Woolworths Ups and Downs since Its Inception in United Kingdoms - Research Paper Example

Strategic analysis of British company Woolworth and causes of its failure The British Company, Woolworths is normally categorized as a variety store dealing in retailing of a range of varying products. Historically it was established as a subsidiary of an American Company F.W. Woolworth &Co, in 1879 by Frank Winfield Woolworth. It was incorporated in England on 23rd July, 1909 as private limited company with initial capital of 50,250 pound sterling. It, first time floated a new idea of selling all the products at a cost not more than five cents. This idea gained popularity amongst the customers resulting in fast growth of the subsidiary. Its first shop at Liverpool attracted about 60,000 people in first two days because of attractive one penny, three penny and six penny products put at sale. It continued to open new shops at various cities that attracted heavy rush of customers and visitors. It was company’s policy to purchase the products directly from manufacturers, who also were very happy due to momentum in their business as well. Some of the manufacturers started doing business solely with the Woolworths and labeled their products with the company’s name. Company’s business grew day by day and it had 31 shops in United Kingdoms by the year, 1914. Due to inflationary trends after the World War II, the company had to do away with its three pence and six pence price limits. It introduced self service first time in its retail side in the year 1955. Woolworth opened about 190 self-service stores by the year 1970. It created new division in the stores by establishing Woolco departmental stores in the year 1966. These stores had full range of quality products like, clothes, groceries, car service and restaurants etc. available at affordable prices. (WGP 2007: Fu 2007) The Company continued to flourish very fast because of its stated aim to remain at the customer’s heart and best kid’s retailer till 1966. But thereafter its sales as well as profits started falling because of its competitors, Marks & Spencer who overtook its sales as well as profits. The results of the company were the worst in the year 1969, because it failed to chalk out suitable strategies necessary to take on its competitors in the market. Sales at Woolworth began to decline. Consumers were reportedly not satisfied with the quality of customer services of the company. Many of the business sites were not at prime locations. Its new products could not attract the customers because of lack of well trained staff and availability of ‘A class service’. The company tried to improve its services in the year 1971 by introducing new system of centralized payments besides closing its 23 unprofitable shops, as an attempt to trade up. The profits of the company increased to some extent as a result of these measures but it failed to boost up its profits at the desired level. (WGP 2007: Peston 2008) The competitors of Woolworth like Wal-Mart, Argos and Next very soon became more prevalent in the market because of low prices, better service and vast range of their products. The Management of the company ultimately decided to sellout the Woolco stores in 1977. In the year 1981 it sold-out some of its valuable prime located properties to cover-up the losses suffered by the shops situated at these locations. Even then its profits went down in the said year and the company was forced to cut the dividends first time since its establishment. In the normal restructuring process during the year 1985, the company decided to abandon the sale of food and adult clothing that was contributing about 30% of its overall sales. The Management of the company sold out its 200 unprofitable shops out of about 990, during the years 1982-1991. During this decade company made a number of acquisitions in order to become more diversified in retail business. It launched Music and Video Club that specialized in CDs, videos and other entertainment products. The company succeeded in boosting its sales and turnover during 1990s and gave impressive results despite the fact that some of major chains like Wilkinson expanded their business in the Woolworth areas. (FRANCE 2008) Woolworth reviewed its entire business in the year 2002. It reconsidered its further expansion and realignment and merger of its overall management structure. It strengthened infrastructure and planned accurate management of its stocks so as to maintain them at their optimum levels. It introduced new till system in order to ensure its stock holding capacity besides provision of improved and efficient services to the customers. The management decided to cut the number of suppliers and enhance the use of their own branded products. These improvements contributed a little in the sales as well as profits. One of main money spinners of the company was its music business that collapsed. The financial results for the year 2004 showed just 4.5% increase in the profits of the company. It had to compete strongly with Argos in the sales of toys and gifts. In the year 2006, the company introduced an in-store collection service for items ordered through website. Company continued its business mainly in entertainment and electronics till the year 2008. It expanded its chains and set up out of town stores that were known as ‘Big W’. It announced considerable loss in its half yearly statement of affairs as on 2nd August, 2008. The management, therefore decide to sellout abut 120 stores, cut jobs and reduce web operations. At this stage reportedly the company rejected an offer to buy its 815 stores. From September onwards the