Strategic Analysis: A Case Study of Woolworths Ltd

1 Strategic Analysis: A Case Study of Woolworths Ltd Paper Outline I.

Executive Summary

II.

Strategic Analysis: A Case Study of Woolworths Ltd A. Introduction B. Background information

III.

Macro Environment Analysis for the Industry A. Political environment B. Economic factors C. Socio-cultural factors D. Technological factors E. Legal

IV.

Industry Analysis using Porter’s 5 Forces Model

A. Threat to market entry B. Threat of substitutes C. Power of suppliers D. Power of buyers E. Rivalry V.

Woolworth’s Competitive Advantage

A. Expanded business portfolio B. International participation VI.

Woolworth’s Business Strategy

VII.

Suitability of this Strategy

2 VIII.

List of References

3

Executive Summary This report analyses in detail the overall environment in which Woolworth supermarket operates with a view of identifying particular areas where the management needs to put in measures that can enhance growth and performance. Woolworth is a retail chain established in both Australia and New Zealand and which mainly deals in foodstuffs.

The chain has further diversified its operations, venturing into other business areas like dealing in the petroleum industry and food restaurants within its premises. The chain has successfully established itself as a market leader in the retail industry, establishing stores in major cities in both Australia and the New Zealand.

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4 Woolworth’s market leadership was mainly achieved through provision of quality service to its clientele and listening to customer pleas and demands and implementing them appropriately. This report evaluates the strong economic and political environments within which Woolworth operates. Other factors that contribute immensely to the growth and performance of the supermarket chains include its internal factors and capabilities such as its strong appeal to keep, attract and maintain customers, the market barriers controlled by the chains which keep new entrants at bay as well as the business diversification that ensures profit maximisation for the company.

5

Table of Contents Executive Summary...........................................................................................................3 Table of Contents..............................................................................................................4 Strategic Analysis: A Case Study of Woolworths Ltd........................................................5 Introduction.....................................................................................................................5 Background information.................................................................................................5 Macro Environment Analysis for the Industry....................................................................6 Political environment......................................................................................................6 Economic factors............................................................................................................7 Socio-cultural factors......................................................................................................8 Technological factors.....................................................................................................9 Legal.............................................................................................................................10 Industry Analysis using Porter’s 5 Forces Model............................................................10 Threat to market entry..................................................................................................10 Threat of substitutes.....................................................................................................11 Power of suppliers........................................................................................................11 Power of buyers...........................................................................................................12 Rivalry..........................................................................................................................12 Woolworth’s Competitive Advantage...............................................................................13 Expanded business portfolio........................................................................................13 International participation.............................................................................................13 Woolworth’s Business Strategy.......................................................................................13 Suitability of this Strategy.............................................................................................14

6 Conclusion.......................................................................................................................14 List of References............................................................................................................15

7 Strategic Analysis: A Case Study of Woolworths Ltd Introduction Woolworths Limited is a retail company based in Australia and whose operations spread across the borders to the neighbouring New Zealand. The retailer chain deals in a multiple of goods and services including food, liquor, hotel services, among many others. Since its formation in 1924, Woolworths has been a success story in the retail industry, expanding very fast to establish subsidiaries and acquiring other retail brands on its growth path. Today, the chain has a huge workforce of over 191,000 and boasts of A$2.14 billion in profits as per the latest figures recorded by close of business in 2011 (Woolworths Supermarkets 2011). This paper analyses the company’s business strategy, investigating its macro environment as well as checking its competitive environment and analysing its competencies as far as resources are concerned.

Background information Woolworths Ltd is a public owned company with its shareholders base exceeding 420,000 people, 40,000 of whom are directly employed by the company (Woolworths Supermarkets 2011). The first Woolworths store was opened in downtown Sydney on December 5th, 1924 with a nominal capital of just £25,000. The company’s initial 11,707 shares were held by 29 people, five of whom were the founders. Woolworths pioneered the conduction of transactions using cash registers; every purchase was accompanied by a receipted printed via the cash register. The stores opened up the first international branch in New Zealand in 1929 which dealt in general merchandise. As part of its expansion program, the chains acquired Foodland supermarkets and Progressive Enterprises, bringing the total number of Woolworths’ stores in Australia today to 750.

8 Woolworths brand has today diversified its business into 5 major divisions which includes supermarkets that mainly stocks households and foodstuffs. The liquor division sells alcohol products through Safeway Liquor, BWS which stands for Beer Wine Spirits, Dan Murphy’s, Woolworths liquor and Cellarmasters. The hotel division is served by ALH Group while the supermarket chains also ventured into the petroleum industry through a partnership deal with Caltex. Other divisions include the consumer electronics, General merchandise and Home improvement (Woolworths Supermarkets 2011).

Macro Environment Analysis for the Industry The macro environment analysis studies external forces whose influence in one way or the other affects the performance of the retail industry in general and Woolworth supermarkets in particular. Players in any business industry often lack the ability to control these external forces.

Political environment The closer economic relations between Australia and New Zealand have benefited Woolworth business performance for a long time. The two countries have established Australia-New Zealand Closer Economic Relations Trade Agreement, ANZCERTA, （ M2PressWIRE 2010 ） which combines the two economies and thus provides Woolworth with the chance to operate in the enlarged economy. The two countries also enjoy political stability which is a perfect environment for doing business.

