If you are looking for an example of how an IT-led transformation can build shareholder value, you could do much worse than look at Woolworths in Australia.
As systems and technologies developed across the ditch are progressively being applied in New Zealand, Woolies local competitors might be well advised to keep a close eye on developments as well.
Last month, former Woolworths CEO Roger Corbett told attendees at HP’s Tech @ Work conference, in Melbourne, about the strategies that have driven the supermarket operator’s share price from A$4 (NZ$4.81) to north of A$30 in the recent past. At the time of writing, shares were trading at A$28.50.
Corbett told of how, in 1987, Woolies’ rival Coles had the biggest chains and the biggest brands in Australia. In addition to its Coles supermarkets, the company owned Target, Kmart and Grace Brothers, as well as Liquorland. It was, he says, totally dominant.
Woolworths, meanwhile, was number two in supermarkets, and not far ahead of number three, Franklins. Its Big W brand had consistently failed to make a profit and Dick Smith was in trouble trying to enter the US market.
Corbett says it’s important for any business to understand the forces at work in its industry and where it sits in the business cycle. He says major changes were happening before and after 1987, reforming the distribution of goods and changing the balance of profitability. Retailers were, generally, not smart enough to understand the changes.
As shopping migrated from local strips to supermarkets and then into shopping centres, more and more people were “clipping the ticket” of the retailer, he says. The real estate equation changed altogether. The property value was transferred to companies such as Westfield or General Property.
Supermarket operators lost control of their occupancy costs and of their flexibility, he says.
“IT and logistics is a critical issue,” he says. This, too, had been subcontracted out, adding yet more businesses clipping the ticket.
Corbett says IT had been “massively oversold into retail”. Management of this was delegated to others and, once again, the ticket was being clipped. As supply lines migrated from the US and Britain to Japan and later China, yet more intermediaries found a place in the chain and took their cut.
In 1993, Woolies shares were trading at A$4 and the company was losing momentum, Corbett says. Supermarkets were driven by margin and not volume.
Woolies realised that vital issues of cost efficiency, store levels, staff empowerment and IT-driven logistics had to be addressed to deliver costs lower than those of the competition.
The first move was to amalgamate the seven state businesses into one national one, Corbett says. Then the stores had to be improved to be the best in the market. Logistics had to be efficient and the IT behind it had to be “world class”.
Woolies set about developing its own shopping centres. It instigated a rewards-based culture, including equity, through options, for staff right down to the department manager level.
The result of the transformation was a $7 billion cumulative reduction in costs which could be passed on to customers through cheaper prices, he says.
“It gave us an immense strategic advantage over Coles,” he says.
Corbett finished his keynote on a more sombre note, issuing a warning the China’s growth simply cannot continue at its present rate.
“If China continues to develop at 8% GNP for the next 20 years, it will consume two-thirds of the world’s grain, two times the world’s paper production and have 1.1 billion cars on the road,” Corbett says. “The world’s stock [of cars] is now 800 million.
“It’s not going to work — big time. And what about India?”
Corbett says the world is fast facing a crisis and the failure of trade negotiations at Doha to reduce the “grotesque” agricultural subsidies of the US, Japan and Europe are compounding the problem.
“Is it a crisis, ladies and gentlemen? It’s a crisis,” he says, adding that free market leadership on such issues is essential.
• Rob O’Neill attended HP Tech @ Work in Melbourne as a guest of HP.