Govt failings driving geo-diversification – what Woolies gets right, Massmart doesn’t

The contrast in earnings between broadline retailers Woolworths and Massmart is stark. Woolworths generated a 24 increase in its most recent numbers, while Massmart’s declined 26 percent. Ted Black, analyses both companies, assessing the productivity of the 2, which follows suit. Massmart’s Rand earned for every Rand spent on assets has declined while Woolworths was upwardly mobile until the 2013 acquisition of David Jones in Australia. Why? Black talks about the influence of government and why Woolworths may have hit the mark with its Australian acquisition, with more than 70% of its asset base now down under. An interesting analysis. – Stuart Lowman

woolworths-

by Ted Black*

We began this series on asset productivity with Tesco. A chart showed one of its most vital measures – “Stockspin” (Sales÷Inventory) – trending south-west from 2001 until, in 2015, the firm posted one of the most spectacular losses ever recorded in UK history.

We then saw that South Africa’s big three food retailers, Shoprite, PicknPay and Spar, despite delivering some great results, show a similar trend.

But what does our ROAM (Return-on-Assets Managed) looking glass tell us about the two big “Broad line Retailers” – Woolies and Massmart…and a little bit more besides?

This chart compares two of the three most important measures of operating management’s effectiveness: Asset Productivity (ATO) – the sales productivity of the asset base – and Cash ROAM %. Overall, it shows that the more sales you generate from your assets, the higher your ROAM % is likely to be.

ATO_cash_31August2015

For ten years, Massmart’s ATO fell steadily from a high of 3.3 to 2.8 in 2014. In other words, for every Rand of assets, they once generated R3.30 Rands of sales. Now they generate R2.80. That’s a 15% drop in productivity. At the same time, their Cash ROS (Return-on-Sales) fell from a high of 6% to 3.5% – a double whammy.

That’s not to say they aren’t still making respectable returns but it’s getting harder to turn the ship around from its south-westerly drift to lower Cash ROAM %.

Woolies more expansive journey is interesting. In 2005, for a retailer, their assets ground round slowly – less that R2 in sales for every Rand of assets. Then, in 2009, they “re-designed” their business system. They sold their Debtors book to a bank and the assets started “turning”. They reached a high of almost 3 in 2013 and a Cash ROAM result of 35%.

Since 2013 both measures have fallen but for good reason. Today, more than 70% of Woolies asset base is in Australia. What does that tell us?

Do the problems facing firms in South Africa today demand geographic diversification as a priority for wealth creation?

Isn’t Woolies (and Spar for that matter) doing the right thing by “internationalising” through direct ownership of businesses in different countries? And doing it without diversifying from what it does really well?

In Third World countries like South Africa, national strategy has a direct impact on performance – especially under socialist regimes. Their goal is rapid wealth re-distribution not long-term, systematic wealth creation.

This is not true of First World businesses where global industry and rival firms govern strategy. National strategy is a minor issue. Our government would do well to read, mark, learn and inwardly digest Simon Susman’s comments on this topic in his 2014 Chairman’s report.

What is government’s task? Isn’t it the same as any firm’s marketing task? Isn’t it to make people productive – especially the poor – by making it easy to do business…here and with the rest of the world?

Maybe simple enough to understand, but not such an easy thing to do because governments are incapable of making resources productive. They can help by focusing on their right tasks though…just a few of them…only a few.

The reality is that “Big, Hairy, Audacious Goals” and plans do not work. Stalin and Mao discovered that but whether they learned from it is moot.

Only systems make resources productive. And who best to design the systems to do that? Definitely not bureaucrats – only effective, entrepreneurial managers.

In the private sector, we have many and we can measure their ability. Here’s the link between Cash ROAM and the Value-of-the Firm (VOF) for our two examples.

Massmart|_ROAM_31Aug

Despite the fallback in Cash ROAM due to its big investments in Australia, Woolies management is seen to have “performance power” – “Cash ROAM” power – the most important power of all for any manager. The VOF reflects this. It was off the chart at 4.5 in 2013. Shareholders still rate it at more than double the value of its asset base.

Massmart, whilst it generates a good return on equity, has work to do to head north and get back to where it was a few years ago.

South Africa’s surrogate share price – the Rand Exchange rate – has headed south-west for years driven by a strong following wind of low productivity, bureaucratic red tape, uncertainty and all the symptoms of a system that lacks any purpose or task clarity.

If all key parties would talk to each other, suppress egos, abandon Never-Never Land ideology and get the brains to work, it can be done. That would change everything for the better.

Or is that to live in Wonderland?

*Ted Black is a ROAM model expert, he can be contacted at [email protected].

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