Woolworths under siege

Woolworths is in a tough spot. Its high-end food business faces increasing competition, and its clothing business continues struggling.

Woolworths’ financial results for the 26 weeks ended 29 December 2024 showed that its fashion, beauty, and home (FBH) business is still a mess.

This segment reported turnover growth of only 2%, well below inflation. It blamed a temporary setback in product flow and late supplier deliveries for the poor performance.

However, the poor performance of the fashion, beauty, and home business is nothing strange. It has been a drag on the retailer for years.

Besides failing to compete effectively against other South African clothing retailers, Woolworths also had a disastrous international play.

In 2015, it invested around R29 billion in David Jones, entirely funded by debt. The investment was a colossal failure.

After years of disappointing performances, Woolworths sold David Jones for around R1.6 billion, a tremendous loss.

It kept the Country Road business, but, like David Jones, it is also causing tremendous pain for the South African retailer.

It has reached such critical levels that the Country Road Group is undergoing significant restructuring to reconfigure its operating model and reset its structural economics.

Woolworths Food has been the feather in the retailer’s cap for years, but it no longer has the luxury of a near monopoly in the high-end food market.

In the latest results, Woolworths Food performed well, reporting 11.4% turnover growth and an improved gross profit margin of 24.9%.

Its on-demand grocery delivery service, Woolies Dash, saw sales increase by 49.2% and online food sales rise by 37.2%.

However, analysing the performance over five years showed a concerning trend for the high-end food retailer.

Woolworths Food’s average annual revenue growth has been 7.2% over the past five years, measured in six-month intervals.

Although this revenue growth is well above inflation, Woolworths Food has seen a steady deterioration in its profitability.

Woolworths Food achieved an average annual profit before tax growth of only 2.7%, and its profit before tax margin steadily reduced from 7.5% to 6.3% over 5 years.

Woolworths Food increased its revenue by 49% over the past 5 years from R16.6 billion to R25 billion.

Over the same period, it has only been able to increase its profit before tax by 25%, from R1.3 billion to R1.6 billion.

The declining profit margin showed that Woolworths Food has not been able to manage its expenses in line with its revenue growth.

Increased competition puts pressure on Woolworths Food

One reason for Woolworths Food’s margin pressure is increased competition in South Africa’s high-end food market.

Checkers, Pick n Pay, and Spar have launched stores which compete directly with Woolworths Food in the affluent market.

Checkers Sixty60 has already hurt Woolworths Food, and Checkers is also revamping many of its stores to appeal to wealthier clients.

Last month, Spar Southern Africa chief executive Max Oliva revealed that the company will roll out 30 to 40 high-end grocery stores.

The first high-end Spar store, Spar Gourmet, will open in South Africa in the fourth quarter of 2025.

Oliva said they are looking at high-end residential and urban neighbourhood sites and that the stores will offer a standardised design and brand philosophy.

Through the Private Label Spar Signature Selection range and strategic partners, it will offer differentiated product ranges and bespoke offerings.

One of these partners will be Vida e Caffe, which will have a presence in all of SPAR’s Gourmet stores.

Pick n Pay is also investing in improving its stores with refreshed formats, including improved layouts, more tailored product selections, and intensive staff training.

As part of these initiatives, Pick n Pay opened a new supermarket at Westown Square, a mixed-use development in Shongweni, KwaZulu-Natal.

“The new store introduces key features that Pick n Pay is incorporating into its refreshed store format, aimed at enhancing the customer experience,” it said.

The new store format includes a vibrant fresh produce area, a full-service butchery, and a deli with fresh, ready-to-enjoy meals, salads, and convenient on-the-go options.

This store’s in-store bakery offers artisan breads, pastries, and cakes baked daily. It also has a sushi counter and a sit-down coffee bar.

The retailer further strengthened its customer partnerships, which include becoming the primary grocery partner for FNB’s eBucks programme.

This means that Woolworths’ premium division, its food business, is facing increased competition and will struggle to maintain its market share.

Analyst opinions about Woolworths

Woolworths’ share price declined 23% over the last six months, and 15% year-to-date. This shows how much trust investors lost in the company.

David Shapiro from Sasfin Securities said that Woolworths’ results show many problems at the retailer.

Grant Nader from Benguela Global Fund Managers said the Woolworths’ food division is a good investment, but the rest of the company is problematic.

He added that he is questioning Woolworths management’s execution to turn the company’s clothing business around.

Country Road is deteriorating as a brand and is underperforming its peer group in Australia. “It is tough in Australia, but Country Road is doing worse than the rest,” he said.

The promised turnaround in Woolworths’ fashion, beauty, and home business did not materialise. “Over the last two years, all we heard is why it was not happening,” he said.

Nader advised South African investors to sit on the sidelines until Woolworths’ management team showed it could fix the problems.

Ricus Reeders, a portfolio manager at PSG Wealth, explained that Woolworths had been outperforming its peers in the retail sector.

“They have been promising to get their clothing business organised for a very long time. This did not happen,” he said.

The latest set of results showed that the clothing business is still struggling. “This is why Woolworths is underperforming,” he said.

Reeders said he does not see any reason to invest in Woolworths until there is clear evidence that the management team has turned the clothing business around.

He added that while Woolworths Food is performing well, it faces increased competition from Checkers.

He advised Woolworths shareholders to consider selling their stock and considering an alternative company like Pepkor or Mr Price.

Zwelakhe Mnguni from Benguela Fund Managers also warned investors to be very cautious about investing in Woolworths.

He highlighted that Woolworth’s South African and Australian clothing businesses are underperforming.

Mnguni said he would like to see a change in management or the disposal of the clothing business before investing in the retailer.

“I cannot see a way for Woolworths out of this problem. It has been a perennial underperformer,” he said.