Big W and Woolworths could be about to change forever under bold plan

Woolworths is being urged by several major investors in the supermarket sector to divest itself of the Big W chain and spin off its New Zealand operations into a new company.

Dushko Bajic, portfolio manager at First Sentier Investors, said at a forum in Sydney this week that he had proposed the changes to Woolworths’ new CEO Amanda Bardwell at a recent meeting, the Australian Financial Overview.

“We want you to be a simple Australian supermarket,” Mr Bajic told Ms Bardwell, who replaced former CEO Brad Banducci this month.

Mr Bajic said Woolworths, which is larger than major rival Coles, should also be making significantly higher profits, but that was not the case.

Coles has grouped its operations into two main divisions: food and beverage, while the Woolworths group has suffered significant losses as its Big W stores and New Zealand stores struggle.

‘Reinvest in your business, your prices and get the most out of your superior supermarket locations [this] “Will not be matched by your competitor.” Mr. Bajic said

‘[Big W] is a company within the [Woolworths] portfolio that simply destroyed capital.’

In August, Coles reported an after-tax profit of $1.1 billion, while Woolworths’ net profit of $1.7 billion was dragged down by a $1.5 billion impairment charge caused by its New Zealand operations, where the company has been expanding aggressively in recent years.

Ray David, portfolio manager at Blackwattle Investment Partners, agreed that Woolworths should “in theory” perform much better than Coles given the company’s size, larger store network and greater logistics resources.

According to research firm Statista, Woolworths Group has a 37 percent market share in the Australian supermarket sector, while Coles Group has a 28 percent market share.

Other investors, who spoke to the AFR on condition of anonymity due to the sensitive financial discussions, agreed that the New Zealand operations should be spun off.

Big W’s biggest problem appears to be competition with rivals Target and especially Kmart, which dominate the discount department store sector.

A key Woolworths Group investor told a forum in Sydney that Big W had “destroyed capital” for the wider business as it struggled to compete with its main rival Kmart

Kmart is owned by Perth-based Wesfarmers. Profits rose 25 percent to $958 million in the last financial year.

Wesfarmers also owns the highly successful hardware business Bunnings, which Woolworths attempted to acquire with its Masters Home Improvement stores between 2009 and 2016.

Masters was a joint venture between Woolworths and US-based Lowes Home Improvement and suffered losses of more than $3 billion.

One investor told the AFR that closing the Big W stores would be a difficult proposition as the supermarket chain relied on its storage and logistics advantages.

Ben Gilbert, head of research at investment advisory Jarden, said maximising returns will be the key focus for both investors and Ms Bardwell as she takes the reins.

Woolworths Group was approached for comment.