February 13, 2004

By Vera von Lieres

Cape Town - Woolworths, which is known for its up-market food halls that cater for people who do not have time to peel carrots, revealed plans yesterday to attack the middle market.

The listed food and clothing retailer said at its interim results presentation yesterday that it would open trial economy food stores in the Western Cape, to be branded i'sentials, between April and June.

The middle market it aims to attract is made up of about 30 percent of South Africa's 43 million people.

In targeting this market segment, Woolworths could be taking on rivals Shoprite, via its Usave brand, as well as Score, which is in the Pick 'n Pay stable, retail analysts said yesterday.

Although the trial stores suggested a shift in strategy, Woolworths would have to be vigilant about not destroying its core brand, analysts added.

Chief executive Simon Susman told a results briefing that the up-market retailer had identified a "strategic gap" in the middle-end food market, which would fit into its franchise business. Woolworths would be looking for black economic empowerment partners in the venture, he added.

Syd Vianello, a retail analyst at Nedcor Securities, emphasised that the key in the move to target the middle to lower end of the market was not to destroy brand equity, which relies on quality.

"Woolworths already has microstores with 1 700 product lines. These [new] stores will be limited to an assortment of 700 lines so it all depends on what products are put into the stores and what kind of customer they are after," Vianello said. 

Woolworths' interim results met market expectations, although analysts cautioned that the road ahead would be tough from a growth perspective.

Clothing retailers had managed very aggressive volume growth for nearly three years and it would be a stiff task to keep innovating.

"As interest rates run low, it will be a challenge to keep growing volumes for Woolworths, but the brand will carry it through," noted Evan Walker, a retail analyst at Andisa Securities, adding that there was no inflation to buffer retailers' revenues as in the past.

In the six months to December, Woolworths delivered a 20 percent rise in headline earnings a share to 39.7c on attributable earnings growth that came in 19.1 percent higher at R340.6 million.

Turnover for the half year was up by 9.8 percent at R5.3 billion while cash inflow from trading grew 20.8 percent to R432.3 million.

Management was cautious about the second-half outlook, pencilling in conservative earnings growth because of the lower interest rate environment.

A feature of the results was an above-expectation performance by the food division, although on the clothing side the childrenswear department suffered the double whammy of price deflation and declining market share.

Looking forward, the low inflation environment meant volume growth of merchandise sales would be key, as well as cost control, Susman said.

Woolworths shares dipped 9c to close at R7.16 yesterday.