Newsletter No 38/7 October 2022
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Roy Bagattini getting Woolies back on track
By The Finance Ghost
Roy Bagattini. Picture: Ruvan Boshoff
No-nonsense decisions from CEO Bagattini, and lessons from Levi’s, helping with the turnaround
The Woolworths CEO’s office is as one might expect. The group’s obsession with quality comes through in the picturesque backdrop of beautiful shelving and perfectly placed adornments. On a video call, a smiling Roy Bagattini exudes confidence and passion for the brand, two things that investors want to see in any CEO.
SA retailers have a terrible track record internationally, with Bagattini’s predecessor Ian Moir perhaps being the poster child for what happens when bad deals happen to good people. The painful adventure in Australia has been documented many times. It’s still unclear why Woolworths paid Moir a restraint of trade, as perhaps the best thing to happen would have been allowing him to work for a competitor.
That was then and this is now. Woolworths is enjoying a far more positive narrative around its share price. At the time of writing, the stock had rallied more than 16% in the past month. Over the same period, Shoprite was down nearly 6.5%. As always, the art of investing is about understanding what the share price is implying vs what you feel the growth will be.
Woolworths nonexecutive director David Kneale has voted with his wallet. The man credited with building Clicks into the retail giant that it is today (ridiculous pharmacy queues notwithstanding) has acquired shares in Woolworths worth more than R511,000. By no means is he betting the farm here in terms of personal wealth, but it’s still an encouraging sign.
Speaking of encouraging signs, Bagattini is refreshingly candid about important topics such as international expansion, the Woolworths Food strategy and the way Woolworths thinks about its customers. His prior role at the helm of Levi’s in the US is helpful here, as the no-nonsense way of doing business in America results in decisive decision-making — exactly what Woolworths needed.
Though you probably won’t find a single Woolworths shareholder who has feelings of love towards the Australian strategy, the good news is that the business is now self-sustaining and even managed to upstream cash to the group. A lot more such upstreaming is needed to numb the pain, but it’s a start.
This has been achieved through deliberate initiatives to take costs out of the business and restructure David Jones and Country Road to operate independently of each other. This is different to the approach previously taken, in which Country Road was “mortgaged for David Jones’s debt”, in Bagattini’s words.
Forcing them to stand on their own feet has resulted in two cash flow-positive businesses, managed separately. They declare dividends separately. Reading between the lines, Woolworths could elect to exit David Jones, without affecting its investment in Country Road. This kind of operational flexibility is critical, even if Woolworths never pulls the trigger.
IM asked Bagattini why companies struggle when they expand internationally. His view is that there isn’t enough “brutal honesty” when assessing these opportunities, as companies tend to underplay the risks in an effort to get the deal across the line. The allure of conquering foreign lands has always been part of human history and corporate leaders are the modern-day equivalent of adventurers setting sail on high-risk journeys. They tend to see the glory rather than the potential to ruin an otherwise great group.
He points out a “3-2-1” approach that was taken at SA Breweries, based on the group’s experience in China. The principle is that a global expansion will take three times longer than you expected, cost twice as much as you thought and deliver half the results you anticipated.
Those investors with investment banking experience might echo this view. The difference is that many corporate executives choose to ignore the risks, as their incentive packages reward them for the wrong kind of behaviour. There are good reasons that institutional investors are paying far more attention to remuneration policies these days.
Another important element that Bagattini highlights is humility, something that many SA executives have learnt the hard way in Africa. There’s a long list of local corporates that have tried to win in Africa by doing things the SA way, assuming that this approach is superior. Bagattini has worked in more countries than most investors have ever travelled to, so he speaks from experience when pointing out that global business is far more nuanced than simply taking a recipe from one country and hoping it will work in another.
Customers are different. Governments are different. Market dynamics are different. Local supply chains bring their own complexities and no two countries are alike.
Shoprite learnt this in Africa and Woolworths learnt this in Australia. I think there’s something to be said for investing in companies that have already been through this process. It builds an institutional maturity and commitment to solid risk-return analysis that is developed only through experience.
As noted, Bagattini was running the Americas division of Levi’s before he joined Woolworths. Even the most iconic clothing businesses (Levi’s literally invented jeans!) aren’t immune to competition, so Levi’s had its share of challenges. Still, things are definitely looking up for Levi’s and the company is taking advantage of the modern trend of direct-to-consumer (D2C) retailing.
Lululemon (responsible for creating premium athleisure clothing as a category) was built around a D2C strategy from the start. Nike is still playing catch-up but is making strides in having a direct relationship with customers. This is a major theme in retail and SA is far behind the curve, which puts local retailers at risk of losing out to offshore retailers.
It’s easy to assume that the point of a D2C strategy is to maximise margins. But, as Bagattini notes, it’s more about “controlling the narrative with the customer comprehensively” — by understanding your customers and knowing more about them, you can make better decisions on everything from store layout to product range and fit.
