Shop­pers’ loy­alty will save Woolies

Its food and fi­nan­cial ser­vices di­vi­sions did well but won’t off­set the cloth­ing divi­sion losses

Mail & Guardian - - Business - Gemma Ritchie

Amonth af­ter Wool­worths Hold­ings re­leased its dis­mal fi­nan­cial re­sults, an­a­lysts have told share­hold­ers not to give up on the re­tailer be­cause it has a loyal cus­tomer base that is keep­ing its busi­nesses afloat.

The com­pany’s David Jones cloth­ing brand, which the com­pany bought in 2015, may not have sold well in South Africa but the re­tailer’s up­mar­ket food busi­ness grew by 8.5% this year, lead­ing to an over­all 1.6% in turnover growth.

“Wool­worths is in a class of its own with its fresh and pre­pared foods, cater­ing for the higher LSM [liv­ing stan­dard mea­sure] group,” said re­tail an­a­lyst Ron Klipin. “This makes this divi­sion es­sen­tially bul­let­proof.”

The re­tailer’s fi­nan­cial ser­vices divi­sion also grew by 4.6% — its debtors book was up 3.8% from last year — with this divi­sion con­tribut­ing 10.4% more to the group’s profit af­ter tax, at R286-mil­lion, than in the pre­vi­ous fi­nan­cial year.

But FNB Wealth Man­age­ment an­a­lyst Wayne McCur­rie be­lieves this will not mit­i­gate the prob­lems caused by the David Jones pur­chase be­cause the fi­nan­cial ser­vices are a sub­sidiary ser­vice. Rather, McCur­rie said, the growth in the re­tailer’s fi­nan­cial ser­vices busi­ness is a sign of a loyal cus­tomer base.

Klipin agrees that the fi­nan­cial ser­vices are not a big part of Wool­worths busi­ness but be­lieves the re­tailer will not be badly af­fected by bad debt dur­ing the re­ces­sion be­cause “Wool­worths is stri­dent on lend­ing cri­te­ria”.

With South Africa en­ter­ing a tech­ni­cal re­ces­sion — its first since 2009 — it may be odd to be­lieve that con­sumers with smaller wal- lets will con­tinue to shop at high-end re­tail­ers dur­ing down­turns in the econ­omy.

But with more than 15-mil­lion Wool­worths cus­tomers across the south­ern hemi­sphere (Wool­worths has stores in Aus­tralia as well as South Africa), Ves­tact an­a­lyst Paul Theron be­lieves the com­pany’s for­tunes will pick up.

“When the tide turns and con­sumers head back to their stores, prof­its will rise. We ex­pect that to fol­low the 2019 elec­tions.”

The re­tailer, how­ever, faces a fur­ther down­grade by S&P Global Rat­ings be­cause of its weak­en­ing non-food mar­kets. S&P down­graded Wool­worths by one notch last week be­cause of “chal­leng­ing macroe­co­nomic trad­ing con­di­tions in South Africa and struc­tural changes in Aus­tralia”.

Wool­worths is fo­cused on a high-end con­sumer base and, “in the­ory, their cus­tomers are al­legedly more re­silient in eco­nomic re­ces­sions”, McCur­rie said.

For years, Wool­worths cloth­ing has been con­sid­ered good value for money but with the pur­chase of sev­eral name brand stores — David Jones and the Coun­try Road Group, Mimco, Tren­ery and Witch­ery — the re­tailer moulded it­self to cater for pro­fes­sion­als and wealth­ier con­sumers.

Wool­worths hit a pot­hole when it bought the high-end depart­ment store, David Jones, a brand that, Klipin be­lieves, was “not un­der­stood” by South African con­sumers. The rea­son the brand may have fallen flat with con­sumers was that it com­peted with Wool­worths’ in­house brand Stu­dio W. Both tar­geted women be­tween the ages of 35 and 45 and the pric­ing of clothes was sim­i­lar.

“The style is too dif­fer­ent and the price is high. Cus­tomers don’t un­der­stand the Wool­worths of­fer­ing any­more,” said Klipin.

Which leaves Wool­worths, ac­cord­ing to Theron, “to fix the fash­ion of­fer, again. Go back to ‘beau­ti­ful, sim­ple, well-made ba­sics’ and hope for the best”.

What hap­pened at Woolies?

The up­mar­ket re­tailer has been los­ing value in its shares since late 2015.

In March 2001, Wool­worths shares could be traded for R29.53. By 2015, trad­ing peaked at R102.

But, ac­cord­ing to Theron, Wool­worths be­gan to “un­der­per­form rel­a­tive to our [Ves­tact’s] ex­pec­ta­tions”.

Wool­worths shares now trade at about R50.

“Con­sumer con­fi­dence in both South Africa and Aus­tralia has been weak. The Wool­worths share price has halved, back to R50 per share,” Theron added.

Ac­cord­ing to McCur­rie, the mar­ket had al­ready be­gun the process of im­pair­ing David Jones with the de­crease in Wool­worths shares since 2015. “The thing about an im­pair­ment,” McCur­rie said, “is that the mar­ket knows some­thing is wrong … Peo­ple are not see­ing the re­turn that they had ex­pected.”

