How Woolies' pain could have been avoided

There is a lot of speculation going around that Woolworths will finally be selling their stake in David Jones.

This is big news in the investment community because the original 2014 deal turned into a catastrophic disaster and left the Woolworth's executives responsible for the decision with egg of their faces and shareholders fuming with frustration.

The deal resulted in astounding value destruction (somewhere in order of over R10 billion), partly because Woolies overpaid for the asset, generated excessive debt as a result, and were just not able to successfully marry all of the moving parts together to get the kind of big retail footprint that they had hoped for.

In summary, the last 8 years have been a nightmare for Woolies.

Writing for the Daily Maverick, Shaheeda Mia has written an insightful synopsis of what when wrong.

The Woolies strategy in the early 2000s was clear - they intended to create 'a Southern Hemisphere retail giant like no other'. Their plan was to go on the hunt for acquisitions that would fast track them in that direction.

The result was the buying of Country Road, and later David Jones in Australia.

'The management team had previously turned around Country Road on acquisition and with that feather in its cap believed it could do so again, this time on a much larger scale with David Jones.'

Sadly that was not to be the case.

So why did the David Jones move end in disaster? Shaheeda Mia offers two clear reasons:

Poor capital allocation skills

Why have so many acquisitive internationalisation strategies gone wrong? Warren Buffet says, “The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes institutional politics.

“Once they become CEOs, they now must make capital allocation decisions, a critical job that they have never tackled and is not easily mastered. To stretch the point, it is as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named the chairman of the Federal Reserve.”

Wicked problems

In a different but also applicable analogy, David Epstein speaks about what he calls kind problems/environments and wicked problems/environments in his book Range*. A kind learning environment is described as one where patterns recur, a situation is constrained, every time you do something you get feedback quickly — basically it’s an environment you know very well and in the context of SA corporates you may have had a hand in shaping that specific area of the industry you play in, so you would have a good grasp of the impact a business decision is likely to have.

In wicked environments, on the other hand, some information is hidden, and feedback may be delayed, infrequent or non-existent. Applied to SA corporates, this would be an unfamiliar environment/territory where you are an outsider and your view on the impact of your business decisions is limited because you have not been around long enough. In this type of environment, the question that also needs to be asked is, if the deal is such a good one, why are local operators who understand the market not rushing to acquire the company?

The need for strategic foresight and scenario planning

In the last couple of years South African corporations have suffered numerous defeats in international markets.

New markets present brand new challenges to executive teams and lots of uncertainty, solutions that work in South Africa do not necessarily work in the UK, or the US, or Australia.

This is where humility is key, and rather than assuming that all the answers are at hand, tools like strategic foresight and scenario planning could really have helped these companies better deal with the uncertainty of these new markets and effectively plan for alternative futures.

SA corporates may suffer from a combination of both the Buffet and Epstein analogies, which often leads to large failures in acquisition executions. Many head off into foreign countries, perhaps not fully appreciating that their local operational success has come in a largely cushioned (and kind) economy, an economy they understand well.

Several of SA’s long-standing companies were established in a closed economy with limited competition present and many companies simply took off even further when the economy was opened to all South African citizens.

A growing economy helps mask poor corporate decisions, because, as the cliché goes, “the tide is in”. Of course, errors of judgment and mistakes do happen, and in the same vein, so does success. Risk-taking is necessary in the quest for value creation, but so too is minimising that risk where you can manage it.

In the future, perhaps more organisations will learn from the pioneering mistakes from the likes of Woolworths, Truworths and Famous Brands; by before heading into uncharted territory doing thorough strategic planning using futures studies tools and methodologies.

From our perspective this seems obvious, but perhaps there is just a misunderstanding as to how useful these practical methods are.

*David Epstein in his book Range, examined the world’s most successful athletes, artists, musicians, inventors, forecasters and scientists. He discovered that in most fields—especially those that are complex and unpredictable—generalists, not specialists, are primed to excel. Generalists often find their path late, and they juggle many interests rather than focusing on one. They’re also more creative, more agile, and able to make connections their more specialized peers can’t see.