Analysts split on the future of Big W
WHAT went wrong with Big W?
A perfect storm of a rapidly changing competitive landscape, a resurgent Kmart and poor merchandising decisions are all to blame, according to retail analysts.
With Woolworths announcing the resignation of Big W chief executive Sally Macdonald on Wednesday after just 10 months in the role, speculation is growing the group is looking to offload its department store just like Masters.
Geoff Dart, retail analyst with DGC Advisory, said the decline at Big W started five to eight years ago, at the same time Kmart began to flourish under Guy Russo.
“They don’t know who they are,” he said.
“They’ve lost their identity. For example, they used to absolutely own back-to-school. Guy Russo turned Kmart around, he positioned it as cheap and cheerful, and absolutely owned that space.
“Big W and Target have never developed that positioning in the marketplace — good-quality things at affordable prices. They’ve never understood who they’re targeting, and consequently how to position the brand.”
Daniel Mueller, senior equities analyst with Forager Funds Management, said it was around five years ago that Woolworths decided to focus more on its “core” 30-plus female customer, having previously sold more general merchandise such as fishing gear.
“The problem wasn’t so much the strategy, it was the execution,” he said.
“It was very vague how they were going to implement it. The buying department was saying, ‘Well what do we do? Do we de-stock these now non-core ranges? Do we buy new stuff? It was a bit of a mess, and I think it was what really broke the back of the company.”
Peter Ryan, retail analyst with Red Communication Australia, said Big W had “never really recovered” after its former head of merchandise passed away several years ago, leaving a “vacuum” in the team.
“It’s a problem with long roots,” he said.
“The decline has slowly been happening for more than a decade. It’s 15 years since Big W was really at its peak.
“The merchandising mix in the store is now patchy, customers don’t to understand the relevance of the Big W identity, and it’s struggling to compete with Kmart on pure price.
“There was a complete failure to understand what was happening in the discount apparel sector with the entrance of H&M and Zara. Kmart went cheap on apparel and effectively stuck the knife into its sibling, and did damage to Big W.”
Steve Kulmar, analyst with Retail Oasis, said he was “confused” by Woolworths’ announcement, which said the three- to five-year time horizon for turning around the business was “inconsistent with Sally’s expectation when she joined Big W”.
He said he believed Ms Macdonald had been appointed to prepare Big W for sale, largely by taking out costs. He pointed out that her replacement, David Walker, was responsible for tidying up Masters when he took over Woolworths’ home improvement arm in February.
“You can take costs out of a business pretty quickly,” he said.
“It’s not a hugely difficult task. You take 10 per cent out, and whether it’s the right 10 per cent is irrelevant. In the short term you’ll maybe see and uplift in performance.
“But you’re not going to save a business like Big W by cutting costs. You save it by investing in merchandise, people and stores. I suspect Sally wasn’t taking costs out fast enough for the board.”
On the question of whether Big W could be saved, and more importantly, whether it should be, analysts were split. But one thing is certain: despite the success of Kmart, the combined discount department store segment has not actually grown in real terms for more than a decade.
In other words, Kmart’s success has been entirely at the expense of Big W and sister store Target.
“There is a ceiling for it,” said Mr Kulmar.
“I think the discount department store category in Australia is stuffed, even before Amazon enters. When a business like Amazon enters, it decimates them.”
Mr Kulmar said he believed Woolworths saw the writing on the wall and wanted to exit the category before the arrival of Amazon.
“A lot of them are untidy businesses that are going to be greatly challenged,” he said.
“You can’t really afford to play in the bottom end of the market unless you are very efficient and very dominant. Survival would suggest there is not room for three discount department stores in Australia.”
Mr Mueller agreed that there were too many discount stores.
“It’s just a very competitive space and it’s probably not as clearly defined as it used to be, there is encroachment both from the higher and lower end,” he said.
“In saying that there are some that get it right. The key is making a really clear value proposition and making it clear what you stand for, and I don’t think Big W has done that.
“In the grand scheme of things for Woolworths, it’s a pretty small part of their business, and a bit of a distraction on management’s time. I don’t think it’s terminal, but to fix it is probably a three-year minimum turnaround, and that might just be too long for Woolworths to put up with.”
Mr Dart, however, said he thought the business could be salvaged, just as he believed Masters could have been.
“The biggest obstacle with Woolies and Masters was arrogance and ignorance, they just failed to listen to common sense,” he said.
“Big W is a well established business, it’s still turning over around $4 billion so it’s got substance and weight, it’s got a very good store footprint and still has good consumer heritage.”
Mr Dart also disagreed about the potential impact of Amazon, saying he thought the eCommerce giant’s ambitious Australian rollout would fail. “We just don’t have the population,” he said. “We’re the same landmass as the US and only 24 million compared to 300 million. Logistically that’s difficult. I don’t think they will cover the cost of the capital.”
According to Mr Dart, Big W would have to reinvent itself by expanding into new categories, just as Bunnings now sold more kitchens than Ikea and JB Hi-Fi was moving into whitegoods with the acquisition of The Good Guys. “They can’t survive as a discount department store,” he said.
Mr Ryan said he didn’t think Woolworths would be best served to dump Big W, just as he didn’t agree with the closure of Masters.
“The track record of the current regime at board level at Woolworths is walking away from problems they think are too big,” he said.
“Clearly they need to fix it. It’s a very complicated set of symptoms that need to be treated, and in Woolworths Group, a business that is somewhat dysfunctional at the moment, that would have been a very tough job in very tough circumstances.”
Big W now “needs to find its place” if its going to survive, according to Mr Ryan. “The first thing is understanding what its value proposition is beyond just pure price,” he said. “What is it going to sell cheaply?”
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Originally published as How Big W went so horribly wrong