Roy Bagattini may be the new CEO of Woolworths, but in sharp contrast to the shiny retail chain he heads, he’s virtually unknown in SA.
That in itself isn’t surprising. Twenty years ago, as an employee of SA Breweries, he left SA as part of the brewer’s drive to conquer the globe. He ended up seeing the world — living in Rome, Beijing, Moscow, Singapore and San Francisco. He even ended up as a top executive at two mega-brands: brewer Carlsberg and fashion brand Levi Strauss.
Now he’s back in Cape Town, with one of retail’s toughest jobs: fixing a retailer that, over the past few years, has gone wrong.
In an extended interview with the FM last week, Bagattini talked candidly about the scale of the challenge to restore Woolworths’ reputation as an iconic retailer.
"[Despite its] admirable reputation in the market, we know we’re delivering below our potential, particularly when you look at the fashion side of the business," he says, in an accent undiluted by his years out of SA.
"We have generations that have gone before us that have given blood, sweat and tears to get this business to where it is today. In a real way, we have an accountability to those generations to take what we’ve inherited and position it for further success."
To say Woolworths is delivering "below potential" is a rank understatement.
Bagattini, 57, couldn’t have had a hotter trial by fire. He took over in February, on the eve of SA’s lockdown, and after five years in which Woolworths’ share price dived 64% — value destruction of more than R60bn.
The reason for this fall was the R21.4bn deal, clinched by Bagattini’s predecessor Ian Moir in 2014, to buy Australian department store chain David Jones. It was meant to turn Woolies into one of the top 10 retailers in the southern hemisphere. Instead, it nearly sank the group.
It’s why Moir got the heave-ho last year. And it’s the central reason why Woolworths made a R1.2bn loss for the year to June 2019 and why, even though it bounced back to a profit this year, David Jones still made a R1.08bn loss.
Though his initial contract will run for five years, it will be Bagattini’s strategy to deal with David Jones that may just define the success — or otherwise — of his stint.
"Bagattini can’t be blamed for the acquisition of David Jones, but will be judged on whether he makes it good, bad or indifferent," says independent analyst Syd Vianello.
It’s hard to overstate the scale of the problem. Since the deal was consummated in 2014 with a price tag of R21.4bn, Woolworths has had to impair R13bn of that. Not just that, it has also had to pump millions more into refurbishing the flagship Elizabeth Street store, just to allow it to compete.
The billion-dollar question: does Bagattini have any plans to throw in the towel on David Jones?
No, he says. The first part of his turnaround plan is to "create value" in the business, then decide on the next move.
However, Bagattini has said previously that "there will be no further funding from here into David Jones", and that Woolworths will "cut our losses if we cannot get things right" in Australia.
Certainly, analysts have been calling for Woolies to ditch David Jones.
Evan Walker, portfolio manager at 36One Asset Management, told the FM a few months ago that "it’s an absolute disgrace" that management "is throwing more money [into] a bottomless pit".
But Bagattini says he has a clear vision of what needs to be fixed, and how to go about it — even if Covid somewhat interrupted his 100-day plan.
The silver lining, at least, is that he sees it as less of a problem with bad merchandise, and more of a need for a "financial turnaround".
"We have the opportunity of writing a pivotal chapter in the history of a great business, and being central to that at this point in time, I find very inspiring," he says.
Part of the challenge of the "financial turnaround" is to restore the confidence of investors, who trusted Moir’s instincts on Australia and ended up badly scalded.
This scepticism was very evident at last week’s Woolworths AGM, where an unprecedented 82% of investors voted against approving the implementation of the retailer’s remuneration policy.
What really got shareholders steaming was the fact that Moir — whom many blame for the Australian misadventure — was paid R77m last year. Remarkably, this included a R34.3m "restraint of trade" payment, due to be paid to him by 2023.
Asief Mohamed, chief investment officer of Aeon Investment Management, told the FM last month that he was appalled at this. "Given Ian’s performance, I’d imagine they’d almost have paid a competitor to take him, rather than pay him a restraint," he said.
Old Mutual voted against the proposal at the AGM, saying "no compelling justification has been provided for these payments". It added that Bagattini had also been awarded share options while "the performance conditions and the rationale for granting these particular awards" were lacking.
