Woolworths - proposed acquisition

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EXECUTIVE SUMMARY

This report is aimed at providing an overview of the potential implications of Woolworths acquiring either Kmart or Target, and an overall consensus on whether this opportunity would be consistent with Woolworth’s investment and operating philosophy. The report suggests the benefits of undertaking an acquisition would significantly outweigh the costs. If Woolworths were to acquire Kmart or Target, this would significantly reduce the intense price competition currently affecting Big W, and would also enable Woolworths to continue in its pattern for sustained growth, and obtain a substantial share in the general merchandising market. A cost benefit analysis indicates that due to the similarities between Kmart and Big W’s product lines and operating philosophy, that Kmart is the most suitable takeover candidate.

BACKGROUND

Woolworths is currently in a position to undertake further acquisition activity in the marketplace. The company has consistently maintained its focus on




n Cost reduction strategies, and

n Acquisitions of core operations within the group.

in order to boost market share and continually achieve growth in profit margins.

The Retail sector currently presents a significant opportunity for Woolworths to substantially increase its market share in the sector, due to the current turmoil being experienced by Coles Myer.

Currently, Woolworths has the financial capacity to undertake acquisitions of Kmart or Target, and to acquire either of these retail giants would not only present substantial growth prospects for the company, but it would also lessen the impact of the highly competitive environment currently being experienced by Big W from these major players.

Alternatively, Big W has continually outperformed the market through its vigorous cost reduction strategies, and have demonstrated an ability to withstand the pressures from Kmart and Target. Experience indicates Big W will continue to succeed in the market, despite the highly competitive environment to which it is exposed.

PROPOSED SOLUTION/RECOMMENDATIONS

Advantages of undertaking the proposed acquisition

n Kmart and Target currently represent the greatest competitive threat to Big W. Hence, to make an acquisition of either of these competitors would certainly reduce the competitive environment in which Big W operates.

n Acquiring either Kmart or Target would enable Woolworths to establish a substantial foothold in the general merchandising market, and would no doubt result in Woolworths becoming the most dominant player in this highly competitive market.

n The business divisions in which Kmart and Target operate, are very similar to the nature of the products sold by Big W stores. Hence, Woolworths has a great level of knowledge of the general merchandising market, the key success factors driving this market, and the competitive strategies adopted by Kmart and Target. Consequently, whilst there are significant business risks that result from acquisitions, many of these risks will be mitigated by the fact Woolworths already has the expertise required to succeed in this market.

n The decision to acquire either Kmart or Target will be driven by factors such as the

- acquisition costs involved

- current position held in the market

- competitive strategy adopted by the player

- nature of the products sold, including any niche market opportunities.

- financial position of the player

The above acquisition factors will be considered in more detail below, with regard to both Kmart and Target

Acquisition Costs Involved

The acquisition would require a substantial investment for Target or Kmart. However, an acquisition would certainly ensure that Woolworths sustained its growth and the advantages of a takeover would outweigh the costs.

Current Position held in the market

Both Kmart and Target currently fit the acquisition requirements expected by management, of high volume, low margins, leveraging the costs and internal efficiencies. In particular, the CEO (Corbett) has previously commented that Kmart represents the most ideal takeover target , given it operates on the same philosophy as Woolworths.

Competitive Strategy adopted by the player

Kmart currently offers value to its customers through its “lowest prices guarantee policy”

Target is renowned for its quality products at discounted prices.

Big W is currently affected by the intensity of this price competition in the market. Hence, an acquisition of Kmart or Target would reduce the impact of intense price competition on Woolworths.

Nature of the products sold, including any niche market opportunities

Kmart offers an extensive range of apparel, toys, sporting goods, bedding, kitchenware, outdoor furniture, music, tyre and auto-service, and electrical appliances.

Targest’ core businesses lie in womenswear, childrenswear, menswear, underwear, and homewears. Baby Target and Target Home ( a new concept home-wares store) have allowed target to establish niche opportunities.

Kmart’s product range is more consistent with the type of products promoted and sold by Big W stores.

Financial position of the player

Kmart’s sales increased by 5.6% in 1-00, to $,467.7 million. Strong sales and large growth was partly contributed to by intensive marketing campaigns. Kmart has continued to excel in the market, and achieved strong sales growth during 00.

Target experienced very difficult trading conditions during 000-01, producing results that were significantly below expectations. Profit margins were severely impacted by major stock clearances and weak apparel demand. However, Target’s performance recovered during 00, with the company reporting strong profit results of 51.7million, compared to its prior year losses of $.8 million.

Due to Kmart’s consistently strong operating performance, there is less financial risk in acquiring this business. The fact that Target has experienced more turbulent trading conditions in recent years, indicates Woolworths may be faced with potential losses from the acquisition,

and this is not a desirable outcome. Hence, the acquisition of Kmart currently appears to be the most financially viable proposition.

Disadvantages of undertaking the proposed acquisition (how these can be overcome)

n Potential intervention from the ACCC, as was evidenced during the acquisition of Franklins.

n Difficulties in ensuring the acquisition process is smoothly carried out.

n The substantial cash outlay required.

The potential outcome of not undertaking any acquisition

n Even if Woolworths does not go ahead with the proposed acquisition, the company still has the capacity and resources to expand its current Big W operations, and the CEO is confident that management can continue to employ strategies to drive sales in the existing business. Project Refresh, in particular, has been the major agent of change, delivering significant cost savings, and reorganising the way business is conducted. Further, Corbett believes the market has the capacity for 50 Big W stores across Australia.

n Big W has achieved excellent financial results for the past 5 years, and has undertaken a number of initiatives including a major upgrading to logistics systems and store refurbishments, which have resulted in operating efficiencies and reduced operating costs.

n The forecasts for Big W indicate the stores will continue to experience significant growth (.6% per annum), despite the competitive pressures from Kmart and Target. Experience also indicates that Big W has consistently achieved increases in market share during the difficult periods.

n Corbett also recognizes that low logistics and warehousing costs are the key to the Big W “everyday low prices” pricing strategy, and Target and Kmart employ “high-low” strategies; that is, they mark up everyday shelf prices in order to offer dramatic discounts periodically, such as 5 % of storewide. According to Corbett, the strategies being adopted by the major players are not as successful as those currently being employed by Big W.

n Many new initiatives are being trialled for Big W to ensure the company remains competitive. In March this year, the self-scanning technology was trialled at two Sydney Big W stores, allowing customers to scan and pay for purchases themselves. We are currently monitoring the system with regard to

- effectiveness

- impact on customers

Implementing the technology across all stores could provide Big W with a significant competitive edge over the other retailers, and allow for even greater efficiencies in the way Big W operates.

CONCLUSION

As a result of the above analysis, it is evident that the most financially viable and suitable takeover target is Kmart, due to the following factors

n Its consistent growth performance and potential for future growth.

n Its focus on high volumes, low prices, leveraging costs and internal efficiencies. (acquisition criteria)

n Its similar operating philosophy and product range to Big W.

n Its price competition strategy adopted in the marketplace.

The acquisition of Kmart would allow Woolworths to gain a substantial share in the general merchandising market, and allow the company to utilize its current expertise in the market to effectively position itself in the market and sustain the company’s growth. Whilst not undertaking any acquisition would not seriously inhibit the company’s ability to expand operations, the cost benefit analysis indicates that this takeover opportunity presents Woolworths with a viable investment opportunity that should not be ignored.



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