Woolworths' turnaround hits chilli moment

What one small vegetable tells us about the Woolies turnaround.

About 18 months ago there was a moment when I thought Woolworths had lost the plot, hard  evidence of it totally forgetting what had made it a successful business in the first place.

I was at the auto-checkout having problems with a chilli (no, not in that sense – those problems came later). The system appeared to work as follows: You scanned an item and put it in the bag. The computer would then check the additional weight in the bag and verify it against the theoretical weight in the computer system.

If one matched the other, you could carry on scanning like a demon. If it didn't, a red light would flash, accompanied by a bleep. The attendant would then amble over and all the other shoppers would look at you as though you were a sad, hopeless bloke trying to steal a tin of beans.

It was a slow, inconvenient and embarrassing system made worse by the act of buying something light like a chilli. The scales never seemed to tally and an alarm was almost guaranteed. I could never get out of the place without an attendant coming over at least once. We got to know each other so well I wondered whether it would be rude not to invite her to my next BBQ (chilli prawns, in case you're wondering).

The entire experience was counter-productive, which is one of the reasons why Aldi thinks self-checkouts are a stupid idea. Expensive labour had to compensate for poorly programmed machines while customers were slowed down, frustrated and humiliated, all presumably to save a few measly shoplifting dollars. If there was another supermarket around the corner that didn't have weighing machines that presumed customers were fruit and veg thieves I would have been in there like a shot.

Companies that make decisions like this usually fix them quickly. Ones that don't tend to be monopolists that know they can mistreat their customers because they have no choice. Woolies is not in that fortunate position, and yet it was behaving like it. The groceries market is becoming more competitive, not less, but the company was happy to frustrate customers, almost inviting them to go elsewhere.

In his review of Woolworths' recent interim result, James Greenhalgh said that 'management wants to fix the cultural issues in head office, which it believes remains divorced from stores and customers.' I'm guessing this was one such issue.

Then, a few months ago, the chilli problem disappeared. I have no idea whether the scales were re-set or the system now ignores items that weigh less than a certain amount but I no longer grit my teeth as I enter the place. This and a few other small improvements give me confidence that the problems James identified are being addressed.

And the moral of the story? At a time when companies talk incessantly of the value of big data, our personal experience as investors can offer the kind of insights unavailable elsewhere, especially in retailing where we can see first-hand the sharp end of a companies' business.

Peter Lynch, author of One Up on Wall Street, was on to this years ago. Whilst analysts busy themselves with spreadsheet models, real-world investors can see how a business is changing up-close-and-personal. Of course, the analysts will eventually catch up as the incremental changes Woolies makes in its business show up in the numbers. But by the time they do the chances are the share price will be higher and the opportunity lost.

Of course, a small anecdote like this is no compensation for the kind of deep, analytical work James has been doing on this stock, but it does add colour to the picture, as does the fact that the general negativity around Woolworths may be infecting how customers think about the company. James emailed on this point yesterday, saying that there's 'no doubt Woolworths is doing a few things wrong, but it's simply not as bad as the “mood” makes out'.

That's the essential truth behind the case for our current Woolworths recommendation. James says 'it will still take time to reverse the 0.8% decline in same-store sales that food, liquor and petrol reported in the half, but there are already early signs of improvement.'

My chilli anecdote is a small but revealing example. For those thinking of joining the register, now might be a great time to revisit our recent reviews on the stock.

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