Zarina Bassa, who chairs the Woolworths remuneration committee, gamely tried to defend the payments, but 13.3% of shareholders voted against her re-election too, presumably as a protest against the excessive pay.
It was a sharp rebuke. But can Bagattini get investors back in his corner?
There’ll be no shortage of sceptics, considering that 28 years of his corporate career was spent working for a brewing company, rather than a retailer.
However, he believes there’s a nexus connecting both industries, at the centre of which lies the customer.
"There are a lot of learnings one can transfer across industries when it comes to brands and brand-building. That’s really what drives me about being in business — it’s the customer-facing piece."
Bagattini says he was particularly attracted by the opportunity to lead people during a crisis. "I have typically relished the more difficult challenge, and I’ve also been determined to ensure the business is in a healthier place," he says.
SAB’s school of hard knocks
Those who know Bagattini say he’s up to the job. He was born in Joburg and graduated with a BCom degree, which he then applied as a director of human resources at building supplies company Cashbuild. After that, he spent eight years with SAB in SA, before being tasked by the brewer to start a business in India.
From there, it was a whirlwind of new cities. First, he went to China to boost SAB’s business in that country; he relocated to the US when SAB acquired Miller; headed to Italy to run the Peroni business; then to Moscow, where he was responsible for SAB’s East European operations.
Finally, after 18 years at SAB, he moved back to Asia when he was appointed by Danish brewer Carlsberg to run the Asia Pacific region. In 2013, he joined Levi Strauss & Co, initially in Singapore and then in San Francisco.
Encouragingly for Woolies shareholders, Bagattini helped turn Levi Strauss around, culminating in its successful listing on the New York Stock Exchange in 2019.
Mark Bowman, a previous SABMiller executive who knows Bagattini well, says he came to SABMiller from Cashbuild, which had a sterling reputation for treating all employees equally.
"He had a leadership style when we were middle managers at SAB, where he was able to stand out and get proper engagement with people … I would typically often get advice from him. He always had a sage perspective. He was ambitious and driven and it was clear he was building a strong career."
Bowman says the charismatic Bagattini was highly regarded at SAB, and says he always sensed he would lead a large organisation one day.
"He focuses on the team at hand, he manages the stakeholders well, but he’s not flashy. Within the team dynamic he’s generous and gives people a lot of space and he’s quite demanding."
Bowman says that, by all accounts, Bagattini did an excellent job at Levi Strauss too.
"I’m sure his leadership style and knowledge of Asia was well received by them. I suppose, reading between the lines, he ultimately wanted to lead a large organisation, and having consumer goods and clothing retail experience positioned him well for Woolworths," he says.
Bagattini is also one of a number of managers who came through the SAB school to lead other large companies. Gavin Hudson, now trying to fix Tongaat Hulett after a crippling accounting scandal, is another.
Bowman says Bagattini "epitomised the SABMiller construct of finding the right leader and team, and then empowering them to deliver results".
Vianello believes there’s a long list of exceptional business leaders who graduated from the "University of SABMiller".
In this case, though, there’s extra pressure on Bagattini.
"There’s no doubt he’s made a lot of money, but this is his last big challenge before he hits retirement age," says Vianello. "The financial incentive is less relevant, and he’s got a huge personal incentive to make it work. The last thing he needs is to retire with failure."
It helps, in Vianello’s view, that Bagattini comes with no baggage, and has no vested interests in defending any decisions made in the past — like the purchase of David Jones.
"He will take the decisions whatever they need to be, as unfortunate as they may have to be. He has a mandate and that is to the board and the shareholders. The real mandate is to fix this up, because when he leaves in five years’ time this needs to be a world-class retailer."
It means that if he has to change the culture or sell David Jones, he’ll have a free hand to do so.
For his part, Bagattini is loving being back in Cape Town with his wife and son. (It says much about his jet-setting career that their son, a student at a university in Los Angeles, has never lived in SA until this year.)
"It’s great to be in a familiar environment, where you can instantly understand and relate to people, where your accent isn’t special or unique, and you don’t have to explain your sense of humour," he says.
Not that he didn’t fall in love with some of the other places where he worked.
Bagattini was particularly partial to Italy — his father is Italian, after all. "Living and working in Rome and being the CEO of Peroni was quite a special experience."
There, too, his goal was to turn around the 170-year-old beer brand, which he says was "really in ‘stage four’ in a sense and we had a lot of work to do".
