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Turnover: R 79.700bnTrading Profit: R 4.800bnTrading Margin: 6.02%
Stores: 218Employees: 46,000
Listed: Yes
 
Woolworths

INTRODUCTION

Woolworths Holdings Limited is an investment holding company and one of the top 40 companies listed on the Johannesburg Securities Exchange. Its core business focus is the provision of retail and financial services to upper and middle-income groups mainly in South Africa but also in Africa, Australia and New Zealand.

Woolworths was founded by Max Sonnenberg in 1931 officially opening the doors of the first store in Adderley Street, Cape Town on October 31st. His belief, that success lay in providing customers with superior quality merchandise at reasonable prices, has been instrumental in establishing Woolworths as one of South Africa’s leading retail chains.

Today, Woolworths is a South African retail chain that extends, through franchise partnerships, throughout Africa and into the Middle East, trading through more than 1400 stores. Woolworths Holdings influence also extends to Australia with a majority share in the Australian retail chain, Country Road.

 

SUSTAINABILITY

2020 Goals:
• Contribute R3.5billion to our communities
• Save 500billion litres of water
• Halve our energy impact by 2020 and source all our energy from renewables by 2030
• Responsible sourcing of all key commodities
• Have at least one sustainability attribute for all directly sourced products

 

CEO REPORT

2018 was an extremely difficult year.

Significant costs and disruption from transformational initiatives in David Jones and poor performance
in our fashion business in South Africa led to a result for the Group that is disappointing. This was exacerbated by challenging economic and trading conditions in both markets. We have, however, made major strides in ensuring that our businesses are well prepared for the future.

Woolworths

South Africa experienced a turbulent year, with political uncertainty and low economic growth impacting negatively on consumer confidence. The change in ANC leadership and the replacement of Jacob Zuma with Cyril Ramaphosa as President, in December 2017, created an opportunity for constructive change in the country, although this has yet to translate into economic growth. Despite the improved consumer confidence in the second half of the year, discretionary spending continued to be impacted by unemployment increased fuel and utility costs, and higher taxes, including a rise in the VAT rate from 14% to 15%.

Our Woolworths Fashion, Beauty and Home (FBH) business performed poorly, with sales 1.5% lower than in the previous year. The poor execution of our relaunched modern womenswear range under the sub-brand EDITION failed to resonate with our core customer, and as a result, we lost market share. It will take time to return to where it should be, but we have made numerous changes and strategic shifts to address the poor product execution we experienced in the current year, including separating our design and buying functions to enable us to be more design-led in our decision making, focusing on repositioning our beautiful basics business, and celebrating the Woolworths brand. We still have a business that is well-positioned to succeed, with world-class customer data management, a highly efficient supply chain, and flexible, future-fit systems, and we are confident that with the changes we are implementing, we will once again offer our modern customer on-trend, stylish and quality fashion, anchored in beautiful value-for-money, key items.

We have continued to build our Beauty business as a destination category. Our customers can now shop the most wanted international brands at Woolworths, including Estée Lauder, Chanel, La Mer, Bobbi Brown, and Clinique. We will also continue to build on our strong private label business as we further enhance the in-store beauty experience.

Our Food business continued to outperform the market, with sales up 8.4% from the prior year. We have now outperformed the market consistently for over eight years and are focused on maintaining our leadership position, working closely with strategic suppliers to continue to offer the quality, value, innovation, and in-store experience that differentiate us from other food retailers. We have understood our customers’ expectations on price, with ‘everyday low price’ offerings and the breadth of range that enables us to continue growing our fresh, perishable, and value-add offers, despite ever-greater competition. Better availability and now falling inflation have also helped us grow volume and trade ahead of the market.
Woolworths Financial Services continues to deliver strong results with solid book growth and well-managed impairment charges.

DAVID JONES
Both cyclical and structural factors heavily impacted performance across the Australian retail sector. Although interest rates remain at historically low levels and the country enjoys near-full employment, consumer spending in Australia remains constrained by high levels of indebtedness, a cooling housing market, under-employment and low wage growth, and rising utility costs. Coupled with that, customers are increasingly shopping online, leading to reduced footfall in shopping centres.

