Numbers show Checkers, PnP eating Woolies Food’s lunch

After inflation, comparable sales declined for the first time in many, many years …

Woolies Food. No Starbucks, no Kauai counter, no Krispy Kreme doughnuts … Image: Moneyweb

There has been some concern among analysts and investors about just how long Woolworths could sustain its above-market growth in its Food business.

The one strategy former CEO Ian Moir got right (he got many wrong) was to become a big foods business – with larger and larger supermarkets, and an offer, particularly on basics, that competed toe-to-toe with entrenched rivals Checkers and Pick n Pay (and, to some extent, Spar).

The plan paid off handsomely, and despite an aggressive push by Checkers for upper-income customers, Woolworths Food has been growing ahead of the market for almost a decade.

Read: Exit Aus and list Woolworths Food separately, say top retail analysts [Aug 2021]

Until now.

A trading update for the year ended 26 June illustrates a business under immense pressure. Even the top-line numbers don’t look fantastic. Sales grew by 4.2% in the 52 weeks, an improvement on the first half (3.8%), but inflation was 3.5%.

Woolies blames:

  • The “high base” (which might’ve been a reasonable reason a year ago when comparing with the stocking up ahead of lockdown); and
  • “the return to out-of-home consumption” (a fair excuse now that the country has opened up post-Covid); and
  • an “increasingly competitive backdrop” (duh!); and
  • “low product inflation across key categories” (this is peculiar given that the average Woolies customer probably experiences far higher inflation than a typical, more middle-class one shopping at a rival).

Contrast the Woolies update against rival Shoprite’s update from Tuesday (also for 52 weeks to the beginning of July), and it’s clear that one business is doing a lot better than the other.

Sales in Shoprite’s South African supermarkets unit (Shoprite, Checkers and its liquor business) grew by 12.6% on a comparable basis (its prior retail year had 53 weeks). That’s a factor of three greater than Woolies Food! Inflation was 5%, as measured by Shoprite.

We won’t know the detail until the first week of September, but it is nearly certain that Checkers has continued to chip away at the core Woolies customer.

It has been competing for share of wallet for some time, and its premium Fresh X stores are arguably a better experience than many Woolies stores.

There has been nothing new added to larger Woolies Food (‘The Market’) stores in quite some time.

There’s fresh fruit and veg. A coffee station. A butcher and a bakery. Groceries, toiletries, the rest.

Checkers, on the other hand, has added in-store Starbucks and Kauai counters, a well-stocked wine cellar, sushi, Krispy Kreme doughnuts, as well as ‘chocolatier’ and honey counters. One may argue, fairly, that it has few of these competencies in-house, and that it has had to leverage other brands to make stores more appealing. Customers likely don’t see it this way. They only talk of the convenience of “having a Starbucks in Dainfern” or being able to “grab a smoothie” after their shop.

Back to Woolies.

Sure, sales were up 4.2%, but like-for-like sales (excluding the impact of new stores) were only up 3.1%.

Factor in inflation (3.5%) and volume ‘growth’ has turned negative for the first time in many, many years.

Source: Woolworths

It’s almost impossible to compare Pick n Pay’s trading performance because its trading update is for 18 weeks only, and its two rivals reported full-year numbers.

However, even newly resurgent Pick n Pay says sales were up by 10.5%, or 8.3% if you exclude new stores. It says inflation was 5%.

That’s still an awful lot more growth than that reported by Woolies.

Period Total sales Like-for-like Inflation
Woolies Food 52 weeks to 26 June 4.2% 3.1% 3.5%
Shoprite RSA 52 weeks to 3 July 12.6% 10.6% 3.9%
Pick n Pay SA 18 weeks to 3 July 10.5% 8.3% 5%

Woolworths executives are surely concerned about Pick n Pay’s plan to effectively split its core brand into two so that it can effectively target the higher-end as well as the ‘very’ middle-class shopper.

This strategy is beginning to take shape, with 10 stores already upgraded to focus on either the ‘Project Red’ (middle) proposition or compete head-on with Woolies and Checkers in places like Constantia and Lonehill.

It says sales in these pilot stores grew by 18%, on average, since launch – and this excludes the first three weeks where it relies heavily on promotional activity to drive interest and footfall.

Read: What took Pick n Pay so long?

Worryingly – for Woolies and Checkers, at least – Pick n Pay says “lessons learnt from the initial upgrades include that strong results are achievable with limited capital expenditure per store given the right customer value proposition (CVP) and rigorous execution”.

It gave no firm commitment in May when it unveiled this strategy, but Pick n Pay now says:

“This has given us confidence to accelerate the plan. Our objective is to have 40 stores upgraded to the new CVP by the end of H1FY23, and 150 by February 2023.”

So far, Woolies has countered with a promotional campaign centred on “everyday quality products” (both its own brand as well as third-party brands) – ‘The W List’ – in an effort to get households to do more of their shop at its stores. The response to this to date has been fairly muted.

Its mammoth R750 million ‘investment’ to lower prices in its foods business, announced nearly two years ago, has almost run its course.

Because of these price cuts – effectively subsidised by the group – it competes very well with rivals, but Checkers, Pick n Pay and even Spar have countered and all now hero (and likely subsidise) prices of goods such as fresh chicken (this was Woolies’s first focus category).


What’s Woolies’s next trick?

Given the situation it finds itself in, it’s going to need something to counter an increasingly strong Checkers and a focused and ready-to-scrap Pick n Pay …

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