So if Peroni was in stage four of its decline, where is Woolworths?
Nowhere near that, says Bagattini.
"There’s no question we’re not delivering to our full potential yet, but we have a lot to work with. There are aspects of our business that are outperforming, and are world-class," he says. "Having studied a number of similar businesses globally, on every metric our food business would stack up among the best in the world. Unfortunately I can’t say the same for the current status of our fashion business."
And, of course, there’s the train wreck in Australia.
How to fix it?
The question is, how does Bagattini set about fixing the mess in Australia?
At the moment, Woolworths has focused on getting its products right, having the right in-store strategies and digital integration. But it’s not as if it has time on its side — with shareholders impatient for progress, turning David Jones from a R1bn loss to a profit is a priority.
One of Bagattini’s first steps towards hitting this goal is closing stores and shrinking existing space. "Our gross margins have been declining in that business for some years now. And shifting the needle on that, I think, will be quite transformative."
Then, financially, the balance sheet must be restructured, to cut the R17bn in interest-bearing debt.
The key to this, says Bagattini, is using its property assets smartly — selling the David Jones properties and leasing them back.
Already there’s been progress: one building has been sold for A$120m, and the Elizabeth Street building (which has undergone a huge revamp) is also on the block.
The Elizabeth Street operation is in an exclusive process with the Charter Hall Group, a major property investment manager in Australia, and Bagattini says the process is quite advanced. "We’re hoping to close out on this some time in the first half of next year."
They will take the proceeds from the sales of the buildings, and use these to set up both David Jones and Country Road independently, so they can pursue their individual ambitions.
Not that it would be a slam dunk. If they sell the properties and lease them back, they’ll still have to pay rent. But the calculation is that bankers would prefer the company to have cash in the bank, rather than own property.
As analysts from SBG Securities wrote in June: "The difficulty for any potential property bidder is that David Jones’s financial distress is well known to the market. Any incremental increase in running costs, implied by the separation from Country Road, renders the group just able to meet its existing rental costs, let alone take on any additional leases."
If Woolworths can’t attract buyers for the properties at the right price, then "the SA parent company would need to step in, in our view".
Still, Vianello says David Jones’s properties may be more valuable than people think.
"I don’t know what other assets there are, but one gets the feeling the balance sheet in Australia is potentially not as stretched as people thought."
But besides fiddling the balance sheet, the company also needs to get shoppers back into its stores. This is why it, and brand partners such as Dior, Chanel and Gucci, spent A$420m on upgrading the store in Sydney’s Elizabeth Street — the flagship that accounts for 20% of group sales.
Jean Pierre Verster, CEO of Protea Capital Management, told the FM in June that this had to be the last roll of the dice.
"If this doesn’t work, they should turn off the lights at David Jones. Sell the business or close the doors, and give back the keys. This is the last chance," he said.
But Bagattini has high hopes. He says Elizabeth Street is regarded in Australia as the benchmark in brick-and-mortar retail and, since the revamp, the average transaction value per consumer at the store has risen more than 80%.
"It is impressive, and it did come at a fair investment, no question. But it’s a great customer experience," he says.
Of course, the litmus test for whether the Elizabeth Street revamp has worked will be whether any tourists who return to Sydney choose to shop there. Says Vianello: "David Jones may be old, but it never was or will be a Harrods or a Selfridges."
What about the fashion?
It would be wrong to think David Jones is Woolworths’ only weakness.
The other thing that needs to be fixed, pronto, is the clothing business in SA.
Vianello thinks the challenge is establishing the size of the segment the company serves, and whether that market is growing or going backwards. Low-cost retailers such as Pepkor have established that their markets are growing, and TFG bought Jet because it wanted to get into the high-growth, low-price market.
Woolworths has targeted the more affluent market, with higher-priced clothes.
Vianello says the issue is that SA’s population is getting younger, while Woolworths’ traditional customer is getting older and has less incentive to spend.
"If Bagattini determines that [Woolworths’ clothing market] is not a growth segment, then the test is how you deal with it."
The irony is that this exact market is fuelling its incredibly successful Woolworths Food business. You can see this contrast in the sales: during its last full year to July, turnover at Woolworths Food grew 10.7%, while falling by exactly that amount in its fashion, beauty and home business.
