The worth of Woolies

Woolworths once again finds itself at a crossroads. Just as it was gearing up for the arrival of a new chief executive with plans to resurrect the brand, one of its former employees has stolen his thunder.

The news that Malcolm Walker, head of frozen food store Iceland – and a former trainee manager at Woolworths – had tabled a bid for the retailer has eclipsed the announcement of the imminent arrival of Steve Johnson, the man who turned around Focus DIY, as chief executive.

Woolworths has rejected the offer from the Walker-led consortium – described as “opportunistic” by one analyst and “unacceptable” by Woolies – but it has certainly upped the ante for Johnson and raised intriguing questions about the fading brand and where it is heading.

The Iceland supremo’s first offer, believed to be in the region of £50m, was simply for the high street stores. It did not include EUK or 2 Entertain – Woolworths’ wholesale and licensing divisions, and the group’s most profitable operations. He also refused to take on Woolworths’ £124m debt or its pension deficit of around £50m.

According to reports, Walker and his partners, including Baugur Group, which holds 10% of Woolworths, have already contacted other shareholders of the retailer in an effort to force its directors to open discussions. It remains to be seen if Walker returns with an improved bid or if other investors will begin circling.

In some ways the brand resembles a faded seaside town. Where once it was filled with the “Wonder of Woolies”, it is now down-at-heel and directionless. Despite a portfolio of 815 stores and a turnover of £1.7bn a year, Woolies’ share price has plunged more than 70% this year. It stands at around 7p – valuing the business at just £100m. A performance that led to the ousting of previous chief executive Trevor Bish-Jones. Johnson, whose appointment was announced last week, arrives in September and has been promised an £8m bonus if he can drag the share price up to 20p.

Woolworths says it has plans to reinvent itself after working with strategy consultants LEK, and the extent of those plans will be revealed next month. For now, it contents itself with saying it plans to develop a “sustainable value retail proposition based… on its small- to medium-sized stores”.

Analysts, however, believe that the Woolworths name has little or no impact in the high street, and criticise the brand in its current format. Neil Saunders, consulting director of Verdict, says there are two reasons for Woolies’ woes. The first is competition. “Grocers sell a lot of the same product categories and it is more convenient for people to buy things at the supermarket,” he says. The other reason is Woolworths’ own fault – the stores look like a “jumble sale”.

Roy Palmer, chairman of Pragma Consultation, agrees, saying the shop format resembles a “charity shop.” He adds: “I don’t think Trevor Bish-Jones ever got into what the brand stood for. It doesn’t have a core set of values or principles.”

Mintel senior retail analyst Ben Perkins joins the chorus of disapproval: “The question about Woolworths is why? Why does it exist and what does it do? The format doesn’t have a future. It is a brand that has outstayed its welcome,” he says.

These are not the sort of comments Johnson, or even Walker, would welcome. However, there is a glimmer of hope – the brand is still held in affection by the public. “There is a place for it in people’s hearts, if not in their pockets at the moment,” says Palmer.

The challenge it faces is finding a niche in a market where other retailers have stolen the ground from under its feet. Brands like Aldi, Lidl and Primark are milking the middle classes’ desire for value in an uncertain economic climate. Wilkinsons and Robert Dyas have taken over the variety store model and even the likes of Poundland and 99p Stores are muscling in.

The idea of focusing on the smaller stores may have some merit says Perkins, but the bigger outlets offer little. Perhaps still smarting from the failed “big W” out of town venture, Woolies appears to agree, and last month offloaded several London stores to Waitrose.

So what of Walker’s bid? It could be an extravagant act of revenge from the trainee manager of Woolworths’ Wrexham branch who, legend has it, was sacked for moonlighting at a frozen food store he was setting up nearby – called Iceland. More realistically it has been suggested that it is a property play.

However, Woolworths’ recent troubled history means that selling off retail space is not a viable option. “It’s not an asset strip any more, because the assets have already been stripped,” says one observer.

The sheer size of the portfolio and its presence across the country could give a food retailer like Iceland an incentive – and it has been suggested that a food offering could help the Woolworths brand. Earlier this year it was announced that Somerfield concessions would be opening in some stores – and this may have prompted Walker to make his move. Perkins says that there could be potential for the brands to develop a mixed offering and create a “poor man’s M&S”.

Whatever the reasons for Walker’s interest it certainly puts pressure on the incoming Johnson, who has been tasked with replicating the success he had in rescuing Focus DIY. Yet Walker’s efforts with Iceland mean he has a better record in turning around failing businesses, says Saunders.

Woolworths has nailed its colours to the mast in rejecting Walker. “It is incumbent upon them now to prove that they have something up their sleeve. If they can’t show that they have got the right man there will be a lot of shareholder anger,” says Saunders. “There will be more pressure on Johnson now.”

He describes Walker as a “stalking horse” and says his bid may have opened Pandora’s box. “If Woolworths becomes the focus of a lot of interest there is the danger that the new management will be sucked into looking at offers and not focusing on the day-to-day running of the business.”

But Palmer is doubtful that private investors will want to get involved. He points to a takeover bid from equity company Apax in 2005. It offered over 58p a share in a deal that would have been worth £837m, but withdrew the bid after studying the books. Woolies’ shares plunged 25% as a result.

Shareholders may wish they had come to terms with Apax – after all, 7p doesn’t buy much, even at Woolworths. Johnson’s task will be to make sure they can at least afford something from the pick’n’mix counter.

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