What Happened To Woolies?

In the last eighteen months, the Woolworths stock price has dropped from a high of $37.74 to a recent low of $20.50. Almost 45%.

Prima facie, Woolies is priced as if it’s broken, but it’s not.

So why do the Fresh Food People look like they’re past their use-by date?

The first thing to note is that at $37.74, the stock was well and truly overpriced and trading at a premium. A more reasonable valuation eighteen months ago was around $31.00 so it had to correct at some point. Every asset always does. Property is the same.

So why is it trading closer to $20 than $30?

Ambition or Arrogance?
In simple terms, Woolworth’s got too big for their own shelves. They wanted to dominate every industry from hotels to hardware and wipe out every competitor in between.

As is often the case with unprecedented growth and/or weak competition (be it business, sport, politics, religion, etc), hubris creeps in and eventually Woolies believed they were infallible. This peaked when they thought they could beat Bunning’s with Master’s. Instead, they turned DIY into ‘Destroy it Yourself’ and their share price followed.

Woolies ambition morphed into arrogance and in doing so, they ignored a sleeping giant…

Aldi
In January last year, I wrote a Moowsletter titled ‘The Rise and Rise of Aldi’. The cut and thrust of that post was that Aldi would always hit Coles and Woolies where it hurts most – right in the margins.

This is how they do it.

Each Aldi store is typically 20m by 40m in size, they stock a maximum of 600 products and have only one supplier for each. E.g. Woolies might have ten different brands of coffee, Aldi has one.

This creates two significant cost savings. (i) Smaller floor space and fewer products means less staff required for stocking and managing and therefore lower wages, and (ii) loyalty to one supplier per product means greater buying power and deeper discounts.

The end result is Aldi have a much lower cost base and are able to pass on the savings to customers.

The problem for Woolies and Coles is they want to offer the best range while trying to beat Aldi at their own game with lower prices. It doesn’t work, try as they may. They need a better strategy.

The Worst House on the Best Street
So does this cast the end for Woolies? Absolutely not. Woolies still have very good bones – a massive data base and a valuable distribution network that cannot be easily replicated.

When the share price of a business like Woolies drops, a few things can happen:

• New Management – this is usually the first issue to be addressed and for Woolies this has been the cause of nearly all their problems. Management has been a ‘running sore’.

• Take-over target – if a stock-price drops too low the stock can become a take-over target. Currently Woolies is trading at $22.15 per share but its intrinsic value is closer to $19.00 per share. A take-over is a real possibility if the share price drops much further.

• Share buy-back – if a business has the available capital, buying back their own shares and pushing up the share price to ward off any take-over is not uncommon.

A lot of businesses go through what Woolies is currently experiencing, and it’s not always a bad thing. Sometimes it’s the melt-down they need in order to re-cast themselves into something bigger and better. Coles went through the same thing and now they’re a much better business for it. So are their customers.

For mine, Woolies needs to drop the idea of trying to discount their way to greatness. It doesn’t work. They can do much better than that.

In an era where people are time poor and space restricted, they need to position themselves as a ‘second pantry’. They need to build a highway to every household’s heart again instead of just focusing on price. Not everyone wants what Aldi has.

If Woolies put more emphasis on adding value rather than just cutting price they could begin a whole new life cycle and give themselves generations of shelf life. They may be ripe but they’re not rotten. Far from it.

Have a good weekend!

Adam

Back paddock – First question: Have you read Anh Doh’s book, ‘The Happiest Refuge’? I just read it again for the second time. What a read! Not surprisingly it has won a stack of awards. I don’t want to spoil it but if you get the chance, just read how his sister got braces for her teeth. It’s a beautiful story.

Second question: What were you doing today eight weeks ago? I didn’t believe it either.