Woolworths has enjoyed a dominant position in South Africa’s high-end food market for years, and the retailer has no plans to relinquish its lead.
Many big food retailers, including Checkers and Pick n Pay, are aggressively targeting the lucrative market Woolworths Food is playing in.
Apart from launching new, high-end stores, Checkers and Pick n Pay have also launched excellent eCommerce offerings aimed at the top end of the market.
Despite increased competition, Woolworths CEO Roy Bagattini said it is important to understand that they are not Checkers.
Bagattini said they offer enhanced value for the premium prices people pay at Woolworths Food, which helped them to produce strong results despite increased load-shedding.
Woolworths announced impressive interim results for the six months to 26 December on Wednesday, with the highest interim earnings per share in the company’s history.
Turnover was up 15% to R45 billion, with profit up 70% to R2.7 billion. Woolworths declared an interim dividend of R1.58 per share, nearly double the previous interim dividend.
This was predominantly driven by a recovery in its Australian businesses, led by David Jones, which has been generating the best profit outcome since Woolworths bought it.
Woolworths is concluding a sale of David Jones, which it says will take R22 billion of liabilities off its balance sheet.
However, the “jewel in the crown” of Woolworths’ operations, its food business, is under pressure.
It makes up nearly half of Woolworths’ total revenue, but its growth has markedly slowed over the past few years, and profit margins are squeezed.
Woolworths Food only managed to grow 5.4% on a comparable store basis, which is attributable to lost sales and increased costs from load-shedding.
Expenses in the food business are up 8.4%, and its profit margin declined to 23.8%.
Bagattini told The Money Show with Bruce Whitfield that the additional expenditure is worth it to maintain its reputation for high-quality produce and consumer trust in the brand.
The superior cold chain undergirds Woolworths’ food business and is built on decades-long relationships with partners in its supply chain and high quality standards.
Bagattini, that “if any of our products are out of the cold chain for more than eight consecutive minutes, we actually declare those not fit for sale” and give the produce to food banks or charities.
Depending on the product, “up to 1,000 checks” will occur before it reaches the shelf, with constant temperature checks ensuring that fresh produce does not get above 5 degrees celsius at any point.
The food business, for Bagattini, is “the Holy Grail”, as it provides the best offering in the market and delivers the best Return on Capital Employed (ROCE) for shareholders.
Woolworths will “fight tooth and nail to protect that”, said Bagattini.
As part of the fight, Woolworths will invest R8 billion in its business over the next three years, prioritising digitalisation, IT, and the food and fashion supply chain.
The “primary objective is to protect the quality and integrity of our superior cold chain”, Woolworths said in its results statement.
To maintain and grow its market share, Woolworths will continue investing in limiting price increases. For 2022, its internal price inflation was 6.8% compared to food CPI of 12.4%.
Woolworths also aims to increase the availability of its fresh produce and store presence by expanding its WCellar and NowNow healthy fast-food concepts.
Woolies Dash’s footprint doubled in 2022 with sales up 150% year-on-year.