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Woolworths’ fast-growing homeware business is set to gain more prominence in stores as the retailer reallocates space from slow-moving fashion ranges and reshapes its portfolio around its highly profitable food division.Under a strategic reset unveiled by new CEO Sam Ngumeni, Woolworths plans to expand its homeware offering and direct more capital towards businesses generating the strongest returns while growing its presence across more consumer eating occasions through cafés, coffee shops, convenience meals, liquor, pet products and delivery platforms.The retailer has also identified opportunities in areas such as events catering and school tuck shops as it seeks to capture a greater share of customer spending within its food ecosystem.Woolworths currently operates more than 230 café and coffee sites but has more than three times as many food locations, meaning fewer than 20% of food customers use its food-service offering.“Food is our heartland, our greatest competitive advantage, our greatest differentiator,” Ngumeni said. “It’s the business with the clearest right to win and the strongest opportunity to deliver sustainable growth and value creation over time.”He described food as the engine of the Woolworths ecosystem, bringing customers into stores more frequently and creating opportunities to sell complementary products.“That’s how the customer shops us. She comes in, she buys food, and then she buys into the adjacencies.”One of the biggest beneficiaries of the reset is the homeware division, which delivered double-digit sales growth over the past year and significantly outperformed fashion.“We think there’s an opportunity that we need to create more space for the home business,” said Ngumeni.There’s a long tail of product that moves very slowly. We think part of what we haven’t been good at is to act decisively, and to remove that and deploy that space to a highly productive, higher-margin home business.— CEO Sam NgumeniHe added that beauty and home “play a particularly important role in extending the food relationship into a broader lifestyle proposition. These growth pockets are identifiable and scaling, and they are categories where brand equity translates into commercial momentum.”Management is also considering changes to store formats as it aligns its physical footprint with how customers shop the brand.“Maybe we’ll see a construct where we only have foods and homes,” Ngumeni said. “Maybe we’ll see a construct where we currently hide our foods business we maybe move it to the front.”He said Woolworths had not acted decisively enough in removing underperforming fashion ranges and reallocating space to more productive categories.“There’s a long tail of product that moves very slowly. We think part of what we haven’t been good at is to act decisively, and to remove that and deploy that space to a highly productive, higher-margin home business.”Stephan Erasmus, investment analyst at Anchor Capital, said the strategy made financial sense given that food contributes close to 70% of group operating profit and generates almost three times the return on capital of clothing.“Off the bat, I can’t argue with the logic,” he said.The review extends beyond store layouts. Ngumeni has launched a broader assessment of every part of the portfolio as Woolworths seeks to improve capital allocation and focus resources on higher-return opportunities.“While each of our businesses has a role to play in the broader portfolio, not all create value equally, nor do they offer the same potential when it comes to generating profit, generating cash and generating returns,” he said.“The make-up of our portfolio should reflect that, but it doesn’t — at least not yet.”The shift does not mean Woolworths is abandoning its non-food businesses. Beauty sales grew more than 7% over the past year, and management believes there is scope to expand the segment through a stronger private-label offering.The biggest opportunity is extracting more value from adjacencies including food services, beauty, pets and liquor,” he said. “Risks are centred around apparel execution, a slower-than-expected consumer recovery and further challenges in CRG— Lebeko Shai, portfolio manager at Abax Investments, The retailer also plans to continue rolling out WEdit, its smaller-format fashion stores, which are delivering double-digit growth and outperforming the core clothing business.“It’s curated, and it’s been considered for the customer profile,” Ngumeni said. “It’s growing probably double digits, far better than the core fashion business.”However, questions remain over the long-term future of the group’s apparel operations, particularly Country Road Group in Australia, which has weighed on group performance for several years.Erasmus said it was “perhaps time to pull the plaster off and exit Country Road Group”, though management had not labelled the business non-core and was unlikely to pursue an exit immediately.Within fashion, beauty and home (FBH), homeware grew almost three times faster than the division overall, while beauty growth significantly outpaced fashion.“I get the feeling that FBH will become more B&H than F in the future,” Erasmus said.Lebeko Shai, portfolio manager at Abax Investments, said the group’s strongest opportunities lay in expanding food-related adjacencies.“The biggest opportunity is extracting more value from adjacencies including food services, beauty, pets and liquor,” he said. “Risks are centred around apparel execution, a slower-than-expected consumer recovery and further challenges in CRG.”Ngumeni said the objective was to move Woolworths “from complexity to focus, from broad ambition to disciplined allocation, and from strategic intent to consistent execution”.Business Times
