Woolworths’ Share Price Woes Continue

Woolworths [ASX:WOW] has had a bad year. The German discount giant Aldi keeps on taking chunks of Woolworths’ market share. It’s been forced into a price war with Coles.

And there is the Masters debacle — the home improvement store designed to challenge Westfarmer’s Bunnings. Master’s was running losses of around $200 million a year.

Last 25 August, Woolworths announced its full earnings for the year FY16. They had a net loss of $1.23 million. Woolworths cited weaker earnings as the reason for their losses. Mainly from their supermarkets, BIG W and hotels.

The results weren’t good for dividends either. Dividends decreased 44.6% from last year.

As you can see in the chart below, Woolworth’s share prices have been steadily declining. Yet after the announcement of bad news, Woolworth’s shares were up.

Woolworths ASX Share Price

Source: ASX

You see, shares went up because Woolies had an exit plan to turn around their Master’s failure. And this plan gave investors’ confidence.

They agreed three separate deals in which Metcash would get Home Timber & Hardware Group (HTHG), a deal with GA to sell the Master’s stock, and the sale of Master’s properties to the Home Consortium.

They estimated that the plan would bring in $1.5 billion.

But on Monday, Woolies got hit with a bucket of cold water. Woolies’ joint venture partner, Lowe’s, accused Woolies of ‘bad faith’ and launched legal action. This move can threaten Woolworth’s exit plan.

And that’s not it for Woolies.

David Jones has just announced that it is planning to take on the high end of the $90 billion grocery business. John Dixon, a former senior executive at Marks & Spencers, is leading the push in David Jones.

It looks like Dixon is hoping to turn around and modernise David Jones, the same way he did with M&S in the UK.

Initially, M&S found success in the clothing business. Yet the food business has now surpassed clothing in revenues.

In the UK, four big supermarkets had most of the market share: Tesco, Asda, Sainsbury’s and Morrisons. Yet much like in Australia, they saw their market share shrink with the entrance of Aldi.

M&S found success in the supermarket wars by differentiating themselves from the rest. M&S catered for a high end market with high quality, high priced food. Plus they gained popularity by focusing on their packaged food.

Coles, Aldi and Woolies have been lowering prices to compete for the low to medium priced customers. Yet David Jones is planning to take on the high end portion of the grocery business, and gearing their offer towards prepared foods.

Woolworths has already dabbled in the high end grocer arena with the chain Thomas Dux. Yet it didn’t encounter much success. It tried to sell the business last year, but couldn’t.

But Thomas Dux is more a specialty grocer, delivering organic farmer fruits, vegetables and delicatessen products. The difference with M&S is that it caters for fast paced customers in city areas, delivering high quality packaged meals.

The truth is that Woolworths and Coles have been copycats of each other for many years. As they had the biggest market share, they only focused on each other. Now the market is changing. It’s expanding and there are more competitors.

Woolies will need to evolve with the market and create their own identity if they want to stay in the running.


Selva Freigedo,
For Markets and Money

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Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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