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Home / Business / Companies / Retail

Woolies result - no room to hide

Christopher Niesche
By Christopher Niesche
Business Writer·NZ Herald·
30 Aug, 2015 09:31 PM5 mins to read

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Ralph Waters has not had the success at Woolworths he enjoyed as chief of Fletcher Building. Photo / Jason Oxenham

Ralph Waters has not had the success at Woolworths he enjoyed as chief of Fletcher Building. Photo / Jason Oxenham

Christopher Niesche
Opinion by Christopher Niesche
Business Writer
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Chairman’s resignation inevitable after deluge of bad news for supermarket giant .

There's nowhere to hide in a duopoly, as Ralph Waters has discovered to his cost.

Waters, the former chief executive of Fletcher Building, responded to pressure from shareholders and resigned as chairman of Woolworths after it reported its weakest profit in nearly two decades last week.

The supermarket giant - which also owns the Countdown chain in New Zealand - reported a 12.5 per cent drop in earnings and flat revenue. It was the company's first full-year profit decline in 19 years, dragged down by its disastrous foray into the hardware market.

But even when we strip out the losses from the hardware business, Woolworths isn't performing well.

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Its Australian supermarkets managed only a tepid 2 per cent rise in earnings.

That's bad, but it's even worse when lined up against competitor Coles, which reported a rise in earnings of closer to 7 per cent.

Coles' earning margins are climbing and the amount of groceries it sells in its individual stores - known as same store sales - is rising strongly.

It's a stellar performance. Coles has managed to keep on winning customers with discount groceries while at the same time increasing its profit margins.

And it throws the Woolworths results into stark relief.

Woolworths' long-term strategy of protecting its profit margins rather than trying to increase overall sales has backfired.

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The Coles result means that Woolworths directors and executives don't have any excuses: they can't blame the soft economy, weak consumer sentiment, rising costs, the unions, or anything else. The simple fact is that Woolworths' leadership have not done a good job.

By the time the result was released to the market last week, Waters and his chief executive Grant O'Brien were already lame duck leaders.

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They had both previously announced their intention to leave the company at some future date. In the meantime, O'Brien continued to run Woolworths, or at least in name, and Waters was staying on until the company had chosen a successor for O'Brien.

But as more bad news piled up for Woolworths, Waters' position became untenable and investors wanted him gone.

Appointing a chief executive and succession planning is one of the most important jobs for a corporate board, arguably the most important. So the fact that Waters and his colleagues didn't have a Plan B (and C and D for that matter) for when O'Brien resigned is an indictment.

Wooing a chief executive to move countries to take control of a struggling company is difficult at the best of times, all the more so when the chairman is also departing, because the potential chief executive won't know who he or she will be working with.

Gordon Cairns, who takes over as chairman tomorrow, will now have to find the new chief.

Then he can move on to fixing up some of the other messes; turning around the supermarket business and fixing up its struggling discount department chain BIG W, which is also without a leader after boss Alistair McGeorge resigned in the wake of a complaint from a female staff member. And last but certainly not least there is the Masters hardware chain. Woolies has sunk $3 billion into its attempt to grab a slice of Australia's home renovation and repair market, but so far hasn't earned a return. Cairns will have to quickly decide whether to try to turn the business around or to cut its losses and quit the hardware sector.

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Waters is an abrasive character and hasn't endeared himself to fund managers over the past few months by reportedly being dismissive of their concerns about the company's strategy.

As chief executive of Fletcher Building for five years until 2006, Waters created a global buildings materials manufacturer and earned a lot of money for his New Zealand shareholders.

It's a shame that he is leaving Woolworths with such a blot on his copybook.

Glimmers of hope for retailElsewhere in Australia's retail landscape, there are glimmers of hope that things might at long last be improving this earnings season.

Homewares and electronics retailer Harvey Norman reported a 4.5 per cent lift in same store sales, department store David Jones reported a near 30 per cent rise in profits, and JB Hi-Fi said its sales so far this financial year are up 5.7 per cent on last year.

It looks as if record low interest rates and rising property prices are finally starting to spur along the retail sector. Harvey Norman founder Gerry Harvey said that people are feeling richer as they see the value of their property rise and spending up big on homewares as a result.

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The retailers' results (Woolworths excepted) are a bright spot in an earnings season that was characterised by slow profit growth and tepid outlooks, not to mention the stock market volatility brought about by nervous investors and concerns about the strength of the Chinese economy.

It's too early to say the Australian economy is starting to recover from its mining boom-induced hangover, but at least there's hope.

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