South Africa has developed a complete lack of consumer confidence, and on top of that, because of a total lack of business confidence, all the retailers have ventured out to other markets.
Woolworths decided to take the Australian route - a market notorious for South African failure. Many companies have walked this path through the years, only to leave with their tail between their legs.
The future profitability of Woolworths is hugely depend on whether they succeed in Australia. And looking at the valuation of Woolworths, it seems like investors are becoming sceptical.
Although their Australian units - David Jones and Country Road - are operating in an economy where growth is around 3%, they have been struggling to increase profitability, with turnaround slower than expected. The Australian unit is critical because 35% of its profits are generated there.
Woolworths is doing well in a tough South African market, and considering the transformation of the Australian business, the recent results show a rise in sales throughout the group of 3% The South African clothing division struggled, but remained the biggest profit generator, contributing 34% of the pre-tax profits.
The second largest contributor to profit, and delivering a great result, is its South African food division (31%). Food sales were up 8.6% for the year to June 2017.
Then comes Australia: David Jones contributed 20% of pre-tax profits and Country Road 15%. Country Road did well, while David Jones struggled through its transformation phase.
We are in the midst of a storm of change in the retail space. The customer is changing and markets are in terrible places. There are significant structural changes in retail. It is more advanced in Australia, but is also coming to South Africa.
There are rapid technological changes and a globalisation of retail competition. Woolworths has recognised these challenges and is building a future-fit business that will be different from the one of the past.
If Ian Moir and his team succeed in turning around David Jones, the share price can rerate to its former glory.
They are in the midst of a transformation process, and all efforts and investments are concentrated here. My guess is that Woolworths will succeed.
They have tremendous cross-selling opportunities and can keep costs at bay with the synergies created. David Jones was in a terrible condition when Woolworths acquired the retailer in 2014, and ever since then, their fortunes have changed.
Their market share has risen steadily, and conditions are improving. The drive for transformation in David Jones is an ongoing process and they have started achieving success in numerous milestones.
They launched a new client relationship-management programme and a new merchandise and inventory-management system and introduced a high-end food service, David Jones Food.
Amelia Morgenrood is PSG Wealth regional director
- BUSINESS REPORT