These factors and the resultant intense promotional activity in the market weighed heavily on David Jones, particularly in the first half of the year, and led to a non-cash impairment charge of A$712.5m, announced in January 2018. But we must look to ourselves for the performance in the current year. We undertook significant change and experienced real disruption during the year which impacted trade and profitability, including the implementation of new merchandise and finance systems, the re-platforming of online
systems, the launch of the new Food initiative, and the move of the head office from Sydney to Melbourne.]
We are now focused on leveraging the benefits of these initiatives, further reducing and controlling costs, and executing the initiatives which are still in progress, to drive the Group’s profitability in the future.

Although sales performance improved into the second half of the year, increasing by 2.2% in total and by 2.7% in comparable stores, overall full-year sales growth ended 0.9% lower than in the previous year and 0.4% lower in comparable stores. The growth in online sales, which grew by 21% on the prior year and now accounts for over 5% of total sales, requires us to carefully manage our store portfolio in order to ensure that physical space productivity is optimised by opening new stores only where we are under-represented, and reducing and closing unproductive space. Net retail space grew by 0.1% during the year, with 4.2% new space and 4.1% of space reductions and store closures. We will further optimise our store portfolio with space reductions of up to 7% by 2021, offsetting new store openings.

One of the key transformational initiatives was the introduction of the new RMS merchandise management
system. The new system provides us with a single, integrated view of inventory, enabling us to improve the management of inventory throughout the merchandise cycle. The implementation of these systems caused significant disruption in the current year. They are now bedding down and are providing the merchandise teams with a level of transparency that has not previously existed, allowing them to make better buying and planning decisions and actively trade the business.

We made further system changes in David Jones by replacing the online system with a new platform that
provides a faster and easier way to navigate, enhancing the customer experience by providing richer content and by being mobile-responsive. Since the re-platforming, online sales are now growing by over 50% on the prior year. We will ensure that the business continues to develop a future-fit digital capability with continued enhancements and supply chain improvements, to drive online sales contribution to at
least 10% by 2020.

We have completed the relocation of the David Jones head office from Sydney to a new, purpose-designed
regional campus in Melbourne, that will also accommodate Country Road Group. This move allowed us to complete an operational and strategic cost review, which resulted in a simplified Australian regional structure and the discontinuation of the Regional Chief Executive Officer role.

The restructure resulted in savings of A$20 million on an ongoing, annual basis. This, together with cost efficiencies identified in supply chain, non-trade procurement, facilities management, and other discretionary costs, will reduce our cost of doing business. The synergies and efficiencies from our new regional head office and the continued absolute focus on cost control will drive profitability across the Group.

Profitability was further impacted by the refurbishment of the company’s flagship Elizabeth Street store in Sydney following the disposal of the Market Street building, sold for A$360 million in 2016. The A$200 million refurbishment of this iconic building is now well underway. Our partners are also spending an additional A$200 million in concession fit-outs, and, together, we will create a truly amazing retail experience. The 12-floor refurbishment includes the conversion of four floors currently used for storage and
administration into valuable retail space offering product ‘worlds’ of womenswear, menswear, kidswear, homeware, beauty and accessories, and food. This includes opening a luxury ‘Shoe Heaven’ floor, in unique partnerships with prestigious brands such as Louis Vuitton, Chanel, and Gucci, and an immersive children’s world, in partnership with Disney, by December 2018. We expect the remaining above-ground store experience to be completed by December 2019, with the opening of the below-ground food hall following in March 2020.

The completed store will set a new benchmark in Australian and global retail as we bring together a unique combination of luxury fashion and gourmet food under one roof in the heart of Sydney’s dynamic retail precinct while maintaining David Jones’ proud heritage. Country Road Group has now assumed responsibility for the design of the David Jones private label collection. The new range was relaunched in March 2018 and repositioned to provide the classic David Jones customer with a quality and sophisticated wardrobe assortment. During the year, Country Road Group introduced a further 22 Politix concessions into David Jones stores with great success.

