Australia’s Woolworths offers a growth model says Glynn Davis

What does a supermarket do when it runs out of obvious growth areas? In the case of Australia’s largest supermarket operator, Woolworths, the answer is - bid for a pub group.
The chain sees its A$969m bid for the pubs and hotels business of Australian Leisure & Hospitality as a way to tap into the fast-growing off-licence market in Queensland. There, the law stipulates that supermarkets are not allowed to sell liquor in their own stores or through standalone outlets without owning hotels. But, even so, the bid, which ALH has until October 18 to respond to having initially rejected the bid, is regarded as an unusual move for a supermarket chain.
So could we see the likes of Tesco, with its track record of relentless diversification within the supermarket box, follow the example of its Australian counterpart and start thinking outside it?
It’s not out of the question but Australia is probably ahead of the game, says Trevor Coates, group MD of Foodland Associated, the third-largest supermarket in Australia. “The Australian supermarkets have had to diversify even more than the UK multiples. Woolworths now has a standalone electricals chain, wine and spirits stores and an office furniture and stationery business.”
Michael Heffernan, analyst at Melbourne-based broker FW Holst, says: “Alcohol is complementary to its operations and this move is part of a trend - it bought Dan Murphy’s liquor outlets some time ago.”
Mike Godliman, director at Pragma Consulting, says: “There is not much to stop a supermarket from entering any mid and mass-market category. Supermarket-owned pubs could appear in the UK but it will take lots of steps to get there. I’m not sure that our supermarkets will have pub chains within the next year.”
What they could have, though, is an estate agency operation. Godliman believes that here the supermarkets could undercut the competition just as they have sought to do with banking.
Mortgages, reportedly Tesco’s latest target, and car retailing, which is currently undergoing deregulation so that dealers can sell a variety of models, are possible options.
Another obvious extension is restaurants and destination eateries. Andrew Page, MD of the UK’s The Restaurant Group, which operates many brands including Frankie & Benny’s and Chiquito, believes that leisure and retail work so well together that it wouldn’t be a massive step for branded restaurant chains to be run adjacent to supermarkets, taking advantage of the large car parks.
The supermarkets have so far tended to extend their non-grocery offers by using their trusted brand and customer base and have left any joint-venture partners behind the scenes. If they were to launch a chain of restaurants, Page recommends the involvement of a specialist restaurateur. “A Tesco-branded restaurant probably would not be seen.”
In general, they should also avoid taking on too much in terms of cumbersome non-core assets, warns Jonathan Miller, associate director at retail consultancy Egremont: “The multiples need to own the customer, their knowledge and the brand - but no more.”
Geoff Webb,founder of the Webb Partnership that works with retailers around the world developing their businesses beyond their core operations, adds: “They shouldn’t take on too many assets - such as bricks and mortar. Acquiring the management of assets that are not core would weigh them down.”
He believes Boots’ move into dentistry and chiropody failed because of this. “It required too many assets and it was not growing fast enough. It was good for the consumer but not economically viable.”
It would have been much more sensible, he says, to have gone in with a joint-venture partner via instore concessions or the partners’ own outlets.
Whatever model is used, Webb stresses that the objective of moving into new areas is not to tap purely into higher growth categories but to grab an ever-greater slice of household spend. In this way the supermarkets become an ever-more significant part of their customers’ lives.
Diversify into the right areas, and the supermarkets could find themselves in the enviable position of servicing customers for a whole raft of needs.
That said, they’ll have to be careful to adapt their business structures accordingly, says Miller. “They will own all the value of the customer but they will have to operate in a lean way.
“In 10 years’ time we could see Tesco using a contractor to outsource the running of outlets,” he suggests.
On this basis, maybe the purchase of a batch of pubs is not far-fetched.