entire World entered into worst ever economic and financial crises that resulted in decrease in availability of necessary credit from the banks and financial institutions besides decrease in consumer spending. The lending banks of the company not only refused to give further credits, they also demanded repayment of their existing loans towards the company. As a result of this crisis the retail business badly suffered. Media also reported possible price crashes, increased personal debts, unemployment, pension shortfalls, stock market crashes and decrease in availability of disposable income. (Straight Times 2009: James 2008) In the above paragraph I have tried to give possible brief overview of the Woolworth’s ups and downs since its inception in United Kingdoms, in the year 1909. It was very much necessary to have the overview and brief history of the company before strategically analyzing the causes of its failure. One thing became quit evident that Woolworth faced sever financial as well as tough competitive challenges from new entrants in the field of retail business, more specifically in the last five years of its business. Its share price dropped drastically during the years 2006-2008. (HC 2008) The strategic analysis of any company, firm or a business entity needs reliable and valid information, evaluation of its periodical and annual reports, company’s accounts and comparative performance of its competitors doing business in the same region or country. Obviously collecting necessary information from the records of the company concerned is not possible because of obvious reasons. Outside analyzers have to rely upon the information gathered through outside resources such as business trade journals, stakeholders’ interviews and trading results reported at various sites. By keeping in view the available information, I would try to analyze through different analyzing models, the causes of failure of M/s Woolworth after doing business for about a century. I would like to analyze the macro-environmental factors, like political, economic, social and technological that had been impacting the company’s potential and direction of operations, its business position and overall market trends. The company had no immediate political threats in the country as there was no political decision that might have impacted the performance of the company during last five years. General elections in the United Kingdoms are due. The Labor party that had been ruling for about ten years had its own economic policies. The surveys conducted at various levels are forecasting a change in the next elections. The Labor party has its own political and economic agenda that may or may not suit the business and industry in the country. They are of the view that the economy can brought out of crises only by remaining with in the budgetary limits without spending additionally, whereas Labor thinks that the economy can gear up with more and more spending. General public is confused over the economic future of the country. They are therefore reluctant to spend and are trying to have maximum savings to fight the current as well as foreseen economic trends. These public trends have negative impacts over the business of already struggling companies like Woolworth. There are no doubt certain anti-globalization movements around the World demanding restrictions to further expansion of multinational companies. (McMillan 2008: King 2008) Current economic situation in the United Kingdoms can be seen as highly negative factor for Woolworth. Low interest rates have dissuaded the people who were making their livings through an income generated from their investments. Retired people have also substantially lost their pensionery benefits because of fall of stock markets. The housing market has fallen to its lowest levels despite heavy falls in the prices of houses. It therefore impacted negatively over the retail market of the country. Oil prices that rose to about $145 a barrel in the early months of the year 2008 fell as low as to $35 a barrel due to falling demand by major developing economies of the World like China. These falling prices of oil indicated the fall in growth of World major economies. In the circumstances profits of the companies dealing in retail sales substantially decreased. The consumer attitude has by and large changed with the passage of time. They are avoiding purchases from large super stores and preferring local shops because of suitability of location. Woolworth failed to compete with other retailers in this area as well because of best business locations of its new competitors. Consumer buying mechanism has also changed considerably. Usage of mobile phones and personal computers has made it easy for the consumers to make shopping through internet after making comparison of cost and quality of products. They are making purchases while sitting at home through the companies that are offering competitive rates of their products besides fast services. A number of companies have entered in the field of selling goods through the internets only. That has given them double advantage. First they are in apposition to sell their goods at comparatively lower rates because they don’t need any premises or any staff and they are incurring comparatively less overhead expenses. Secondly they are attracting busy and elderly people who are unable to visit the chains due to age factors. I may add that the elderly people make a major part of the society in the United Kingdoms. This technological advancement has affected the business of Woolworth. (ColClough 2008) All segments of the retail industry are facing tough competition