EDITORIAL: Woolworths draws a curtain on painful David Jones chapter

Roy Bagattini, the boss of Woolworths, certainly took his time in offloading David Jones, the high-end food and clothing retailer’s ill-fated Australian acquisition. 

But an announcement in recent weeks that Woolworths has struck an agreement with Anchorage Capital Partners, a private equity outfit in Sydney, is most welcome.  

It is not clear how much Anchorage has agreed to pay for the businesses, with Bloomberg and top Australian business daily newspaper the Financial Review having reported that David Jones probably fetched A$100m-A$130m. Woolworths did not confirm the figure except to say it was selling the more than 180-year old department store chain for more than its carrying value.   

What is not in doubt is that David Jones was sold for far, far less than the A$2.2bn Woolworths splashed out in 2014. At the time,  then CEO Ian Moir pitched the transaction as the first step in building the largest retailer in the southern hemisphere that would benefit from concurrent fashion seasons and fend off competition from European rivals such as H&M and Zara.

Woolworths was riding high. It had doubled its profit in the five years before the acquisition, sending its share skyrocketing almost sixfold as Moir’s two-pronged strategy of catering to Woolworths’s traditional luxury-seeking customers while also developing less expensive aspirational brands.  

The reasoning was enough for Woolworths’s shareholders to overwhelmingly back the deal that sent their company down an unknown path: the department store business model.

It did not take long for shareholders, who had approved a plan to fund 30% of the deal via a rights issue, to realise they had made an expensive mistake in backing Moir. His strategy — which included introducing food and building David Jones’ in-house brands — to replicate the success of Woolworth failed, forcing the company into hefty writedown charges between 2018 and 2019.

Sadly, that meant shareholders were stuck with a company whose department store business model was in irreversible decline. For decades, the department store business model was the cutting edge of retail, luring millions of middle-class consumers into its stores with a dizzying collection of products.   

In an era of online retail and easy-to-navigate shopping malls with dozens of specialised retailers, which tend to have a reputation for superior product selection in a defined category, the outlets that become mini shopping malls have no future. 

The list of department stores that have failed across the world is long: from JCPenney and Saks Fifth Avenue in the US to BHS and Beales in the UK. But the most high-profile example in SA in recent years is probably Stuttafords, which closed its doors in 2017. Edcon is still alive, but remains a shadow of its former self. 

Any expensive revival efforts under such circumstances was akin to throwing good money after bad. Kudos to Bagattini, who took the helm in 2020, for finally giving shareholders a reason to smile about what was once a must-have in the portfolios of many pension and mutual funds and other investors.

Not only does the deal free up his team to focus on core businesses, it also removes R17bn in liabilities related to the David Jones store portfolio. That is not an insignificant amount: it is more than a fifth of Woolworths’s 2022 annual revenue and more than three times its annual pretax profit.

Woolworths is by no means the only SA company burnt by disastrous overseas forays to escape low growth at home during the state capture years. Sasol is another high-profile example. Hit by cost overruns at its Lake Charles Chemical Project in the US, it eventually spent $13bn (R215bn), having initially estimated the cost at about half of that.

The lesson for shareholders and corporate leaders is that desperation to diversify should not come at the expense of what shareholders really want: acceptable returns on investment.