FASHION FAIL
CEO justifies pouring more cash into Aussie brand’s transformation
Woolworths this week reported an annual loss as its Australian business continues to struggle and women consumers shunned its clothing ranges.
● It has been only four years since Woolworths bought Australian department store David Jones, but the move could go down in history as a costly strategic misstep. Despite this, Woolworths plans to spend a further A$124m (about R1.29bn) capex at David Jones as it prepares for the relaunch of its Elizabeth Street flagship store in Sydney next year.
Speaking in his office in Longmarket Street, Cape Town, Woolworths CEO Ian Moir said he spends an equal amount of time between Australia and SA as he attempts to salvage the department store.
David Jones’s problem is that it is an oldfashioned department store business that has not kept pace with changing consumer tastes, and Woolworths’ attempts at a turnaround have failed as it competes with global retailers.
“David Jones has undergone two years of the most inordinate transformation,” said Moir. “When we bought the business, the first two years were good, we were trading up at 16% in those first two years, but we knew that we had to change the business. We took on a lot. We knew we were taking on a lot and it cost us. It cost us financially, it cost us in disruption, but it had to be done.”
In the past two years, Woolworths has faced delays in redeveloping David Jones — after buying it for R21.4bn (A$2.1bn) in 2014 — as Moir’s efforts fell flat. Earlier this year, Woolworths admitted it had bought David Jones at a 33% premium and was forced to impair its Australian operations by almost R7bn. This cost it a loss after tax of R3.5bn in the 2018 financial year ended June, from a profit of R5.4bn in the previous year.
But when asked whether a separation of its Australian assets may be on the cards, Moir said he could not see the logic in separating the SA and Australian businesses. “We’ve benefited from scale. We’ve taken costs out of the business and we’ve been through two horrendous years of transformation and we want to benefit from that.”
Moir said that “the Country Road Group [CRG] has been part of the Woolworths group for 20 years; now is not the time to separate. I can’t see the logic in doing that, and certainly not now”.
Woolworths chairman Simon Susman said building a business from the ground up was tough. “When I launched the Woolworths food business in the 1980s, the board kept telling me to close the business, we are going nowhere. We were not making any money but we persevered.”
The food business has now overtaken the clothing business in revenue and profit.
“We had the same issue in the 2000s with Country Road, but CRG is now an integral part of this business, it makes a good return and will make an even better return going forward,” Susman said.
However, “we’ve just written off A$712m of shareholders’ money. We are embarrassed. We shouldn’t have done that, but we believe in the business. It will just take time.
“We’ve learnt a hell of a lot of lessons. We’ve got a team that’s focused so if in two years’ time we are having the same conversation, well, we’d better be rethinking it, but I’m quite confident that we will not be in the same situation,” Susman said.
In July, Woolworths also announced that it was cutting jobs as it tried to stabilise the David Jones business. This meant the loss of 15 head office jobs, including that of its Australian MD, John Dixon.
Moir said: “We haven’t disclosed the number of jobs lost [in total]” due to an agreement in this regard with the government of the state of Victoria. “But it was less than you would think because it was a level of quite senior people. It was A$20m out of David Jones and A$5m out of Country Road Group and that’s our sustainable ongoing saving.”
After its failures with David Jones in Australia, Woolworths will be going “back to basics” in its home market as it seeks corrective measures to lift its poor trading performance. During the financial year, Woolworths’ food replaced clothing as its best performer. Food accounted for R2.1bn of group turnover, an increase of 9.6% from the previous year, whereas its clothing turnover fell 21.3% to R1.7bn in the full year ended June 24.
“We’ve gone back to focus on the basics, focus on the key items to build our ranges right and get the basics right. We are going back to being Woolworths rather than subbrands. We have just launched a new season in which we’ve seen a switch,” said Moir.
Part of the setback in SA was due to putting too much emphasis on its house brand, Edition, which is targeted at younger fashion-conscious women, when the group’s core customers are older consumers, he said.
“We made it 30% of our womenswear offer and we looked to take that business more fashionable. But when you saw where [the] design [division] took the brand, it was younger again and we ended up focusing on the 18-to-20-year-old, and that was a mistake.”
Woolworths Classic, which fell under the local David Jones brand, would now return to the Woolworths private label.
“What Woolworths really stands for is great basics. You need to come into Woolworths for the great basic items. The key item in your wardrobe, the staple, because that’s what everybody thinks Woolworths does best,” Moir said.
But Delphine Govender, chief investment officer at Perpetua Investment Managers, said: “The DNA of the firm is deep and it is clear, but what I’ve always struggled with is why they have such clarity of focus in the foods business, yet that they have struggled to consistently translate this to clothing.
“It’s as though something falters where that DNA doesn’t run deep enough in clothing. If you go over the past 20 years, while clothing is inherently cyclical, they repeatedly self-inflict poor product decisions to only exacerbate the cycle.”
Govender said the food business overtaking what clothing earned was “quite a seminal issue. At a profit line this is the first time that it’s switched.
“There seems to be an unwillingness to accept their core identity in clothing as if that commitment to identity existed in every single buyer, they simply wouldn’t put high fashion in.
“I would like to know that after all these years, Woolworths accepts who they are in clothing, which is mainly being the go-to retailer for good quality basics, and that their customer has not changed,” she added.
When asked what he could have done better, Moir said: “I wish I had bought [David Jones] at a different time and therefore could’ve paid a different price, and I wish I had acted quicker on restructuring people.
“The board have given me time and they have expressed their support and belief in me. Do I think the board are calling me on performance? Yes, they are, it would be remiss of them not to.
“But they do believe that my team are the right people to do it. They are not happy about performance but they are happy about where we are heading.”
But Moir may be on borrowed time. Woolworths spokesperson, Susie Squire, said Moir was due to retire in 2021, adding that he “remains instrumental in the turnaround of the group and plays an active role in informing group CEO succession planning and that of his executive team. The board will work with an independent adviser to ensure that an appropriate successor is in place by that time.”