of­fer­ing, but in a much smaller space than which our full-line stores op­er­ate in,” ex­plains Sus­man. “The idea is to place th­ese stores mid-dis­tance be­tween two ma­jor shop­ping nodes, and thus bring­ing fur­ther con­ve­nience to our cus­tomers,” he says.

Given the way South African con­sumers have thrown their sup­port be­hind the food of­fer­ing, the smaller com­bined of­fer­ing is likely to be a win­ner.

Si­mon Sus­man,

Wool­worths CEO

FOODOOD TURNOVER AND GROWTH

Source: Wool­worths an­nual re­port, 2006

SALES VOL­UMES

Source: Wool­worths an­nual re­port, 2006

SALES DEN­SITY

Source: Wool­worths an­nual re­port, 2006

Paul Simp­son, exeu­tive, real es­tate de­vel­op­ment, Wool­worths

FOOD PER­FOR­MANCE

Source: Wool­worths an­nual re­port , 2006

Syd Vianello An­a­lyst, Ned­bank Se­cu­ri­ties

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