in the United Kingdoms as well as the World over. Some of the companies like Tescos, Sainsbury and Asda are seeking new sectors or trying for higher market penetration in order to boost up sales of their existing products. These companies are trying to sellout their branded products at significantly lower prices whereas some new entrants like Aldi, Netto and Lidl are selling unbranded products at comparatively lower prices resulting in increased sales and profits. In these circumstances Woolworth is dragging behind and loosing its grip over the retail market. Woolworth was facing biggest threats from the stores like WalMart and Morrisons because of their product diversification such as Lloyd’s pharmacies. As against Woolworth, these companies were in vigorous struggle to achieve a foothold in new geographical sites as well. Woolworth’s high street stores had to rely upon provisions for kids’ celebrations, the area where it had remained a key provider, that too under tough competition with other super markets. The competitors like George, Asda and Tescos were offering alternatives with strong fashion by employing designers of the fame. For example Tescos offered Levis jeans at a price lower than even its manufacturer. These strategies had helped these stores in increasing their market share. No doubt, there was an inherent risk of profitability, for all the stores doing the retail business. It was mainly because of tough and fierce competition. To remain in the market they were to remain competitive both cost and quality wise. Some of the retailers moved their manufacturing business to other countries in order to produce cheaper products. Use of cheap material in manufacturing the products was although not a good option for the retailers because of feared questions over the nutritional value of these cheap products yet some of companies took the risks and earned profits. Woolworth could not test any of these options. (Richard 2009) In order to determine the competitive intensity and attractiveness of Woolworth we will have to search for the forces that were close to it and affected its ability to satisfy the customers and increase its sales and profitability. We will have to make a qualitative evaluation of the company’s strategic position by using porter’s five forces framework. For this purpose we will analyze the threat of new entrants to Woolworth. Although high numbers of retailers were doing business in general merchandise during the year 2008, Argos and Next were two main companies that were successfully competing the other companies like Woolworth. Both of them offered full range of products like toys and gifts, electrical goods and house wares etc. They had advantage over Woolworth because of their minimal stock holdings. It made more selling space available to them. Another group of foreign companies like Ikea, Pound stretcher, Gap and H&M etc, achieved good organic growth by taking start from zero, mainly because of new business strategies and ideas. Their business directly and indirectly had negative impacts over the companies like Woolworth. (Heather, Zoe 2008) Another factor behind the decreased profits of retail companies was that of their diminishing bargaining power because of development of information technology that has helped the buyers to have direct access to potential suppliers. On the other side the suppliers bargaining powers had increased due to increased demand of their particular products. For example when they knew that a particular model of mobile phone or computer game is at high demand they gave preference to customers other than the existing retailers. Companies like Woolworth that were lacking sufficient funds to stock the highly demanded commodities before hand were left behind. Companies like Marks and Spencer marketed superior substitutes of certain food products in order to exploit and attract the customers who could afford to purchase these high quality products at comparatively higher costs. Not fully, but to some extent their strategy attracted the consumers. Some of the super markets and stores, not Woolworth, also marketed the low priced substituted products under their own labels and they attracted the customers who had faith and loyalty with these stores. Most of the customers avoid making shopping as per routine; rather they wait for seasonal sales so that they could purchase their needed commodities at reduced prices. They expected to get “three for two offers” throughout the year. This approach had put the retailers like Woolworth at back foot because they were forced to adopt competitive pricing and offer limited range of commodities, instead of targeting market promotions. The competitive rivalry has always been very high in the variety stores sector because this business had already been saturated in the United Kingdoms and even than it was expanding day by day. Companies were searching for different channels and introducing new range of products in order to fetch higher profits. The companies that were relying on their existing range of products suffered either from losses or gained minimal profits, not sufficient even to pay off their debts. While we have talked a lot about various forces impacting directly or indirectly, the performance of Woolworth, we may have a brief view about its strengths that had kept the company’s business intact for about a century. The company being one of the oldest in the United Kingdoms had its specific recognitions in various business strategies. It had good reputation and a recognized name throughout. Its internal competence and expertise enabled it to reduce the cost of saleable products and introduce