As part of our strategy of creating a differentiated department store experience, our key Group brands
will become exclusive to David Jones. This includes our iconic Country Road, Mimco and Politix brands which will be offered exclusively to David Jones customers, joining Witchery, Trenery and David Jones private label which have already been introduced as exclusive to David Jones. This will enable us to better control the customer experience with our brands and enable us to better position them within the
increasingly competitive and promotionally driven market.

We are also building the portfolio of external brands that are exclusive to us, including Louis Vuitton, Chanel, Gucci, Givenchy, Disney, Scotch & Soda, Nautica, Loewe, Kenzo, Isabel Marant, Burberry Beauty and Louboutin Beauty, with further exclusive arrangements with other brands expected in the future.
We have launched three trial Food formats during the year, and while we have received good customer response, particularly to our private label fresh and prepared products and our Malvern store, we have also learned important lessons. We will implement these learnings as we continue to evaluate and refine our store designs, formats, and offerings according to customer profile, store size and location, drive
cost efficiencies and improve waste.

Our Customer Relationship Management (CRM) programme, underpinned by the SalesForce system implemented in 2016, enables us to gain a better understanding of our customers and we will continue to develop the toolset to inform all our customer-based decisions. We are currently working to launch a loyalty programme for David Jones with new member reward benefits, a virtual card and regular, exclusive
offers. This will attract new customers, drive up-selling and cross-selling opportunities, and optimise marketing spend and promotions through more targeted and direct communication.

COUNTRY ROAD GROUP
Country Road Group (CRG) also faced intense competitor and promotional activity in Australia, and while the Witchery, Mimco, and Politix brands delivered good sales growth, overall performance was impacted by the poor performance by Country Road womenswear. Sales increased by 1.7% for the year, but comparable store sales (which exclude the menswear brand Politix, acquired in November 2016) declined by 1.8%. Online sales in CRG, now represent 18% of sales, with growth of 21%. We expect to drive online sales contribution to more than 20% by 2020. Despite the strong growth in online, customers still demand highly engaging and relevant in-store experiences. In the current year, we re-launched our Country Road flagship stores in Bondi Junction and Melbourne Central, and our Witchery flagship store at the Chadstone shopping centre. At the same time, we remain focused on rationalising our physical store footprint, exiting from unprofitable space to improve trading densities.

Net retail space grew by 2.5% during the year, largely due to the roll-out of Politix in David Jones stores, with space reduction of 7.0% from store closures in other brands. We expect reductions of up to 10% by 2020 as leases come to an end, with new stores adding 4% to the overall portfolio.

In July 2018, we appointed Elle Roseby as the new Managing Director for the Country Road brand. Elle has a wealth of Australian fashion experience, and we are confident that the brand’s performance will improve as she re-invigorates the vision and product direction.

The Country Road Group, too, will be moving to the new Melbourne head office during this year, bringing all our Australian head office operations together. The regional head office and the new systems introduced in David Jones, which are now consistent across the Group, will enable us to finally deliver the synergies we set out to achieve on its acquisition.




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CHAIRMAN'S REPORT

The year ending 2018 has been a difficult one for the Woolworths Holdings Group.

Our businesses in Australia and South Africa have, for the most part, not performed to our expectations.
The impairment to the carrying value of David Jones has been costly and unwelcome. It is a reflection of
a difficult industry and department store sector, and the depth of the challenges, some underestimated,
that we have faced in re-engineering and repositioning this business.

TRADING
Both our major markets have remained difficult. Consumer spending has been constrained – but in each geography, wherever we have been able to differentiate ourselves, our sales have grown, and we have done well.

AUSTRALIA
Here, we have been implementing the largest change programme that the Group has yet experienced.
We have introduced new systems, launched a food business moved offices, created shared services and
made a number of leadership and structural changes – more recently removing a further layer of overhead across the region.

