Background
Woolworths recent financial update, first half FY26, may be labelled disappointing by some. There will be much analysis of the numbers that will highlight issues such as poor execution, due to industrial disputes, during the key Christmas period decreased sales etc. This simple blog suggests that an important factor behind the numbers is the offer. Simply put, is Woolworths offer what shoppers value today?
The offer
The offer is a term that historically highlighted what product / price a retailer offered. For example, Aldi offers a basic product and price. David Jones offers a premium product and price. Using Porter’s Generic Strategies model Aldi has a cost leadership strategy and David Jones has a differentiation strategy.
Interestingly, Amazon’s offer is not product/price based. The sellers on Amazon’s platform can determine the product/price offer. Amazon focused on technology (their website) and then the service (delivery via their supply chain) to differentiate their offer. In modern retailing this would be described as the offer is based on the overall shopping experience, not the product/price mix.
Woolworth’s historic offer
Historically, Woolworths had a cost leadership strategy. Some will suggest this was due to competition from Franklins, particularly in the NSW market. For example, in 1999 the first project refresh was launched. This project aimed to ensure Woolworths offer was price competitive by minimising CODB (cost of doing business) to offer shoppers lower prices. The basic concept was lower prices, increases sales, which improves overall financial results. This model is sometimes labelled ‘double loop’. Woolworths partnered with Bain & Co and Jack Shewmaker (Wal-Mart board member) for this project. Even today many of the project refresh concepts, e.g. minimise CODB via automation, are part of Woolworth’s business model.
“We will deliver to the customers of Australia a further $2 billion of price cuts … this will drive our sale and therefore our growth and therefore our earnings per share.”
Woolworths CEO Roger Corbett
Woolworths strategy saves ‘billions’, SMH , Nov 03
2001 Aldi opened their first store in Australia. It could be argued that the arrival of a hard discounter into the Australian market threatened Woolworths cost leadership strategy. At this stage Woolworths had already started project refresh, with great initial results, and continued the project.
Interestingly, in 2008 Woolworths launched Thomas Dux – a gourmet grocer and deli. Some will suggest this occurred because Woolworths was struggling to maintain a cost leadership strategy vs Aldi Australia. Woolworth’s closed the last Thomas Dux store in 2017 (Wikipedia). Some premium P/L (private label) SKUs are still branded Thomas Dux in Woolworths today. Thomas Dux had a differentiation strategy, similar in concept to Marks and Spencer in the UK market.
Please note recently in other markets, such as the UK, supermarkets have ‘price matched Aldi’ with limited success. Recent press reports suggest they are reversing this initiative (‘Question over future of Aldi price match schemes’ as Sainsbury’s joins Tesco in scaling back, The Grocer, 18/02/25) due to declining margin. It is debateable whether Aldi Australia shoppers would switch to Woolworths if they were to try to reposition themselves as the price leader in the Australian supermarket industry today.
Australian supermarket industry
Since 2000 there has been structural change in the Australian supermarket industry. This is due to new international entrants (Aldi, Amazon, Costco) commencing operations in Australia. Each retailer offers a different shopper experience vs Woolworths.
Aldi – smaller store format with focused range of P/L.
Amazon – great online, including fast delivery, shopping experience with large range.
Costco – warehouse store format with larger, buy in bulk and save, packsizes.
Importantly the supermarket industry has experienced structural change due to changes in shopper demands too. Simply put shopper demands have evolved from ‘best product at the best price’ to valuing retailers, such as Amazon, that offer a superior overall shopping experience. Many will argue that the power of shoppers has increased. My blog, Who has the power? , provides more details. Also, shopper demands have evolved from product/price mix to include all aspects of how a business operates. My blog, ESG in FMCG , provides more details.
Woolworth’s offer today
Due to structural changes in the market Woolworths has had to evolve their offer. The offer has evolved from price leader to a better overall shopping experience. To achieve this differentiation strategy Woolworths has made significant investments in technology and supply chain (like Amazon).
