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Nikko Asset Management fund manager Craig Young doesn't have to look far to find someone to blame for the downfall of Woolworths.
Woolworths' management and board dropped the ball, Young says, but shareholders also played a role by urging Australia's largest retailer to deliver growth quarter after quarter when the focus should have been on long-term sustainable gains.
"The market wasn't as critical as it should have been of Woolworths' performance in the early days – if the market looks for short-term gains they'll get short-term improvement," Young tells AFR Weekend.
"[Former CEO] Grant O'Brien tried hard, he just wasn't the right man for the job, and the board as well – they were responding to what the shareholders wanted, which was short-term performance.
"The shareholders should have asked the company to go hard and accept the short-term pain for long-term gain," Young says.
Woolworths investors are now paying the price. The company has shed more than $20 billion or 40 per cent of its market value in the last two years and new chief executive Brad Banducci has made it clear the journey to recovery will be expensive and lengthy.
Woolworths has booked more $4.6 billion in charges and restructuring costs since Banducci took charge – first as head of supermarkets in March last year and then as chief executive in February – and will report a bottom-line loss of $1.3 billion in 2016.
Woolworths has also invested more than $1 billion into grocery prices and service in supermarkets over the last 18 months. While there are some encouraging signs – customer transactions have risen, units sold have improved and staff morale and customer satisfaction are finally heading in the right direction – same-store sales are still going backwards and BIG W has plunged into the red.
Banducci has now taken a leaf out of Andrew Mackenzie's playbook at BHP Billiton and is shrinking Woolworths to greatness.
Five hundred jobs will be lost at Woolworths' support office, taking the number of jobs shed over the last year to around 1100, and another 1000 staff are moving from head office and shared services roles into the operating businesses.
Three years after analysts first raised concerns about the supermarket "space race", Banducci is pulling the pin on O'Brien's aggressive new-store plans, slashing the number of new supermarkets from 30 a year to 15.
More than 30 stores will close in the next 12 months at a cost of $196 million and another 34 stores and 20 development sites are under review.
Banducci plans to sell the EziBuy business that O'Brien acquired only three years ago to underpin BIG W's e-commerce efforts. He has also pulled the plug on a proposed marketplace business and parts of the $1 billion Mercury II supply chain restructure, which aimed to slash the cost of transporting goods across the country.
Nothing is off the table. Banducci is even prepared to sell Woolworths' non-food assets and has cleared the way for divestments or demergers by establishing separate governance structures and boards for what are now referred to as "portfolio businesses" – BIG W, hotels and liquor group ALH, and data analytics business Quantium.
Last week he appointed Woolworths' deputy chief financial officer, Colin Storrie, a former Qantas and AMP executive, to the new position of director of the portfolio businesses - emphasising the split between the food and non-food businesses.
"We have been deliberate in saying we have our food and liquor business and then we have our portfolio businesses," Banducci told the Financial Review after unveiling details of his new lean operating model and store closures last week.
"We are working on giving the portfolio businesses the control they need to be successful but we'll continue over the coming year to ensure Woolworths are the right, natural owner of any of those businesses," he said.
Without BIG W, hotels or even petrol, Woolworths would revert to being a pure-play food and liquor retailer for the first time since the 1960s.
Sales would slump from $61 billion to less than $50 billion and Woolworths would give up any hope of regaining from Wesfarmers its title of Australia's largest retailer.
Investors are unfazed about the prospect of Woolworths becoming a shadow of its former self.
They have cautiously welcomed potential asset sales, as long as the proceeds, which could exceed $5 billion, are reinvested wisely or returned to shareholders.
"Shrinking back to the core food and liquor business is something the market would like," says Perpetual Investments' head of equities Paul Skamvougeras, who holds shares worth more than $1.5 billion.
"For the last five years not only BIG W and hardware but the core food and liquor business has been mismanaged, they've relied on the strength of the core business ... they have if you like squandered the money, they haven't invested wisely, the capital allocation has been poor.
"Food and liquor is a highly cash generative business – run properly it's a very attractive business."
"These are complex issues," says Perennial Value managing director John Murray. "Nonetheless we support management taking action in relation to non-core assets where it would deliver value for shareholders over the medium term.
"It is clear some reinvestment into the supermarkets business is required, however, once again, this should only occur where the investment will create value in the medium term."
In an attempt to shift the focus away from short-term gains and create long-term value, Woolworths is adopting new performance metrics – sales per square metre and return on funds employed – as part of management incentives.
Shareholders say the focus in the past on earnings per share growth and total shareholder returns contributed to poor decisions including raising grocery prices to fatten margins, opening new stores rather than fixing existing stores and, of course, the disastrous foray into home improvement, which has cost Woolworths more than $3 billion.
Woolworths' supermarket sales per square metre once exceeded those at Coles. But as Coles' productivity has forged ahead, Woolworths' sales per square metre have fallen 3 per cent since their peak in 2011, according to Citigroup. Group return on funds employed has dropped from 29.3 per cent to 25.7 per cent due to investment into hardware and unproductive new stores.
"The EPS growth hurdles that were in place a number of years ago were fairly aggressive and may have encouraged management to adopt a strategy which, with the benefit of hindsight, was high risk," says Murray.
"In broad terms, we agree with Brad Banducci's plan, particularly around the need for management to focus on improving sales per square metre in the supermarkets business.
"In turn, this will benefit profits over time."
Skamvougeras agrees that wrong incentives played a part in Woolworths' downfall, but says the board and management were more to blame.
"This is a business where they've taken their eye off the ball," says Skamvougeras.
"They got arrogant, they got complacent, and they forgot to reinvest in the business – that allowed competitors such as Coles and Aldi to get to where they are today.
"The foundations are in place for a turnaround to happen – the changes on the board, new management, the change of culture, the focus on KPIs that matter such as sales per square metre and ROFE, owning up to the mistakes of the past.
"As to when it actually takes hold, execution is the key. Let's see how they go."