Woolworths warned it would get nothing for Big W if it sold the chain tomorrow, after shareholders grilled it over the future of the chain following the shock exit of its chief, Sally Macdonald, last week.
Chairman Gordon Cairns said Australia's discount supermarket sector was "significantly challenged" in Australia, answering a series of difficult questions from the floor of its annual meeting.
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The Woolworths warning
Comment: A warning to everyone in business that markets are constantly changing and that anyone who is not keeping up with the change can fail.
"It has been harder in Big W than we anticipated, we are on the record as saying that no decision will be taken on the business until we have improved the business," Mr Cairns said.
Mr Cairns was quick to assure investors this was not another Masters Home Improvement, least of all because of the scale of the chain.
"Big W made about $200 million two or three years ago, the truth of the matter is we've let it deteriorate and if we were to try and sell it now, we'd probably get nothing for it," he said
Mr Cairns warned the turnaround would take time but said Woolworths had proved with its supermarkets operation that it could improve its performance.
"This is not just an act of faith ... we will not worry about the ants when the elephants are getting away," Mr Cairns said.
"Big W might go from where it is to $200 million, our supermarkets make $2 billion."
"I'm personally disappointed Sally chose to leave us but I'm confident with David (Walker) in charge we can start to rebuild this business."
Woolworths chief Brad Banducci said Woolworths remained committed to the Big W transformation however he appeared to leave the door ajar for a change in direction.
He said Woolworths would continue to "refine and build on the transformation agenda," suggesting the shock loss of Ms Macdonald could trigger a shift in thinking.
"In our Q1 results, we noted that Big W was at the start of a multi-year turnaround," Mr Banducci said.
We didn't treat Aldi with the respect they deserved.
Brad Banducci
"Sally Macdonald unfortunately resigned last week. However, in her time with the company, Sally made material progress in restructuring the business in many areas ... we plan to maintain our focus on this transformation."
Supermarkets Business
Big W didn't distract shareholders from the retail giant's core supermarket business with a number of tough questions about its "confusing" loyalty scheme and its strategy for competing with Aldi.
Woolworths admitted its response to Aldi had been "lackadaisical" but the retailer said it had invested in price as well as its house brands to compete with the German discount retailer's range.
"We didn't treat Aldi with the respect they deserved," Mr Banducci said.
He said Woolworths initially matched Aldi on price with its Homebrand range but it didn't deliver a sales boost.
In the course of this year, Woolworths has phased out Homebrand and replaced it with Essentials but Mr Banducci said it would take more than private label to compete with the grocery discounters.
"The truth is, if we would like to succeed against Aldi we need to differentiate ourselves and that's why we're obsessively focused on having the best range in store and the best team," Mr Banducci said.
Australia's biggest supermarket chain is also looking to emerging competitors such as Amazon and it has set up a special unit to focus on these new players and prepare the business for their arrival.
Director Kathryn Tesija said a lot of things Woolworths was doing "today" were focused on customer loyalty to help it "compete and prepare for the future".
"They (Amazon) are a formidable competitor, there are lots ... but they would be new," Ms Tesija said.
Changing Loyalty
Woolworths hinted there were further changes planned for its loyalty scheme in the new year after a number of shareholders criticised it for altering the scheme and dumping its partnership with Qantas' Frequent Flyers.
Mr Banducci defended the decision in regard to Qantas, saying only a small proportion of Woolworths' shoppers were able to take advantage of Frequent Flyer points.
He said the scheme needed to be receptive to customers but the challenge was developing a scheme that met the different needs of all its customers.
While acknowledging the criticism of the loyalty scheme, Mr Cairns said Woolworths would continue to make mistakes because it was committed to trying new things.
"We are not perfect, if you think we will never make a mistake again you will be disappointed," Mr Cairns said.
"We will continue to make mistakes because we will continue to try things ... we are humble enough to admit when we're wrong."
Looking Forward
Mr Cairns said the board was feeling optimistic about the future despite its legal battle with the Australian Competition and Consumer Commission over its treatment of suppliers and its ongoing arbitration with its Masters Home Improvement partner, Lowe's.
"That's not blind optimism, it's based on fact," Mr Cairns said.
"We lost the trust of our customers, we abused it, it's very easy to abuse and very hard to get back.
"The financial results are disappointing, I want to reiterate this has been a year of significant progress on our transformation journey, there is much to do and we remain determined."
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