Top of the food chain
Susman, the convenience king
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.
FOODOOD TURNOVER AND GROWTHSource: Woolworths annual report, 2006
SALES VOLUMESSource: Woolworths annual report, 2006
SALES DENSITYSource: Woolworths annual report, 2006
Paul Simpson, exeutive, real estate development, Woolworths
FOOD PERFORMANCESource: Woolworths annual report , 2006
Syd Vianello Analyst, Nedbank Securities