Bagattini’s key lesson from Levi’s is the importance of being obsessed with understanding the customer. This is far more than just “who wants our jeans?” — Levi’s cares about the type of customer for each product, the level of comfort and stretch, the choice of colours and much more. A substantial data mining and analytical capability supports these initiatives.
Another lesson from Levi’s is that a clothing retailer needs to pick a couple of lanes at most, focusing on core products and ensuring that they are delivered in a way that beats competitors. By becoming too broad, Woolworths clothing lost its way and ended up alienating core customers who started to shop at competitors. There is a major focus at Woolworths on making amends for this, something that a fast-growing business such as Pick n Pay Clothing will need to keep an eye on.
Bagattini joined the group in early 2020, just in time to run a critical grocery business during one of the strangest times in modern history. Though some would argue that his previous experience in the brewery industry could also be considered an essential service, it’s clear that running a food retailer during Covid was a social responsibility of note.
Coming into the role, his reference point was Whole Foods in the US as a premium food retailer. This business has lost its way a bit since being acquired by Amazon, another reminder that no company in the world enjoys a permanent and unassailable moat.
With 2,000 new products in Woolworths Food every year, there’s a substantial product innovation engine sitting behind the business. Anyone who has ever bitten into a Woolworths apple will know that Checkers still has a long way to go when it comes to product quality. Bagattini tells a fun story of walking into a room with food scientists who were testing wine gums that were bought at different intervals in recent months. They were testing the colour and “squish” and whether those attributes are maintained over time.
Still, the threat of Checkers isn’t being ignored, nor should it be. Its quality is catching up in many areas and the logistics capability is miles ahead, with Sixty60 as the obvious leader in this space and Woolies Dash giving a disappointing customer experience. If Woolworths is serious about retaining its younger, busier customers who value convenience above all else, there will need to be considerable investment in this space.
This investment won’t be made without a proper assessment of return on capital. Bagattini is clear on this: the “holy grail of food retailing” is to strike a balance between what works for customers and what works for shareholders. If a certain portion of market share becomes subeconomic, Woolworths would rather let that go. This is a mature approach to capital allocation that is sorely lacking in most local retailers.
Of course, IM posed the question of whether the food business and the clothing business still belong together. Bagattini highlights that this question was especially relevant before the fashion business started turning around, with shareholders now more inclined to see the value of the combined operation with clothing starting to perform again. There are synergies around cross-shopping, shared customer data and other opportunities. When people can shop across categories such as beauty, food, homeware and clothing, the data becomes powerful. There is also the benefit of a shared brand, something that Woolworths needs to do more with.
The Levi’s influence is clear here — Woolworths is getting more serious about customer insights.
Though Woolworths is focusing on the basics, there’s room to innovate. Woolworths Now Now is an interesting proposition in the quick-service restaurant space, bridging a gap between junk food and niche health food. The group’s partner is none other than Kevin Hedderwick, former CEO of Famous Brands. There will be four Now Now stores by the time you read this. IM wouldn’t bet against this becoming 40.
IM also wouldn’t bet against Bagattini turning this ship around. FM
South Africans selected for BoF 500 Global Fashion Leader Index
Dr Precious Moloi-Motsepe, founder and executive chair of African Fashion International and Lucilla Booyzen, director of South African Fashion Week.
Lucilla Booyzen, director of South African Fashion Week, and Dr Precious Moloi-Motsepe, founder and executive chair of African Fashion International (AFI), have been elected to The Business of Fashion’s (BoF) annual BoF 500 Global Fashion Leader Index, an authoritative index of the professionals shaping the $2.4tn global fashion industry.
The BoF 500 was launched in 2013 and is regarded as an authoritative index of the professionals shaping the $2.4tn global fashion industry.
As the name suggests, the index began as a list of the 500 most influential people in the global fashion industry, but BoF has annually added new names to the ever-growing group which now includes 1,193 people representing more than 70 nationalities, based in more than 45 countries. According to BoF, the 2022 additions form the most diverse and global index cohort to date.
The 103 new additions to the index were announced on 30 September and was celebrated at a gala event in Paris on 1 October 2022.
Other new members to the index from the African continent include Adama Ndiaye, founder of Senegal’s Dakar Fashion Week; Nigerian designer Adebayo Oke-Lawal of Orange Culture; SoleRebels founder Bethlehem Tilahun Alemu, Claudia Lumor, Glitz Africa chief executive and editor-in-chief; content creator Khaby Lame; Laureen Kouassi-Olsson, founder and chief executive of Birimian Ventures; Karim Tazi, founder and chief executive of Marwa; and model and photographer Malick Bodian.
Those who make the list are hand-picked by the editors of The Business of Fashion, based on nominations received from current BoF 500 members as well as thorough data analysis and research.
Booyzen and Moloi-Motsepe now join fellow South African members forming part of the index, including Johann Rupert, chairman of Richemont; Khanyi Dhlomo, founder of Ndalo Media; Nkosiyati Khumalo, editor of Apple Music South Africa and sub-Saharan Africa; Hanneli Rupert, owner of Merchants on Long and Okapi; Ian Moir, group chief executive officer of Woolworths; Alice Heusser and Olivia Kennaway, cofounders of Lalesso, and Adrian Joffe, president of Comme des Garçons and Dover Street Market.
