If you look at the number for Woolworths’ 2018-19 financial year it becomes easier to see why Banducci and his board were prepared to embark on such a radical simplification and a shift towards what Banducci has described as a food and everyday needs “ecosystem.”
The core Australian supermarket business is firing and has real momentum. On a normalised basis (it was a 53-week financial year) sales were up 3.3 per cent and comparable sales 3.1 per cent, with comparable sales for the first two months of the current year up 7.5 per cent showing a sharp lift in what had been a strengthening trend of sales growth in the second half of 2018-19.
It is apparent from the numbers that Woolworths’ “Lion King” collectibles promotion more than blunted the impact of Coles latest “Little Shop” promotion but also that there is now an underlying solidity and sustainability to the growth in supermarket sales and earnings in an environment where both the major supermarket groups are competing rationally.
Earnings before interest and tax (EBIT) for the supermarkets of $1.86 billion were up 4.7 per cent and the return on average funds employed was 140 per cent. If the New Zealand food business were included, the supermarkets contributed nearly 80 per cent of the group’s EBIT from its continuing operations of $2.72 billion.
It is the rekindled and now consistent performance of the Australian supermarket business, the dominance of food in the group’s sales and earnings and the remarkable returns the businesses generate that provided the confidence and ability to rethink the Woolworths model and portfolio.
Within Woolworths’ results presentation it provided a pro forma picture of what the new Endeavour Group will look like once the ALH merger is effected early next year. Endeavour will initially be owned 85.4 per cent by Woolworths and 14.6 per cent by the Mathieson family ahead of the planned demerger or some other “value-accretive” transaction.
It will be a big business, with sales of more than $10 billion, EBIT last financial year of $418 million (down from $455 million) and a retail margin (EBIT to sales) of 7.1 per cent. While Woolworths didn’t provide a return on funds number for the merged group Endeavour Drinks, the larger contributor to the new Endeavour Group, had a return on funds of 15.2 per cent.
From Woolworths’ perspective it is shedding businesses that represent less than 20 per cent of it sales and earnings base but generate returns on funds that, while attractive by conventional standards, are a fraction of what it can get from investing in its food businesses.
It will still have an ongoing relationship with Endeavour, as it does with its former fuel and convenience business, using them to leverage its supermarket supply chain, its loyalty scheme and its other capabilities but without the material capital commitments it faces today.
Once Endeavour is at arm’s-length, Woolworths will be a higher-returning business with the ability to invest its free cash flows in its highest-returning operations.
It will also have Big W, which lost another $85 million last financial year, but at least is starting to generate the sales growth – 6.5 per cent, or 4.2 per cent normalised – that is a prerequisite for a turnaround.
Banducci appears confident in its trajectory and “agnostic” as to whether the discount department store group, assuming it can eventually be returned to profit, will be a longer-term component of his everyday needs strategy. A profitable Big W could either be a core part of the everyday needs strategy or, like Endeavour, an associate member of the Woolworths’ ecosystem.
A significant piece of that strategy is Woolworths’ e-commerce, data and media capabilities, badged WooliesX.
Group online sales were up 32 per cent and its online platforms were profitable, so there is significant momentum being driven by its digital capabilities to overlay the general sense that the returns from the heavy investment Banducci has made in the core of Woolworths are gathering pace and will emerge even more starkly once the group is reduced to that core.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.