The sale of David Jones means Woolworths has lost its foothold in Australia and its desire to be the biggest retailer in the Southern Hemisphere. (Brent Lewin/Bloomberg via Getty Images)
ANALYSIS
The sale of David Jones means Woolworths has lost its foothold in Australia and its desire to be the biggest retailer in the Southern Hemisphere.
The question of what is next for Woolworths remains — the same question asked when Shoprite (the biggest retailer on the African continent) left Nigeria in 2020.
Syd Vianello, an independent retail analyst, said Woolworths now has to concentrate on its business.
“How much time has [Roy] Bagattini been spending sorting out the David Jones mess with no return? He’s got a business, a good business that he can expand domestically,” he said.
Bagattini, a former Levi Strauss executive at the helm of Woolworths for three years now, could not make the Australia-based clothing company work. Before the announcement of the sale Bagattini had told Bloomberg: “It’s increasingly difficult to create a so-called regional player with a level of impact and scale that can really materially shift your performance.”
The move by Bagattini is a deviation from the vision of his predecessor, Ian Moir, who had ambitions to create a Southern Hemisphere retail giant by buying David Jones in 2014, which cost about R21.4 billion.
Moir spent eight months as the interim head of David Jones in 2020 and failed to turn it around.
Vianello said the decision was made to sell David Jones because Bagattini “realised that the ‘biggest department store in the Southern Hemisphere’ concept that Moir had envisaged was never going to work.
“Now is the right time for the business [David Jones] to operate under new ownership, while Woolworths refocuses on its core South African and Australian Country Road group businesses,” Bagattini said.
Vianello said Bagattini had been teeing up the sale of David Jones since he was appointed group chief executive.
“One of the first things he did was to clean up the banking and the security relationship between David Jones and Country Road because they knew that Country Road was a profitable and successful business and David Jones was not.
“They then sold the fixed property of David Jones to realise enough cash to service the debt and to separate the two businesses from the banks. This was to ensure that if they decide to sell David Jones, it was a saleable entity and was not tied up to Woolworths,” Vianello said.
The sale to Australian private equity fund Anchorage Capital Partners is to be complete by the end of March. The final proceeds are yet to be determined. The sale means Woolworths will improve its returns profile and remove R17 billion in liabilities related to David Jones.
“The money he gets from David Jones he’ll bring back to South Africa and that money will be used to liquidate debt … Now you will start to see the return on investment coming through. He’s cleaned up and he’s facing an interesting environment,” Vianello said.
During the eight years Woolworths had David Jones the group’s share price weakened by more than 20%.
Vianello noted that Woolworths has been lagging with its fashion and food businesses because it has been focusing on fixing David Jones.
He said retailers such as Shoprite Checkers has taken some market share and Pick n Pay has been rejuvenated, which meant Bagattini has to protect the Woolworths food franchise and get the clothing business right.
“It’s clear he’s been restructuring that business [fashion]. For the first time we’re seeing international brands like Levi and Guess on the shelves. He can now devote 100% of his time and energy to restructuring the food and fashion business,” Vianello said.
In 2020 Woolworths, which exclusively sold its own products, introduced international brands and it started with Birkenstock sandals, Business Insider reported.
Makwe Masilela, of Makwe Fund Managers, said it was “good” that Woolworths had cut the “tumour” of David Jones that would kill it.
“They just need to expand their strategy and start competing with the likes of Checkers. The other retailers are starting to eat some of their lunch because Woolworths has not been focusing. Maybe they need to reconfigure everything to make sure they regain the market share whether it’s for food or clothing,” Masilela said.
Woolworths Food sales for the year ended June 2022 grew by 4.2% while sale of merchandise for Checkers for the year ended July 2022 increased by 9.1%.
“Another area they could expand is the liquor business. Almost everyone has liquor, your Shoprite, Pick n Pay and the likes. Those other retailers are also competing with Woolworths on clothing,” Masilela said. “They [Woolworths] might need to consider expanding their liquor business.”
Shoprite announced last year that it will open 10 to 12 clothing stores in March.
Liquor is a high margin business and has shielded retailers during tough times. Last year, Spar saw its sales boosted by its liquor business, TOPS. After trading restrictions were lifted in 2021, Spar’s liquor sales increased by 42% over a six month period.
Makwe said Woolworths should also improve their delivery service. “They have to push their e-commerce hard and invest in it a lot because they are losing out.”
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