Woolworths' ill-starred foreign flirtation

ParknShop wasn't the most logical purchase for Woolworths, but the supermarket giant’s failed bid highlights its growth constraints at home.

For years Australia’s largest retailer, Woolworths, has been searching for growth options beyond these shores to help restore net income growth to the double-digit pace that was reported every year for 11 straight years until 2011.

Woolies, under former chief executive Michael Luscombe, made repeated tilts at New Zealand’s largest listed retailer, The Warehouse, which were blocked by competition concerns. There was work done on a small North American supermarket chain acquisition, which was wisely abandoned.

And now another failed flirtation, this time with Hong Kong supermarket chain ParknShop after owner Hutchison Whampoa pulled the sale process due to disappointing bids. Woolies chief executive Grant O’Brien had reportedly lobbed a first-round offer in the vicinity of $3 billion for the chain, which controls around one-third of Hong Kong’s grocery market with 270 stores.

While fund managers seem willing to support the prospect of an offshore acquisition of some size, ParknShop was not seen as the most logical option. It is a business that services seven million people in a small geographic area, with a small store size.

Woolworths’ supermarket business in Australia is very different, with the main logistical challenge that of delivering fresh food across a vast geographic area. Whether the Australian firm would have had the necessary expertise for Hong Kong was debatable, even before the question of whether the deal would have been seen as a jumping off point for greater China, and ParknShop’s 60 outlets on the mainland.

Nevertheless, the fact Woolworths explored such a transformative deal reflects that it is bumping up against growth constraints at home. Total sales surpassed $55 billion in the latest financial year and much of its investment has been in stabilising returns from its core Australian food and liquor business, helped by customer insights derived from the seven million members of the Everyday Rewards loyalty program.

O’Brien has a few avenues for domestic growth. Opinion is clearly divided on the expensive, still loss-making foray into hardware via Masters, including revenue and cost forecasts that proved too optimistic and that misjudged the seasonality inherent in the business. However, with the hardware market still fragmented despite the established might of Bunnings, investors are mostly willing to give O’Brien the benefit of the doubt.

The other real golden opportunity for expansion is in online retail, particularly at discount department store Big W. Last month, Big W expanded into ebooks with an offering of mainly genre and contemporary fiction for mobile devices.

Arnhem Investment Management partner Martin Duncan estimates Australia’s non-food retail market is worth some $175 billion annually. National Australia Bank data puts online retail sales at $14.2 billion over the year to August, or about 6.3 per cent of total (food and non-food) retail spending.

Woolworths bought some online expertise with its $A306 million purchase of New Zealand’s EziBuy earlier this year, a direct-to-customer retailer with fulfilment expertise in online apparel and 68 per cent of its sales in Australia via a multi-platform model of the web, a call centre and old-fashioned catalogues. EziBuy is now exploring mobile platforms, which could complement Woolies’ existing mobile apps.

It was a small purchase in the scheme of things for Woolies, though strategic. If the country’s retail giant can’t find a winning acquisition of scale in the next year or two, investors are likely to renew pressure for a capital return.