Australia's supermarkets are beginning to find themselves in a very similar situation to those here in the UK, with the two biggest brands – Woolworths and Cole – now facing stiff competition from discounted brands, such as Aldi. In the UK the likes of Tesco have suffered huge losses because of the growth of the cheaper alternatives and Australia's retailers are keen not to find themselves in the same position.
Woolworths in particular has wised up to the situation, after it announced in February that it would be undergoing a strategy reset, following a fall in profits in the previous half. With the supermarket facing its slowest growth in 20 years, with net profits down 3.1 percent to $1.28 billion in December, it announced that it would be sacrificing short term growth in favour of finding $500 million in cost savings and investing in delivering better service for the customer.
Central to these investments are IT, supply chain, digital and 'big data'. Again, similarly to the UK, Woolworths has recognised that if it wants to compete with the lower end of the market, then it not only needs to be able to lower its costs through efficiency investments, but it needs to deliver an exceptional multi-channel customer experience.
And today Woolworths has announced that both its CEO Grant O'Brien and its head of retail services Penny Winn will be stepping down from their positions, suggesting that new management is needed to make this strategy work for the retailer. The company also announced 1,200 job cuts as part of the transformation plan.
O'Brien has been CEO since 2011 and a global executive search process including external and internal candidates will now be conducted by the Woolworths board to find his replacement. O'Brien will remain CEO and managing director through this period of transition. He said:
“Woolworths is family to me and I have been honoured to work alongside our team of 200,000 hard-working, talented people for the past 28 years. Woolworths has a proud tradition of success and growth which has been built by dedicated Australians and New Zealanders.
“At the recent Investor Day we set out clear strategies to grow our businesses over the next three years and we have been working hard to execute these plans. However, the recent performance has been disappointing and below expectations. I believe it is in the best interests of the Company for new leadership to see these plans to fruition.
“We have been very transparent about the key challenges and opportunities for growth for each of our businesses, including setting out detailed plans at our recent Investor Day to win back sales momentum within our Australian Food business.
Outgoing CEO, Grant O'Brien
“We are on track to exceed the forecast of $500 million in cost savings across FY15 and FY16 and we have commenced investing these funds into lower prices, better service and an enhanced offer for customers. We are now at our most competitive position on price since January 2014, and our in store experience is greatly improved.
Meanwhile Winn, whom has been responsible for heading up the company's big data initiatives, multi-channel delivery and online investments, is expected to be replaced by an internal candidate.
Digital investments
Following its disappointing half-year results, which spawned the plan to find $500 million in savings and lower the costs for customers, Woolworths laid out a three pronged approach to its transformation strategy. It said it was going to focus on the following:
Cost: Improving efficiency and cost position through taking 'real dollar' costs out in a low inflation environment
Customer: Investment in a multi-faceted and seamless offer to our customers
Growth: Growing our customers and market share
With Woolworths' online sales reaching over $1.2 billion, according to its last full year results, having grown over 50% on the previous year, the retailer is astute to the need to continue investing in its digital offerings to support the above three strategic objectives.
This is evident from a number of initiatives that have taken place over the past year or so. For example, Woolworths opened Australia's first full range dedicated online fulfilment grocery store, it has introduced order tracking via GPS routing on online orders, rolled out Click & Collect and has announced a partnership with eBay so that shoppers can collect their items bought from the auction site in-store.
Woolworths has also made investments in multi-channel shopping, most notably with its acquisition of EziBuy for $306 million. EziBuy is an online, catalogue and call-centre retailer and was acquired by Woolworths in the hope of driving online growth in is general merchandise division – an area that has proven tricky for retailers in the UK to grow organically.
Woolworths Food Group Managing Director, Brad Banducci, recently commented on the company's need to continue these improvements. He said:
Woolworths is Australia’s leading supermarket retailer and has great people, assets and capabilities.
We have 14.6 million regular customers and 500,000 online customers, and they are visiting us more frequently than ever before, but they are also getting fewer of their needs exclusively from us.
Put simply, we need to gain customer trust and a greater share of their shopping basket, and we have a clear plan and the investment capacity to do so.
By getting Customers to put us first, we can regain the sustainable sales momentum we need to extend our leadership.
However, it is investments in Woolworth's Mercury 2 programme that the retailer hopes will drive even higher cost savings and growth.
One of the company's most successful chief executives was Roger Corbett, who delivered double digit sales and profit growth over a ten year period up until 2009 by investing in cost saving programmes, which were cost
savings then passed back on to the customer. This is effectively the same strategy now being favoured again by the supermarket chain.
One of Corbett's most successful cost saving programmes was Mercury 1, which was essentially huge investments in IT and improving the company's supply chain. And the company has decided that given the programme's success during the early 2000s, it is now going to give it a refresh and has announced that it will invest $1 billion in Mercury 2, the second phase of the project.
However, this time around, alongside the company's investments in supply chain efficiency and new technology across its distribution centres, it is also going to try and learn more about its customers through advanced analytics.
As we have seen in the UK, rewards programmes and loyalty schemes are quickly becoming the backbone of a supermarket's digital growth plans. Not only does gleaning insights from customers give you the opportunity to sell more, it also allows you to provide a better customer experience by understanding their needs.
Woolworths is planning to do this via its 50 percent stake in data analytics company Quantium, which it says allows it to gain an even better understanding of its customers' needs and continues to tailor the experience using these insights. Woolworths says that it now has a total of 9.8 million rewards customers.
Out-going CEO O'Brien recently said:
We are building a set of world-leading cross-business supply chains and integrated merchandising systems to create competitive advantage for all businesses and a platform for growth under Mercury 2.
Woolworths is leveraging unique data assets to drive new insights and competitive advantage not available to other retailers. Ultimately this will drive our focus on the customer by making all decisions across the business starting from the customer perspective, using data on their actual needs and behaviour rather than surveys and stated behaviour.
My take
A story all too familiar for us buyers and observers here in the UK. Woolworths has been slow to react in Australia and assumed its dominance made it untouchable. However, cheaper alternatives, such as Aldi, are making headway and Woolworths needs to move quickly to keep its foothold.
However, investments in supply chain, digital and data are the right way to go. Execution is now key.