To better understand and meet changing shopper demands Woolworths has invested heavily in data. Their loyalty program (Everyday Rewards launched in 2008) and data business (Quantium, investments in 2013, 21) are key drivers to better understand shopper demands.
To better serve customers Woolworth’s supply chain has continued to invest in automation to improve in-store availability whilst minimising CODB. Additionally, Woolworths have offered improved online services for shoppers. This includes direct to boot (click and collect) and a home delivery service. Both these services are now offering faster pick-up / delivery times. FY24 86% of B2C orders were delivered within 24 hours (Woolworths Annual Report FY24).
In terms of product/price the improved shopper understanding and supply chain has enabled Woolworths to move towards store specific ranging. Stores have been clustered (value, mainstream, premium/up) and ranges can be tailored to meet local demand. Technology to crunch the big data from numerous sources, e.g. scan, loyalty card, has been vital to this evolution. Also, the supply chain has had to physically manage more SKUs, including low volume SKUs ranged in fewer stores. With the move towards store specific ranging it is difficult for Woolworths to be a price leader. For example, increased ranging of P/L in a premium store, such as Double Bay Sydney, may not meet local demand and deliver shoppers a better overall shopping experience.
Woolworths offer evolution could be labelled as a move from cost leadership to differentiation. Many in the industry shall suggest Woolworths offer is evolving from store based product/price to an omnichannel shopper experience. In the future this offer will evolve to unified retail. Unified retail allows the entire operation (backend and frontend) to work together seamlessly to deliver a better overall shopping experience.
The challenge today
“I think we could clearly have done a better job of explaining our decision, that’s why I’m here,”
Mr Brad Banducci, Woolworths CEO
news.com, Woolies boss grilled by morning show hosts over controversial decision to scrap Australia Day merch, Jan 24
IMHO the challenge today is Woolworths explaining to shoppers how their differentiation strategy (better overall shopping experience) delivers ‘value’ to shoppers. Due to COL (cost of living) pressures shoppers have become more price sensitive. Many shoppers may still believe Woolworths is the cost leader (old strategy). This perception is reinforced in-store with half price Gondola ends, marketing communications (brochures and online) highlighting price promotions. As per below the first tab on the website is even for price promotions.
Woolworths difficulty explaining business / commercial decisions to shoppers is a factor in many recent issues. This includes H1 FY23 year on year profit increase and the Australia Day merchandise ranging decision in FY24. Many will argue shoppers’ reactions to Woolworths (and others) business decisions is the main reason the government is having the ACCC supermarkets inquiry. The combination of government, media and shopper actions have led to a decline in trust for Woolworths (and others).
“We have been tracking trust and distrust of brands in Australia for more than seven years, but we have never seen a reputational crash as dramatic as Coles and Woolworths – not even Qantas. This is in direct contrast to the soaring reputational trust that they gained during the pandemic.
Roy Morgan CEO Michele Levine
Distrust replaces trust for Coles and Woolworths – and it’s just the beginning. May 24
Others, such as Aldi, have a different strategy (cost leadership) and shoppers may switch to due to COL pressures. Similarly, Amazon may lose shoppers to Shein and Temu in this environment. The short-term loss of shoppers is not necessarily because Woolworth’s offer is wrong. The underlying issue may be shoppers not understanding how the offer meets their demands. The offer (shopping experience) ranges from selling hot chickens in store (product/price) to fast home delivery (online service). The sales / share of Coles and Woolworths highlights Australian shoppers do value / prefer this type of offer. The real challenge is how to best explain this offer when shopper demand switches to lower prices in the short term.
Summation
Disruption is the new normal in supermarkets. Due to structural changes in the market, caused by new entrants and changes in shopper demands, Woolworths has had to evolve their offer. They are now focusing on improving the overall shopping experience for Australian shoppers. In the long-term this differentiation strategy should maximise sales and financial results. In the short term the challenge is explaining to shoppers how this offer delivers value to them.