Most of the company’s profits come from its media and distribution arms. As the 825-strong chain of shops goes deeper into decline, a break-up bid could be on way.
WHEN Woolworths opened its doors on the British high street in 1909 it promised to be at the forefront of a retail revolution.
It pledged to provide good quality mass-produced goods that everyone could afford.
The store chain had started life in America and brought to Britain a dose of American pizzazz and when its Liverpool flagship store opened in 1923, it was nothing short of a retailing dream - fine mahogany counters were packed with all manner of wares from photo frames to luggage, buckets, bowls and stationery.
Now, more than eight decades later, that pizzazz seems to have disappeared. The company’s share price has collapsed, triggering renewed speculation of a break-up. And when the group unveils its full-year results this week, it is expected to slash its dividend.
Tucked inside the tatty shop doorway, customers were greeted with a torn cardboard Doritos crisp box hung with a white sign, perplexingly advertising multi-packs of Quavers for £1 - reduced from £2. Inside the box there was little sign of any discounted crisps - just a handful of lurid orange and purple plastic hand-held fans.
The wooden slatted flooring in the store was dirty and scratched. And the bizarre array of value products - from toys to childrens’ clothes to lightbulbs, paint, weed killer, picnic rugs, cards, pillows and pans - were merely scattered about, with no style and seemingly no logic to the way they were arranged.
An enquiry to the cashiers about whether the store had undergone any refurbishment in the past few years was greeted with a bemused smile. “If it has, we haven’t done a very good job,” one of them laughed looking around.
Richard Hyman, an independent retail analyst, summed up the experience perfectly: “It is like a slightly more organised jumble sale.”
Unsurprisingly the group’s descent from its heady beginnings in Britain 99 years ago has been mirrored in its stock market valuation.
Since it was demerged from parent company Kingfisher in 2001, the price of Woolworths shares has plunged by two-thirds to just 11p, destroying more than £250m in shareholder value in the process.
The collapse has brought with it the inevitable attentions of value investors - the Apax private-equity group made a takeover approach in 2005 but subsequently walked away.
Unity, a consortium led by Baugur, the Icelandic investment group, has amassed a 10% stake through derivatives. Baugur has made little secret of its desire for a break-up of Woolies.
Woolworths may be best-known for its 825-strong chain of shops but it has long expanded beyond its high street roots to incorporate two media and distribution businesses that generate most of the company’s profits.
The first is 2entertain, a DVD publisher that it owns in a joint venture with BBC Worldwide, and the second is EUK, a specialist distribution business that supplies CDs, DVDs, games and books to rival retailers - from major supermarket chains to small independent retailers.
When Woolworths announces its full-year results this week, the first signs will emerge that Baugur may be one step closer to getting its wish.
Woolworths will confirm that a stringent cost-cutting programme and margin improvements have helped its stricken high-street arm return to profit after a £13m loss last year. And that will effectively pave the way for a break-up of the business over the medium term.
It is the group’s 40% stake in 2entertain, which distributes music and DVDs, including BBC hits such as Doctor Who and Top Gear, that is expected to be first on the block.
It is forecast that Woolworths will confirm for the first time that it is prepared to consider seriously all options, including a sale of the 2entertain stake - which is valued in the region of £200m. A so-called “put and call” option - which allows the group to sell its stake in 2entertain to BBC Worldwide - becomes exerciseable this month.
Since the start of this year, hints about a break-up have been coming thick and fast. A recent debt restructuring saw Woolworths swap unsecured debts of £350m for a four-year asset-backed facility worth £385m.
Woolworths stated that its pension fund would receive the first £50m of the proceeds from any sale of its stake in 2entertain and in January Trevor Bish-Jones, group chief executive, instigated a management shake-up under which Steve Lewis, managing director for retail and distribution at Woolworths, was installed as managing director of EUK.
Simon Turner, a former Tesco executive, was appointed to work alongside Tony Page, previously with Asda, who is managing director of Woolworths’ retail arm.
One City source familiar with the Woolworths business said: “I think they are entirely open to a break-up; the question is how they do it. The high-street shops come with lease liabilities and it is how you extract the other businesses out of that structure.
“But over the course of this year I think it will happen. They need to do it if they are going to convince anybody that the business has a future because nobody thinks that just struggling on like this is particularly credible.”
Nevertheless, retail watchers close to Woolworths believe a broader break-up may take some time. Bish-Jones has never said that he is opposed to the idea - but he has always insisted that a restructuring is only possible when the retail business produces “consistent and sustainable profits”.
Although the retail arm will be back in the black at the full-year stage, analysts think it will be difficult to sustain that.
Hyman said: “I believe it will be a very difficult year for Woolworths. Even the strongest retailers are going to find this a tough year. Trevor Bish-Jones does a wonderful job of talking it up but it is a business model invented a hundred years ago, which proliferated all over the globe, but it is also a model that has been in decline for many years.
“It was the poor man’s department store but it has been superseded many, many times over.”
He added: “I don’t think it has a proposition and it faces more and more competition. Nobody would invent Woolworths today and that is one of the acid tests of retailing. There is far, far too much product. Products have to say something to the customer and be given room to breathe.”
Nevertheless, despite the widespread scepticism about the prospects for the high-street arm, it is likely that even in the current difficult market conditions it would attract some takeover interest - potentially from supermarket giants Tesco and Asda for stand-alone nonfood stores, or from Baugur.
Analysts believe that the Icelanders would seek to install a new dedicated management team and shake-up the product mix to reduce its dependence on toys and confectionery.
They suggest Baugur would make Woolworths more like the discount variety store Wilkinsons by relying less on seasonal goods and selling more home-ware and garden products. Even a range of dried foods is a possibility.
Of course, similar ideas were tried before, in the 1980s. In fact, there is little the group hasn’t tried in its recent history. But none of the initiatives - whether they be big out of town stores or a new catalogue - has provided the magic pill needed to save the business.
