The truth about Woolworths is in the stores, says Sussman

The truth about Woolworths is in the stores, says Sussman by Lans

March 5, 2009, 8:53 am
Filed under: Opinion/Analysis

By Etienne Swanepoel

Simon Sussman joined Woolworths in 1982 after working at Marks & Spencer in London, where he was the executive professional assistant to the chairman, Marcus Sieff.

Sussman headed the retail operations and the food and clothing divisions of Woolworths and was appointed to the board in 1995. He became chief executive in 2000.

During his time as chief executive, the number of Woolworths stores has grown from 100 to more than 330 today.

Under his leadership Woolworths has entered the convenience food store format in a joint venture with a fuel retailer. At the time, this was a bold strategic decision and has since been imitated by its competitors.

During this time turnover has grown from R6 billion to market estimates of R21 billion for the year to June 2008 and market capitalisation from R2.5 billion to R10 billion, with a high of R16 billion about 18 months ago. To make the obvious point, these results speak for themselves.

Sussman is a leading member of the business community. He is closely associated with introducing sustainable business practices in a complex retail supply chain.

Woolworths won the internationally respected responsible retailer of the year award from the World Retail Congress in 2008 in recognition of its business practices, known as the good business journey.

Woolworths occupies a unique brand position: it attracts the custom of upper-income consumers in the living standards measure (LSM) categories 9 and 10 in respect of food and clothing. It is also a highly desirable shopping destination for aspirational consumers in LSM 7 and 8.

In an interview with Sussman at the Woolworths head office in Cape Town last Friday, we discussed the leadership challenges presented by the global crisis.

There is a view that suggests South Africa has escaped the worst of the global credit crisis. We seem to be less isolated but still well insulated, even as the crisis is rapidly being transmitted into the real economies of developed countries. It seems, however, that our real economy may not be as well insulated as our financial system.

The discussion included growing revenue and earnings in an environment now generally thought to afford poor earnings visibility, the difficult trading environment and related concerns about the resilience of the sales growth of high-end shopping destinations such as Woolworths.

On the latter, Sussman is of the view that these concerns are misplaced. LSMs 9 and 10 are “disconcerted consumers at present”. These consumers “shop according to confidence”. LSMs 7 and 8 border that group of consumers who shop according to needs and cash flow availability.

The prices of core commodity foods at Woolworths are no more than those of its competitors, according to price surveys.

Sussman adds: “Woolworths attracts consumers on the basis of quality, innovation, freshness and unique placements, such as its free range and organic products.”

Retail analysts say Woolworths has the best cold supply chain in the business. Due to its centralised supply chain and stock management systems, truck turnaround times at its stores are the quickest in the industry. Inasmuch as its core consumers are affected by confidence, “one does not respond to this development with prices”.

The strategic response is to ensure standards remain the same. Furthermore, one maintains the custom of other consumers by encouraging the return to quality.

Sussman notes that Woolworths remains close to its suppliers. It seeks mutually profitable long-term relationships, which take time to develop. Woolworths also invests heavily in science and technology.

He says management has taken steps to improve operating efficiencies. These include the repositioning of price points and investments in merchandise planning systems, which are expected to assist volume growth, reduce wastage and markdowns, and so improve gross margins.

In response to the broad economic issues, Sussman notes that “demand destruction and destocking are taking place”. This is tough for retailers.

Once the macroeconomic environment stabilises, lending restarts and liquidity returns; the economy will obviously recover. He notes that it is difficult to estimate when this may take place. At some point, however, “consumers will recalibrate”, and demand will recover.

We discussed how he makes decisions and how his leadership process works.

The bulk of decisions originate from the stores and customer. “The truth about the business is in the stores.” Sophisticated data processing systems provide information about trends and directions.

He is an “intuitive merchant”, and if the data provide information he does not believe, the assembly of that data is usually wrong. He will interrogate the data until he is satisfied it correlates with his intuitive interpretation of what he observes in the stores.

Our small talk included a shared admiration for the skill of Formula 1 drivers. It is said these drivers have the highest work rate – that is, the highest processing of a given amount of data in a given amount of time – of any profession. Other professions may be more complex, but they generally make calculations in a disaggregated manner without the same time constraints.

It is said the driver’s conceptual framework is geared towards the simultaneous mental processing of about 25 different sets of data. In short, Sussman observes, drivers achieve this by the rapid processing of a constant, dense flow of microdata.

Sussman relates his experience working under Farrel Ratner, the chief executive of Woolworths in the 1990’s. Ratner could tell at a glance, in quick succession, whether items would retail successfully.

When asked why, he would first brush it off as instinct. Probed further, he could immediately provide his detailed analysis of each item or garment, commenting on the minutiae of each with reference to the prevailing consumer tastes and trends.

Sussman provides a broad framework to management to implement decisions and strategy, which is guided and assisted by a proven, embedded value system.

We discuss the fact that retailers have a competitive advantage in the consumer credit and insurance markets, due, among other things, to their geographical footprint. There is a natural fit between the core competencies of retailers and banks.

Woolworths itself has recently entered into a strategic joint venture with Absa. This fit provides new channels to market.

Sussman also comments on the “regulatory and management excellence found in our banking system”, and the necessity to ensure that South Africa has a “vibrant and unfettered agricultural industry”.

He expresses his “long-term faith in South Africa, though economically there may be some tough years ahead”.

His reading interests are palaeontology, geology and the environment, about which he is passionate. He strikes one as a thoughtful person with an unmistakable air of authority and command. Judging from his record, the consensus is that he is well qualified to lead Woolworths through the possibly tough next year or three.

Etienne Swanepoel is a partner at Webber Wentzel. The views expressed are his own

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