The new Woolworths boss has been given every chance to make a turnaround work

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At first glance Brad Banducci, the new CEO of Woolworths, looks like he’s been thrown an impossible task of piecing the mess back together and making it as shiny as it used to be.

He takes his seat after a string of results showing the business in worse than expected shape.

Woolworths today posted its first loss in more than 20 years, $972.7 million for the first half of the financial year.

The result was largely driven by a huge pre-tax impairment of $3.25 billion ($1.898 billion post tax) against the Masters hardware business which has been losing about $200 million a year.

Growth is slipping. Sales, which had been expected to be flat, fell 1.4% to $32 billion. And the company says it can’t see an improvement in the second half because of the competitive environment. Everyone, it seems, is discounting.

Coles, the main competitor, is doing so much better, with food and liquor sales up 6% to $937 million for the same six months. At Woolworths, food and liquor sales growth barely moved the dial at $22.34 billion, up just 0.7%.

And then there are the discount chains, such as Aldi, setting the agenda and making the whole business about price, opening new stores and gaining market share, mainly from smaller players but increasingly Woolworths and Coles are in sight.

However, Gordon Cairns, the new chairman appointed in August last year, has done Brad Banducci a favour. He’s cleaned up much of the mess before appointing Banducci, giving him a clean run, with few distractions, at turning around the business.

Most of the nasty business, including the weight of $200 million plus a year losses from Masters, the disastrous foray into hardware warehouses, has been done for Banducci.

The impairments have been posted and the process to get the whole thing off the books is in train. Sometime in 2017, the whole hardware business will be just a bad memory.

One remaining issue is on thee table, that of Big W. Private equity groups have reported to be sniffing at Big W which, with 184 stores, competes against Kmart and Target, both run by Wesfarmers, the owner of Coles.

Selling that business would be be a boost to the balance sheet. So Banducci has a potential good announcement to make sometime in the near future.

And so what Banducci has left is the core business and the task of increasing sales at the supermarkets and making sure the margins are there.

The best indication that this is achievable is Coles.

Woolworths CEO Brad Banducci. Image: Woolworths Limited.

If Coles can grow its sales in a discounting market, then so can Woolworths with a combination of good service and smart discounting. At Coles, EBIT (earnings before interest and tax) increased 5.6% to $945 million on revenue growth of 3.1% in the last six months. Food and liquor recorded sales grew 6% to $937 million.

Banducci is a retail veteran of 25 years who was the CEO of the highly successful Cellarmasters until it was taken over by Woolworths. Since then, he was instrumental in the development of Dan Murphy’s, one of Australia’s great retailer, as managing director of Woolworths Liquor Group.

He moves into the top job from being managing director, Woolworths Food Group.

Woolworths, it is worth noting, is still a very large, significant and big brand Australian company.

Banducci is inheriting a company, despite its share price dropping from $34 a year ago to $22.17 today, which is the ninth largest on the ASX 200.

Yes, sales are down but that still leaves more than $60 billion a year flowing through the business.

Gross margins at the biggest part of the business, Australian Food and Liquor, are 24.91%. That’s essentially the percentage of money kept by Woolworths after paying off suppliers.

And Banducci says he’s a true believer in the potential of Woolworths.

“I am excited about our future,” he says. “We are at our best when we are innovative and focused on the customer and winning their trust.

“I am an entrepreneur at heart, and a retailer by discipline, and I want us to take our company back to its best levels of performance.

“My goal as CEO will be to recapture the spirit of innovation and customer focus right across the business, and to grow a culture where our people once again feel a strong ownership of the business.”

An indication of his direction, his next moves, are contained within the market presentation on the results today.

In it, the company talks about moving to a “listening culture”, with the voice of the customer central to that, and about a partnership with suppliers, team work and greater transparency.

He might be listening, but the market will be watching.

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