The biggest impact of this has been on our largest challenge - David Jones itself. Here our overheads were
just too high, and our inherited systems just too out of date, for a modern business. David Jones is now in a new home, has new leadership, and a suite of modern systems which it sorely lacked. It has also embarked on a programme of reducing surplus footage and at the same time considerably improving its online capabilities. More importantly, like for like sales seem now to be stabilising. The refurbishment of our flagship Elizabeth Street store in Sydney is on track. This will deliver one of the most exciting department stores in the world. Our suburban stores, too, will be steadily upgraded over the coming years but here both footage and capex will be restricted. The David Jones Food trial is getting good customer response – particularly in its simplest format in Malvern in Melbourne. The demand there is largely for perishable and David Jones private-label products. It is driving the halo effect on non-foods that we have been seeking. This is much like the Woolies South Africa experience. This business has some way to go to reach profitability, but by the end of this year, we will be able to see more clearly the real potential of this important initiative.

The Country Road Group (CRG) has had a mixed year. Most of our brands have been performing well ahead of the market but Country Road itself, the biggest brand, particularly in womenswear, has been off the mark and has not delivered. Here, too, we have made leadership changes to correct this. We now have a strong team of merchant leaders and expect positive growth. Buying discipline, too, has been tightened up. This will enable us to be less drawn into the promotional behaviour that dominates so much of
our competitors’ activity. CRG is leading the Woolworths Group in online sales. We are fast approaching our medium-term target of 20% of sales online. CRG, too, will be moving to the new Regional Head Office site during this year. This brings all our Australian head office operations together.

SOUTH AFRICA
Woolworths South Africa has had a tale of two parts. Our Food business has continued to outperform the market. Here we have been clearly differentiated. We have understood better than in previous recessions, our customers’ expectations – particularly on everyday product pricing and in the breadth of range. This
has enabled us to continue growing our fresh, perishable and value-added offers, despite ever-greater competition. On top of this, better availability, continuous innovation and now falling inflation, have helped us grow volumes and trade ahead of the market. Our Fashion and Home business has not performed. With
hindsight, our ranges had become complex and proliferated and the core values of our business: a simple offer, easy to shop and of good quality, good taste and value for money, were missing in many areas, all confusing for our customers. As a result, our market share has suffered. The teams are now clear about what we should stand for in our customers’ eyes. Changes to the ranges have started to happen.

We have, during the past year, invested heavily in our Beauty business. This is performing well. We have rolled out the major brands to 34 stores and are seeing significant market share gains. Woolworths Financial Services continues to be a steady driver of both extra sales to the South African business and of
profit for the Group. It delivers a good and growing return on investment. Woolworths and ABSA together have managed this book tightly, yet kept it growing. There are a number of legislative changes protecting the consumer being effected. We support these and have designed our business model with them in mind.

OUR BOARD
There have been a number of changes to the Board over the year. We are delighted to welcome Siza Mzimela as a Non-executive Director. Siza will bring an entrepreneurial spirit and much experience in broader South African issues to the Board. We look forward to her making a major contribution to
our thinking. Late in the year we regrettably said goodbye to two of our directors. John Dixon has left the group as a result of the restructure in Australia. We thank John for his contribution to bringing the Australian businesses together and in setting in place the processes to re-engineer, in particular, David Jones, into a modern department store business. Stuart Rose, after eight years on our Board, has decided to move on. We will sorely miss his wise counsel and his deep retail skills. We also said goodbye to Peter Bacon who retired at our last Annual General Meeting. His contribution to the Board has been invaluable and the Board expresses its gratitude to Peter for his wisdom and contribution during his tenure.

Woolworths has always prided itself on a strong and diverse Board. We will continue this journey and ensure that this diversity is both relevant and strong for both our major geographies and our rapidly changing retail industry.