This is a good assurance for shareholders, both domestic and foreign, that their investment is safe and it is an incentive to them to add even more. The 2011 IMD World Competitiveness Yearbook ranked Australia and New Zealand in positions 3 and 5

9 respectively, which is a good indicator that both economies offer a perfect environment for business activity. With continued political stability, Woolworth is poised to grow and expand even more as many investors are assured of safety in the event that they decide to put their money into the venture. There are no fears of political wars and uprisings that can affect the company’s business performance Economic factors Australia and New Zealand offer economically sound environment that is good for business activity. The two countries, in comparison to other nations, have a high living standard. The World Bank acknowledged Australia as a rich country in 1995 while the country’s GDP hit the $ 1 trillion mark in 2006 ('World Bank puts money on Australia' 2011). The economy’s growth has been rated at 3.3% per annum with one of the highest Purchasing Power Parity, PPP in the world. In 2004, Australia’s PPP was recorded at $30,700. The country has very low inflation and interest rates with one of the best infrastructures in the world. Its education facilities are of advanced quality while a majority of the population are rich. The World Health Organization certifies Australia’s crime rates to be among the lowest in the whole world.

New Zealand has an estimated Purchasing Power Parity PPP of US$28,250 which is relatively high. The economy is made up of manufacturing industries as well as a vibrant service sector which together compliment the agricultural sector. The country’s nominal GDP is the 51 st in the world at $157.877 with a per capita income of $35,374 (‘Economic performance' 2011). New Zealand’s economy has been on the rise since 1984 following rapid restructuring that transformed the economy to a liberalised one.

Unemployment has fallen to a record 3.4 percent in 2007 which was the fifth lowest in

10 OECD nations. The global recession of 2009, however, affected the country’s economy negatively mainly because the country highly depends on international trend. The financial crunch pushed unemployment rates among the youth to very high figures of 17.4% in June 2011.

Australia’s stable economy with the high living standards of her population portends a lucrative market for Woolworth’s business performance. More nationals have a high purchasing power due to the country’s high per capita income and very low unemployment levels. Foreign nationals who visit the country in large numbers also create a huge chunk of the market as they experiment with the unique goods and services offered in Australia.

New Zealand is on the recovery path of her economy following bad economic times between 2008 and 2011. With the recovery plans on course, the country has been experiencing a brain gain as more professionals who had opted to seek better employment in Europe and America troop back. This implies that the country’s living standards are set to improve in the short term period as the problem of unemployment is tackled. New Zealand’s Purchasing Power Parity is also comparatively high and an improved living standard for the entire population will prove substantial for the overall performance of Woolworth.

Socio-cultural factors Woolworth has adopted a green lifestyle in its 2007-2015 sustainability strategy.

This implies that the company is more aware of practices that harm the environment and has thus adopted environmental friendly practices for the good of its consumers and the society at large. More consumers are conscious of their environment and would

11 love to purchase and patronize items and goods that are organic. Woolworth further addresses individual needs of its customers by providing efficient and fast services.

The environmental awareness that is carried out by the supermarket chains continues to attract more clients as everyone today would love to be associated with clean environment.

Technological factors Woolworth continues to invest heavily in information communication technology as it aims at improving service delivery and customer satisfaction. The self-checkout machine is as a result of the company’s initiative and has continued to be emulated by other players in the industry due to its convenience in business performance (Research & M 2012). The machines were introduced in 2008 and enable customers to scan, weigh, as well as pay for their acquired goods through debit, credit or cash cards. The Service Oriented Architecture is yet another technological initiative by Woolworth which enables the supermarket management to monitor general trends in performance at a glance and spot out any existing bottlenecks that could be slowing down business. The speed with which this happens helps the management to put corrective measures into place that eventually averts losses or negative growth. The Visa payWave which is the latest innovation by the stores has helped in reducing average customer waiting time.

The frequency at which the checkout queues are being cleared is much faster than was the case in advance.

These technological advances have attracted more customers to the stores due to the improved efficiency with which clients are being attended to. No customer would

12 love to spend longer times at the check out point than the actual time they spent doing their shopping (Tyre & Hauptman, 1992).

Legal Woolworth is a registered business entity that is licensed to operate in both Australia and New Zealand. The company pays huge taxes to both governments as a legal requirement and the funds go a long way to finance activities of the respective governments such as building and improving infrastructure, paying salaries and buying necessities such as medicines.

The realisation by customers that Woolworth contributes immensely in the growth of their economy convinces as many consumers as possible to purchase from their local store and contribute towards building the economy (Peng, 2004).

Industry Analysis using Porter’s 5 Forces Model Threat to market entry It is difficult for any aspiring supermarket chain to enter into the industry in Australia and New Zealand markets and manage to break even easily. In Australia, Woolworth’s business magnitude together with that of its main competitor, Coles supermarkets, means the two giant stores would easily enjoy economies of scale to the disadvantage of a new entrant. The stores have spread across the nation, opening numerous branches in all major cities and centres and it would require massive capital for an aspiring investor to out perform their business prowess.

