Woolworths' $1 billion plan to rewrite the retail rule book

Woolworths' radical $1 billion transformation plan will change the entire Australian retail landscape and once again see the group lead the way.

All Woolworths' rivals -- from Coles to Myer and including Target, K-Mart and Metcash -- had better understand that the giant is reawakening.

Woolworths is not just spending another $1 billion plus on expansion. Its so-called Mercury Two program is designed to change the way Australians think about shopping. No one has attempted anything like it in Australia and it is rare in the world.

Today Coles will announce a $1bn plus investment program but it is a conventional investment. Woolworths’, meanwhile, is radical.

Many will remember that Mercury One, introduced by former chief executive Roger Corbett, transformed Woolworths by adapting American techniques used by Wal-Mart to Australia. Corbett substantially lowered the cost of retail distribution in Australia, and Mercury One and associated plans gave Woolworths supermarket leadership. Coles has since bridged much of the gap but is still catching up.

By titling his new plan Mercury Two, current chief executive Grant O’Brien is telling the world he believes that his new Woolworths transformation will be just as dramatic as the one undertaken by Corbett.

If O’Brien can make it work I believe Mercury Two will change the retail rulebook even more radically than Mercury One -- particularly as it covers not just food but almost all types of goods, including clothes and furniture.

To understand what O’Brien is planning you have to go back to two key moves last year. The first was to buy 50 per cent of Quantium to deliver Woolworths the best information available on customer buying patterns. Woolworths wants to know not simply what customers are buying but to be able to anticipate what they will buy because of the Quantium analysis of the data. And once you know customer buying patterns in advance the next step is to transform the supply chain. But the Woolworths supply chain transformation goes much further.

The second acquisition was EziBuy in New Zealand, which greatly enhanced the skills of the Australian operation in direct selling. Most of Woolworths' direct selling knowledge came from Cellarmasters in liquor. EziBuy widened the scope and prepared the company for the next stage.

And so Mercury Two is about taking those two acquired skills and attaching them to a new way of thinking about in-store and online retailing. Currently, online retailing is about people ordering online and then the products being delivered to the home or perhaps picked up at the nearest store.

The first part of Mercury Two is to transform the supply chain so that not only are stores restocked more efficiently but that restocking process is aligned to the customer knowledge that Woolworths gains via Quantium data.

And the process is extended to online so that when a customer orders a product that’s the product they get. Currently, all too often when peas are ordered it is beans that are supplied.

Under Mercury Two customers will also be able to nominate a time of delivery -- same day or in a day or so. If customers want same day delivery it should be routine. That requires first class systems and scale.

To that base improvement in the online and in-store systems is then added a radical concept -- while home delivery will still be available, Woolworths customers will be able to pick up their supermarket orders from Big W, Dan Murphy's, Masters and participating Caltex service stations. Similarly, Big W and Dan Murphy's online customers will be able to collect from all other group outlets.

That transforms the shopping experience. Suppliers will deliver their goods to Woolworths distribution centres but these centres will need to be transformed to undertake not just their current distribution (albeit improved) but a new distribution pattern.

It will take five years to complete the change. You would not undertake such a radical change unless you believed that online retailing was going to be much bigger. It is currently around 2 or 3 per cent of Woolworths' sales. Best practice offshore is about 10 per cent.

If O’Brien can make Mercury Two work, online retailing is going to go way beyond 10 per cent of Woolworths’ group sales. We could be talking about numbers around 20 per cent. And in the process, as in Mercury One the cost of Woolworths' retailing will be slashed.

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