"Maybe Bagattini will tackle the age-old conundrum facing Woolworths: getting its well-heeled food customers to buy apparel from the same business," says Vianello.
"To achieve this, you need products which resonate with them and this would have to be sufficiently upmarket. But this may alienate your existing customer base and will involve shifting the product from one price segment to another more ‘upmarket’ one," he says.
Woolworths has talked about shifting its focus for clothing for years, but has never done it, he says. "Maybe now is the time."
On clothing, Bagattini acknowledges Woolworths has lost sight of the customer.
He’s spending a lot of time on the shop floor, looking at what customers are picking up and what they’re avoiding.
"I love getting into the stores and spending time in the stores. Unfortunately I’m beginning to get fairly well-known in Cape Town and I can’t hold onto my ‘mystery shopper’ status for too long," he says.
The company is also investing far more in online channels. Woolies Dash, a delivery service with the aim of delivering food within the hour (along the lines of Checkers’ immensely successful Sixty60 service), is to launch in the next few days, to sit alongside the current online offering and the "click-and-collect" option.
What makes it all the more challenging is that Bagattini is trying to turn this tanker around during the most gruelling period in SA retail for maybe two decades. With shoppers under more strain than ever, price has become more important than ever.
Says Bagattini: "Our marketplace is really a function of where we’re at with some of the broader macroeconomic issues: high unemployment, constrained disposable income … and that does tend to drive the inclination to using the price lever much more, I guess, than might be the case in a number of the developed markets that I’ve worked in."
Which presents a unique challenge for him: Woolworths has never tried to distinguish itself on price — but rather on quality and sustainability. Now, to make itself more relevant to customers, it’ll have to pay greater attention to price. It’s something it seems to realise. Woolworths has set aside R1bn as part of its strategy to boost its market share — cutting prices to bring new consumers into the brand and bringing existing customers into new categories.
Was it arrogance?
It’s clearly part of Bagattini’s vision to make Woolworths more relevant in shoppers’ eyes. During the interview with the FM, he speaks of "relevance" a lot: the "relevance" of the Australian business, the "relevance" of SA’s fashion offering, and the "relevance" of David Jones in the Australian shopping ecosystem.
The question is, why did Woolworths miscalculate so badly in the first place, and lose this relevance? Are SA companies just too arrogant? Do they overrate their skills?
Woolies isn’t the only SA company to come badly unstuck overseas: there’s Brait’s disastrous deal to buy New Look, Famous Brands’ purchase of Gourmet Burger Kitchen, and Shoprite’s foray into Nigeria.
Bagattini says there are risks associated with any acquisition, but it comes down to whether you’ve done your homework.
"Typically we either overestimate the opportunity, or underestimate what it’s going to take to deliver on that potential. I think doing your homework well circumvents a lot of the risk here, but there’s no question [that there is] always a level of risk when you invest in other markets and you don’t understand the lie of the land," he says.
But, he says, this doesn’t diminish the fact that South Africans have proven to be excellent managers of companies across the globe.
"There is something about us — our resilience, our determination to succeed, we can always make a plan, we always have a can-do attitude. I find South Africans in foreign environments much more adaptable than many other nationalities and certainly they have an inherent ability to successfully manage quite comfortably in diverse contexts," he says.
Charismatic boss says Woolworths has plenty to work with as it embarks on battle to reduce huge debt
— What it means:
Bagattini says if he has any regret, it’s that he’d have liked to spend a bit more time in particular countries. It’s been frustrating "not being able to see through some of the strategies and plans", he explains.
He’s now got the time, and the scope, to really make a difference.
He’s on a five-year contract, but if things go well, he hopes he’ll stay for longer. "SA is still our home … I hope that through what we do here, we can extend our tenure."
Helpfully, Vianello says he’s already seeing some "green shoots" in the wider business. "They have managed to pull the debt back — it seems as if the way they’ve done it is to get their stock down — they were probably overstocked in the first place. What appears to me to be more positive is they’re managing to get the debt down in Australia."
Not that it’ll be easy. Bagattini keeps a punishing schedule, typically starting between 6.30am or 7am with video-conference meetings with the Australian managers.
You don’t claw back R60bn in lost value without putting in some serious time.
"Our team is determined and committed, and we’re beginning to get after it. We’re mindful there’s a lot of work to do, but we also have a lot to work with," he says.
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