them under its own label that provided additional turnover to the company. Company minimized the risks by entering into agreements with other competitors. For a long period, the company dominated the suppliers of toys, house wares and manufacturers of other products due to its strong presence. The locations as well as number of the Woolworth stores were another point of its strength. As a tool of marketing campaign the company was first to adopt advertising icons. The management of the company, to some extent, succeeded in managing the stocks efficiently. They continuously reviewed their operational efficiency in order to survive in the competition. The company developed a high level of understanding the customers due to its long experience in retail business. For a long period the management of the company was in a position to predict the changes in the consumer behavior on the basis of their experience. They tried to apply different strategies at different times in order to take on competition. (Rupert, Manfreda 2008) There were certain weaknesses in the operational strategies of Woolworth that dominated its strength. Its practice of discounting and offering deals made the customers habitual therefore the company was forced to continue such practices despite various financial constraints. This policy no doubt had considerably contributed towards improvements in the sales but also had negatively impacted its profitability. The company failed to adopt new technologies like RFID that reduced the company’s capability to compete in value chain reductions. The management of the company made certain poor trading decisions at the occasions of Christmas that not only resulted in decreased sales as also dropped the confidence of customers and other stakeholders. The management of the company could have well taken the advantage of its high street retail outlets as the consumers did not prefer out of town stores but it failed. By making use of latest technology, the company could have come in such a position that it could also avail the key opportunities in the future retail business. By adopting these measures the company would have been in a position to avoid risks and compete with the retail sector as well as other sectors like discounters and category killers etc. Another problem faced by the company was the refinance agreement it entered into for availing a 385 million pounds loan against its assets. It added to its burden in shape of about 30 million pounds interest per year. (APM 2008: Thompson 2008) Under these circumstances as well as in wake of market saturations, coupled with economic downturn, it was highly difficult for the Woolworth to maintain competitive pricing. Woolworth’s financial results for the first half of the year 2008 showed 99.7 million pounds pre tax loss. Decreased credit availability, decreased public spending and pressure of creditors to pay off debts of about 385 million pounds, forced the company to sellout its 120 shops that were going in loss besides reducing the web operations, cutting the products and axing the employees. These measures could not help the company to survive and ultimately it suspended trading of its shares on the 26th 0f November, 2009 and at last decided to close down its all 819 stores and axe its 27000 highly dedicated employees. The parent company of Woolworth also announced its intention to go into administration on the 19th of January, 2009 Conclusion: In the light of above discussions and analysis we would not be wrong to say that Woolworth failed to compete with the other retailers as it couldn’t compete with discounters, category killers and specialists because it lacked necessary capabilities and understanding of markets. It failed to respond the threats posed by the new entrants because it took lightly the changes in the buying pattern of the customers. It is twenty first century and not twentieth, therefore every business had to keep its eyes and ears open. Initial signs of any threat might be vague but it could create brewing trouble. Those companies that adapted the new technologies grew fast while others dragged behind and ultimately failed. Stately in the last couple of years the Woolworth customers had to buy its low quality products at comparatively higher prices. Resultantly more and more customers moved away from Woolworth. Woolworth continued to look at its performance from the inside out, instead of looking outside in. he company was not prepared for the worst, therefore it could not survive in the current highly competitive society. REFERENCES WGP, (2007). Woolworths Group. Retrieved May 13, 2009, Web site: http://dic.academic.ru/dic.nsf/enwiki/532434 FU (2007). Foot Locker, Inc. . Retrieved May 13, 2009, Web site: http://www.fundinguniverse.com/company-histories/Foot-Locker-Inc-Company-History.html Peston , R (2008, Nov 26). Woolworth into administration. Retrieved May 13, 2009, from BBC News Web site: http://www.bhttp://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/11/woolworth_into_administration.htmlbc.co.uk/blogs/thereporters/robertpeston/2008/11/woolworth_into_administration.html FRANCE 24, (2008, Dec 27). France 24 | British icon Woolworths stores closure begins | France 24. 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Retrieved May 13, 2009, Web site: http://marketplace.publicradio.org/display/web/2008/11/27/woolworths/ Thompson, James (2008, Jul 30). Woolworths shares dive to all-time low after warning of 'marked' downturn. Retrieved May 13, 2009, Web site: http://www.independent.co.uk/news/business/news/woolworths-shares-dive-to-alltime-low-after-warning-of-marked-downturn-880422.html Read More