“I am deeply humbled and grateful to be invited to join this exceptional circle of global fashion industry leaders. I truly regard this as the pinnacle of my personal and life-long dedication to carving a place for South Africa’s creative talent on the world stage,” commented Booyzen.
Moloi-Motsepe commented, “It is an honour to be recognised for the many years of behind-the-scenes work. This is a recognition of all the people at AFI who do the work and our passion for Africa. As a leader, my goal is to develop the vision and purpose for the team and industry.
“To be considered an influential figure in global fashion is an acknowledgement of AFI’s efforts to establish Africa as a strong player in the industry, and it is also a testament to the incredible talent of the pan-African designers affiliated to the brand.” Bizcommunity
Massmart – potential closure of Game stores
Massmart initiated a process over a 12-month period to investigate, as a preferred option, the opportunity to sell its East and West African Game stores to local investors. Unfortunately, this initiative did not deliver a meaningful outcome. Massmart initiated potential store closure consultations with staff members in the Game stores in East and West Africa.
Pick n Pay – trading and earnings update
Shareholders are advised that Pick n Pay is in the process of finalising its financial result for the 26 weeks ended 28 August 2022 (H1 FY23), which is due to be published on 18 October 2022.
The Group reported sales growth of 11.5% for the period, with like-for-like sales growth of 7.4%. The base period (H1 FY22) was severely disrupted by the July 2021 civil unrest and the loss of 55 days of liquor trading due to Covid-19 trading restrictions. Excluding these impacts, the Group estimates normalised sales growth for the period of 8.2%.
Internal selling price inflation for the period was 7.2%, reflecting a sharp uptick over July and August, compared to the 5.0% reported for the first 18 weeks of the financial period. This is further evidenced by the increase in Food CPI which rose from 8.6% in June to 11.3% in August according to Statistics SA. We reiterate our ongoing commitment to low-price investment and collaboration with suppliers to limit price increases.
Sales growth was primarily driven by a strong performance from Boxer. The year-on-year sales growth from the Pick n Pay supermarkets upgraded to the new CVPs (customer value propositions) has been particularly encouraging, but the upgraded stores do not yet constitute a substantial enough proportion of the estate to meaningfully impact the overall performance of the Pick n Pay brand.
As guided previously, FY23 is an investment year for the Group, as the various elements of the Ekuseni strategic plan, announced in May 2022, are set in motion. Substantial progress was made in H1 on all elements of the plan, including the launch of the QualiSave banner, which has been very well received by customers. The new Pick n Pay food and grocery offer delivered by Mr D has been successfully launched in a limited number of stores and will now be rolled out rapidly across the country. The Group is also making progress in its plan to create a single, modernised head office, and to drive productivity and efficiency gains in its cost base. Overall, the Group’s result in this period demonstrates strong sales growth, partly offset by some underlying margin pressure, as the Group invests in price to support under-pressure consumers, and externally-driven operating cost pressures.
The Group expects its H1 FY23 earnings to fall within the following ranges:
Earnings per share (EPS):
26 weeks to 28 August 2022 Expected range % growth – 47% – 57%
26 weeks to 28 August 2022 Expected range Cents per share – 91.10 – 97.30
26 weeks to 29 August 2021 Reported Cents per share – 61.97
Headline earnings per share (HEPS):
26 weeks to 28 August 2022 Expected range % growth – 55% – 65%
26 weeks to 28 August 2022 Expected range Cents per share – 94.99 – 101.12
26 weeks to 29 August 2021 Reported Cents per share – 61.28
Interim result announcement
Shareholders are advised that the Group plans to release its financial results for the 26 weeks ended 28 August 2022 on SENS just after 7:00am on Tuesday 18 October 2022. An online results presentation will follow at 9:00am on 18 October. Stakeholders are invited to register for the results webcast via the following link: https://www.corpcam.com/pnp18102022. The slides accompanying the result presentation will be available on the Pick n Pay Investor Relations website at www.picknpayinvestor.co.za shortly before the commencement of the presentation. A playback of the webcast will be made available on our website approximately 2 hours after the presentation.
Highest altitude fashion show on land
The highest altitude fashion show on land took place at 5,500 m (18,044 ft 7 in) and was achieved by Pankaj K Gupta, India, Ramila Nemkul, Nepal and Riken Maharjan, Nepal at Gokyo 6th Lake View Point, Nepal on 23 September 2021.
The main idea behind the record attempt was to promote eco-friendly clothes as sported by the fashion models during the ramp walk as well as promulgate the idea of peace and harmony in the world as it does in nature. Mt. Everest until just a few years ago had become rather polluted because of irresponsible tourism but has since been cleaned up by strict implementation of rules and regulations. The attempt took place within the limits of these regulations
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