Woolworths learns a painful lesson

Woolworths’ latest financial results revealed that it suffered another poor performance in Australia, which has been a drag on the company for years.

Woolworths’ results for the 53 weeks through June 2024 revealed a significantly weaker performance from the retailer than last year.

Revenue increased in line with inflation. However, Woolworths’ profit for the year declined by almost 50%, going from R5.08 billion in 2023 to R2.60 billion in 2024.

The retailer blamed its poor performance on an increasingly challenging trading environment caused by macroeconomic events.

“This was particularly evident in Australia, as sustained interest rate increases and higher costs of living continued to impact consumer confidence, footfall, and spending,” it said.

Country Road, Woolworths’ main Australian operating entity, reported a decrease in its revenue, falling by 3.3% from the previous year.

The real story was the bottom line. Country Road reported a R533 million loss before tax from the previous year’s profit of R1.5 billion.

Woolworths CEO Roy Baggatini blamed poor performance on the worsening economic conditions instead of managerial failure.

He said it could not be denied that the broader environment had a pronounced impact on the group’s results.

However, this is nothing more than an excuse. The executives of many companies which suffer losses do not want to take responsibility for their failures.

Instead of examining what they did wrong and admitting where they failed, they prefer excuses, which are all too easy to find.

Woolworths is no stranger to burning money in Australia. In 2015, it invested around R29 billion in David Jones, entirely funded by debt.

The David Jones acquisition formed part of Woolworths’ strategy to expand its operations beyond South Africa and increase its international footprint.

Woolworths planned to become a leading apparel retailer in the southern hemisphere, and buying David Jones was a first step toward this goal.

However, it did not work as planned. The investment was a huge failure. After years of disappointing performances, Woolworths sold David Jones for around R1.6 billion.

The company clearly does not excel at running businesses in Australia, and the Country Road loss is an extension of its David Jones debacle.

Woolworths versus TFG

Woolworths’ excuses for its poor performance in Australia will make many people think the country is not favourable to retailers.

The Foschini Group’s (TFG’s) experience in Australia shows that Australia is not as hostile to retailers as Woolworths made it out to be.

TFG acquired the Australian retail apparel group RAG Holdco in July 2017. TFG paid R2.7 billion for the 100% shareholding in RAG.

RAG was established in 1987 and is a mid-to high-value speciality menswear retailer in Australia. It also offers women’s athletic leisurewear.

TFG financed the transaction through an accelerated book build, where new shares were issued to qualifying investors.

Therefore, it did not use any debt to finance the transaction, and RAG became the core of TFG’s Australian operations.

In its first year of reporting, TFG’s Australian segment reported R3.1 billion in revenue and already reported a R253.1 million profit before tax.

TFG Australia showed strong growth. It increased revenue to R9.4 billion in 2024, a big increase since 2018. Its average annual revenue growth over six years was 21.7%.

RAG significantly outperformed Woolworths’ Country Road. In comparison with RAG’s 21.7%, Country Road has only achieved an average annual revenue growth of 5.4% since 2018.

The slower revenue growth rate experienced at Woolworths’ Australian operations caused TFG to capture a significant portion of the Australian market share.

Woolworth’s international struggles are shown when the two companies’ Australian operations are compared. The chart below illustrates the difference.

TFG Australia has reported strong profitability since its launch in Australia and has maintained an average profit-before-tax margin of 10.5% since 2018.

Woolworths, in comparison, had an average profit-before-tax margin of only 7.1% since 2018.

In their latest results, Woolworths reported a R533 million loss in Australia, while TFG generated a R1.01 billion profit.

This clearly illustrates that Australia offers promising opportunities to fashion retailers. The business simply has to be well managed.