Woolies: a tale of two continents
SA business suffers as Australian acquisitions demand attention
A lot of effort is being put into turning around David Jones
Matthew Zunckel Equity analyst at Vele Asset Managers
● Operating a company in multiple regions is tough. Even in the age of private jets, Skype and e-mail.
Woolworths took the gamble four years ago with its acquisition of David Jones, a struggling Australian retailer more than 11 000km away and operating some nine hours ahead of its Cape Town headquarters.
Woolworths also owns Country Road, which trades in New Zealand as well as Australia and South Africa.
Aligning all three divisions with their separate boards was the task facing CEO Ian Moir, who has headed the South African retailer since November 2010.
This week, the difficulty of managing operations on two continents became apparent. Woolworths warned shareholders that headline earnings may drop as much as 17.5% because of difficulties in both regions: a sluggish South African economy and an Australian retail environment that is under pressure.
The retailer’s shares fell nearly 9% on the news but recovered to end the week at R67.29. The share finished 2017 down 8%, following a 29% decline in 2016.
Matthew Zunckel, equity analyst at Vele Asset Managers, said the problem with running separate businesses in two vastly different geographies was that it was difficult for management to focus on both at the same time, given that they had different markets and required different approaches.
This is particularly the case when companies buy into businesses with issues, on other continents, that require specific interventions. David Jones is a prime example.
“The consequence is that the core business at home can sometimes suffer, as the senior, most qualified executives focus on turning around the new acquisition.
“We may be seeing this to some extent at Woolworths, where their South African clothing business has underperformed over the past year while a lot of effort is being put into turning around David Jones,” Zunckel said.
Reuben Beelders, portfolio manager at Gryphon Asset Management, said few retailers could successfully operate in multiple territories without full support teams.
Apart from the different time zones, which made communication difficult, retail as a sector had proved difficult to “export” from one country to another, he said.
A number of large retailers, such as the UK’s Tesco, failed to achieve success in the US.
The only success appears to be notched up by the big-box discount retailers, but even this seems to be confined to Europe.
Zunckel said a change in Woolworths’s management strategy to a more decentralised structure could work in helping executives keep a better check on its geographic spread.
But it would require a “fresh slate” as in the current situation the value of David Jones was significantly overstated on Woolworths’s books.
A significant impairment would need to take place — but this would be a clear admission by management that Woolworths overpaid for David Jones, “something they may be reluctant to do”.
Food offering
And in fact such a move would miss the point of the David Jones acquisition in the first place: to exploit synergies with the rest of the group, and in time to introduce private-label brands from Woolworths into David Jones.
Analysts agree that the clothing and food businesses in South Africa remain goodquality assets with great locations and a niche carved out in the minds of the South African consumer.
However, David Jones’s business model is at a questionable stage and is dragging down the rest of the group.
The question is whether management will be able to create a sustainable business model with David Jones.
There is that possibility with the roll-out of the food offering in Australia.
Unfortunately, this will take time to play out, and until it does, David Jones will likely continue to be a casualty of the global declining department-store sales trend, say analysts.