VALUES
As always, the values of the business underpin all that we do. Our teams have been on an on-going programme to roll out the values through the organisation. As more of our leadership, particularly our buying leadership deeply internalises this value system, so it will give guidance as to what is needed to create the right product offering for our customers. Even as their world moves online and their lifestyle rapidly evolves, what they seek from us will always, in essence, remain the same - products that are beautiful, trustworthy and fully available in a simple shopping experience whilst offering real value for money. From our values has come our Good Business Journey. This has led us to take a leading stance on both community and environmental issues. We recently announced that all Woolies packaging in South Africa would be reusable or recyclable by 2022.

Each business plays an ever more meaningful role in the communities in which they operate - from MySchool in South Africa to Redkite and Ovarian Cancer Awareness in Australia. Our South African emerging black supplier programme is a leader in its class. We take much pride in our efforts to grow
these entities to be sustainable and meaningful contributors to the Woolworths’ value chain. Seasons Find grew from a garage operation five years ago to a fully-fledged t-shirts factory with a throughput of 1.2 million t-shirts per annum for Woolworths.

Takalani Security Holdings started with eight employees, and two years later, two hundred and eight new jobs were created in this entity as a direct result of the Woolworths account. We are active supporters of the YES (Youth Employment Service) Campaign targeted to provide thousands of young unemployed
internships to build their experience base for future employment.

OUR ECONOMIC WORLDS
Trading in these two large regions of the southern hemisphere continues to offer both contrast and
opportunity. Australia remains stable with a growing economy. It has a tradition of effective government and offers real opportunity for the future. It is highly competitive as a market and attracts the world’s top players trading against us and each other.

As we have seen – we need to be at our best to compete here. The work we are doing on each of our business units is targeted to do just that. In South Africa, the consumer is under serious pressure. The
last seven or eight years of national mismanagement have taken a heavy toll. The change of leadership in the ruling party, however, brings some hope back to the nation. It is encouraging to see the efforts being made to shut down corruption and to hold more and more of those responsible to account. The rot throughout government, though, is deep.

It will take great courage for our new leadership to stand its ground and to root out the remaining beneficiaries of the Zuma cabal. We believe that progress will be made and will continue to support initiatives that further enable us to build an inclusive and growing nation. Government will, however, need to be far more circumspect in stopping itself from continuously introducing populist fixes that are guaranteed to fail, and to further weaken the economy, putting even more people out of work.

The land issue is likely to have severe negative impacts. Land is a highly emotional subject that will struggle ever to be fully and fairly resolved. It has become a proxy for the real issue – jobs. As currently proposed, it threatens property rights, which deeply hurts confidence in both economy (and therefore jobs) and, of course, food production. Evidence to date is that even the current reforms have done little to create either work or food. We should rather be strengthening property rights, particularly in the townships and the rural areas, thereby putting real assets into the hands of the poor. But the crucial issue for South Africa is jobs. Much of our labour legislation is designed to protect those in work - not to create desperately needed jobs. It is labour legislation that restricts business – particularly small businesses - from growing and does not help create a single job. Rather it condemns our growing number of young people to an undignified life without work. SMMEs, unlike large corporations, cannot afford the restrictive red tape they continuously face. These should be the prime drivers of job creation in South Africa. They need to be freed up to grow. We call for a national dialogue to relax labour legislation and to test the start-up and entrepreneurial spirit of our nation. This could be tested in selected areas around the country and in selected industries. If we do not have the courage to make these changes, we will never stop the ever-growing, hopeless number of young jobless people in our nation. Woolworths will be an active and constructive member of such a dialogue and looks forward to the urgent changes it needs to bring.

OUTLOOK
Our Group has much work to do to get back to real growth. We need to show that our investments in Australia are productive, growing, more online and increasingly profitable. We have been through an extended period of transformation and now need to deliver. In South Africa, we need to keep our Food business trading well and to continue its very special story into the years to come. Our clothing business is undergoing a reset. It will return to what is meaningful and understandable to our more modern and discerning customers. Our 46 000 staff, our many millions of customers, our investors and our suppliers jointly, are who we answer to.

These and the many other stakeholders that support, benefit from and help drive this business’ growth rely
on us to affect these changes. The Board now sees a management team with newfound energy prepared to deliver to these stakeholders into the future.
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SUMMARY

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