Given their huge stores and reliable customer base, Woolworth and Coles have the capacity to stock a lot of goods at a reduced cost. This eventually affords them the

13 power to lower prices below what the market can offer and in the process win more customers than a new entrant could manage (Desarbo, Jedidi & Sinha, 2001).

Threat of substitutes Coles supermarket chains pose the greatest threat to Woolworth’s existence and business performance. The store has been in the industry for longer periods and has established itself just like Woolworth. It has mega stores in major cities and other strategic centres and stocks a variety of commodities including foodstuffs and electronics. These products are also stocked by Woolworth and Coles offers a perfect substitute for consumers who may not be satisfied by the service delivery.

Apart from Coles supermarket, other smaller chains have also established themselves in the industry and include Drake Supermarkets, Jewel Food Stores, BI-LO, IGA, Harris Farm Markets, Safeway and Flemings. Unsatisfied customers therefore have other alternatives from where they can purchase products and services (Bodily & Allen, 1999).

Power of suppliers Suppliers in the supermarket industry have more power owing to the existence of many supermarket chains. All the chains depend on the suppliers directly for the delivery of their stock and this leaves the suppliers with the power to dictate on proceedings in the industry. Through the action of the suppliers, commodity prices can be influenced to their own advantage while leaving the Woolworth together with its clientele base at a disadvantaged position (Cusumano & Takeishi, 1991).

14 Power of buyers Woolworth’s performance in the retail industry depends highly on the power of the buyers. The more buyers the supermarket attracts to do business with, the more chances of growth they create. The management must therefore do everything within their means to ensure that service delivery and quality meets the expectations of customers. If buyers will feel dissatisfied because of poor service, they can easily opt to acquire the same goods and services from rival stores thus loosing out on business opportunities (Ehrenberg, 1964).

Rivalry There are several retail stores operating in the same industry with virtually of them dealing in a variety of products and services. Coles supermarket provides the biggest competition to Woolworth due to its big market share and expanded network.

Other small chains that have substantial market share include Drake Supermarkets, Jewel Food Stores, BI-LO, IGA, Harris Farm Markets, Safeway and Flemings.

With many customers looking for good value for their money, quality in service delivery has remained the main basis upon which customers are making their final decision to buy. All the players in the industry are putting measures in place to ensure they attract more customers and therefore expand their market share.

All the above discussed forces as identified by Porter can easily be manipulated

by Woolworth in order to gain competitive advantage over its rivals. However, any slow reaction to addressing these factors can cause business suffering leading to huge losses and reduced market share (Chang & Singh, 2000).

15 Woolworth’s Competitive Advantage Expanded business portfolio Although Woolworth is a household name in the foodstuffs retail industry, the chain has an expanded business portfolio which includes investments in the oil industry, restaurants, as well as dealership in the electronics industry. The expanded portfolio provides the business with competitive advantage in the sense that it can still maintain profitable performance even in instances where the foodstuffs retail business experiences poor performance.

International participation Woolworth has an international subsidiary in New Zealand which further expands its market as compared to other players. Even in instances where Australia or New Zealand experiences economic melt downs, the company can still bank its hope on the performance of its subsidiary in the other country (Wright, 1987).

Woolworth’s Business Strategy Woolworth’s business strategy is to explore opportunities of growth in various industries that are not directly related to its main business area of retailing foodstuffs.

The company has entered into a partnership with global oil marketer Caltex to establish filling stations within its parking lots and other stand-a-lone refilling centres. The company intends to exploit this business area with a view of making more profits to compliment its retail industry. Apart from the petroleum industry, Woolworth has also established eating points and restaurants which serve members of the public within its premises. These ventures aim at enabling the company to optimise profits such that

16 poor performance in one division may not necessarily have adverse effects on its general performance (Hambrick, 1983).

Suitability of this Strategy The diversification strategy employed by Woolworth is particularly suitable for the firm as it is more of a precautionary measure that shields the firm from effects of competition in one sector. With rivalry in the foodstuffs retail industry being very high, Woolworth has managed to transform its parking lots adjacent to its stores into petrol stations where patrons can refuel their vehicles after doing their shopping. Customers with vehicles have more reasons to do their shopping at Woolworth stores because they can refuel their vehicles at the same locations without having to travel to different locations for refuelling purposes (Michael, 2000).

Conclusion Woolworths, as a retail company which is well grounded in Australia and New Zealand, is in the perfect position to remain competent in this region based on its favourable internal and external environments. The company will continue to benefit from the mutual economic relations New Zealand and Australia have since its operations are based on a wider economy. The economic environments and stability of both countries are very favourable for Woolworths. Its environmental friendly practices will continue endearing the company to consumers and the society at large. Its decision to invest in modern ICT like Visa payWave will see the company remain competitive.

The economies of scale enjoyed by Woolworths will see the company remain a threat to substitutes. However, Coles supermarket chains among other small scale stores will remain a significant threat of substitute to Woolworths. The company must therefore

17 continue to expand its portfolio as a competitive strategy. Woolworths must also internationalize in order to realize even a wider market.

18

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