Al­though an­a­lysts have ex­pressed their con­cern about the David Jones pur­chase, Wool­worths chief ex­ec­u­tive Ian Moir has said in sev­eral in­ter­views with other me­dia out­lets that the is­sues the re­tailer had were in its sys­tems and pro­cesses. He has in­sisted that the is­sues with David Jones have been cor­rected.

In the in­terim, David Jones has launched part­ner­ships with sev­eral high-end brands: Louis Vuit­ton, Prada, Chanel and Gucci.

In the long term, McCur­rie said, David Jones may con­tinue to be a prob­lem and “I would not be sur­prised if they sell this busi­ness”.

Wool­worths’ cloth­ing busi­ness may still strug­gle be­fore its sit­u­a­tion im­proves as con­sumers tighten their belts to cover the price in­creases in util­i­ties and fuel and switch to more “value for money” al­ter­na­tives.

“Con­sumers are turn­ing to more af­ford­able cloth­ing, es­pe­cially in ar­eas such as school uni­forms, and value for money from stores like Pep and Ack­er­mans, as well as Mr Price,” Klipin said.

Al­though Wool­worths will still be sup­ported by its high-in­come con­sumers, it will prob­a­bly see a dip in its in­come rev­enue as even its wealthy pa­trons tighten their belts in these tough eco­nomic times.

It is nor­mal for cloth­ing brands to get fash­ion wrong from time to time, said McCur­rie, adding that the re­tailer’s ap­parel and home di­vi­sions will “come right even­tu­ally”.

In the mean­time, it will be sup­ported by its loyal cus­tomer base, he added.

Mean­while, share­hold­ers are wait­ing pa­tiently for Wool­worths in­vest­ment in David Jones to sta­bilise and pay off — or see the brand sold.

Wool­worths had not re­sponded to re­quests for com­ment at the time of

Cap­i­tal at Capitec

Capitec Bank posted strong in­terim re­sults this week, an­nounc­ing that in the past six months it has at­tracted an av­er­age of 109 000 new cus­tomers each month. Its head­line earn­ings rose 20% to more than R2.46-bil­lion.

The bank has made a name for it­self by serv­ing lower-in­come clients with low-cost trans­ac­tional ac­counts and ac­cess to un­se­cured loans.

It also an­nounced that re­tail de­posits had risen by 20% to R66­bil­lion, sug­gest­ing cus­tomers find its sav­ings of­fer­ings in­creas­ingly at­trac­tive.

Ear­lier this year Capitec was tar­geted by re­search firm Viceroy, which had made a name for it­self by call­ing out Steinhoff’s sus­pect ac­count­ing. Capitec re­futed Viceroy’s re­port, say­ing it was

“full of er­rors”, and was backed by the South African Re­serve Bank. Cus­tomers, it seems, also buy Capitec’s line.

Water resur­faces

The City of Cape Town has an­nounced it will lower water re­stric­tions and tar­iffs next week. This is an in­terim mea­sure while it waits on the na­tional water and san­i­ta­tion depart­ment to make a de­ci­sion about water re­stric­tion lev­els for the sum­mer pe­riod.

Dam lev­els in the Western Cape have risen to 74% of stor­age ca­pac­ity; it was 37.5% for the same pe­riod last year. But ex­pec­ta­tions that an­other El Niño cy­cle is on its way have raised con­cerns about an­other drought. The South African Weather Ser­vice re­cently warned that, al­though the ef­fect of the pre­dicted El Niño is not known, early in­di­ca­tions are that it will mean Oc­to­ber, Novem­ber and De­cem­ber will be drier than nor­mal.

US rate hike a risk for SA

The United States Fed­eral

Re­serve raised in­ter­est rates on Wed­nes­day in line with mar­ket ex­pec­ta­tions. This was on the back of what it saw as im­prov­ing labour mar­ket con­di­tions and growth in the US econ­omy.

The rand showed some weak­ness, to R14.20 to the dol­lar from R14.13 to the dol­lar due to the de­ci­sion, which has im­pli­ca­tions for South Africa’s in­ter­est rates cy­cle, In­vestec econ­o­mist Annabel Bishop said.

“With the usual com­ment that the ‘stance of mon­e­tary pol­icy re­mains ac­com­moda­tive’, not ap­pear­ing in the state­ment this time around, it has been taken to im­ply the Fed has passed the half­way mark in its cur­rent rate hike cy­cle, and is likely nearer to its con­clu­sion,” Bishop said.

She high­lighted the risk of in­ter­est rate hikes for South


As the US hikes in­ter­est rates, South Africa will risk “sub­stan­tial fur­ther rand weak­ness” if the dif­fer­en­tial be­tween lo­cal and US in­ter­est rates widens be­cause rates re­main un­changed in South Africa. But po­lit­i­cally pro­posed in­ter­est rate hikes in SA “are prov­ing to see in­creas­ing re­sis­tance”, said Bishop.

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