Johnson focuses on woes of Woolies

IT's a weekday lunchtime in Edinburgh and the Stockbridge branch of Woolworths is as bustling as a graveyard.

Two teenagers stand outside, counting up their coins before scanning the sweet selection to see what their £1.80 will buy them. Elsewhere, a middle-aged woman spends five minutes passing up and down the aisles, eyeing the eclectic stock.

With a look of confusion, she picks up some solar-powered garden lights before putting them back, wandering through the toy section and settling on a pair of kitchen scissors for less than a pound. Business is so slow that no one is manning the tills and the three customers have to wait as a sales assistant slowly lollops to the cash register.

This is one of 800 stores that Steve Johnson, the former boss of Focus DIY, has agreed to turn around after accepting the top position at Woolworths last week. It's one of the toughest jobs on the high street.

He will take over next month from Trevor Bish-Jones, whose surprise departure from the chain – which celebrates its 100th year on Britain's high streets next year – was announced in June.

Woolies' chairman Richard North has challenged Johnson to induce a recovery in the retailer's exhausted share price, which has lost close to 80% of its value since floating independently in 2001, following its demerger from the Kingfisher group. Johnson has been promised a handsome £9m incentive package if he can lift the share price to 20p over the next four years – a task which analysts have described as "no mean feat" after Woolies shares closed at 6.65p on Friday. They hit an all-time low of 5.5p at the end of July.

Braving the shark pool of City traders for the first time last Tuesday, Johnson put on a brave face, stating: "I will be focused on value creation for all stakeholders as we seek to move the group forward."

But as retail sales continue to fall across the board, sceptics are already taking bets on whether Woolworths' 100th year on the high street will be its last. What, if anything, can Johnson do to save one of the UK's oldest retailing institutions?

According to Nick Bubb of Pali International, the Woolworths board did well to attract a chief executive of Johnson's calibre, but it will be a "minor miracle" if he pulls the job off, saving it from what many see as its inevitable fate: bankruptcy.

At the end of last month Woolworths issued what effectively amounted to a profits warning after like-for-like sales at its retail division fell 6.7% during the six weeks to July 26. North, who presented the results, warned margins during the first half of the financial year are likely to be "disappointing" – a forecast many analysts seized upon as a sign that the group is unlikely to break even this year. Some even went so far as to say shareholders will not receive a dividend payment for the 12 months to the end of January.

Bubb expects Johnson to forge ahead with plans to scale back the business after a firm of management consultants recently advised the Woolworths board that it can build a sustainable business based on its smaller shops. Another attempt at overhauling its pick'n'mix stock, ranging from confectionery and toys, to garden and household products, is also likely to be on the cards.

But Bubb argues there will be no quick fix for Johnson and many of the options open to him have already been tried and tested. "If it was that easy, it would have been tried before," he says.

Nick Gladding, lead analyst at Verdict Research, argues Woolworths' variety store formula, which was popular with shoppers in the 1900s, is no longer relevant in the 21st century. He says Woolies has been undermined by the large supermarkets such as Tesco, where shoppers can now buy sleeping bags, barbecues and the latest Britney album alongside their fruit and veg. It has also been overtaken by other discount stores such as Argos and Wilkinson, which tend to have a wider variety of stock, and benefit from better locations.

"It's a very difficult job that Johnson has," says Gladding. "Many of Woolworths' problems are deep-seated and difficult to turn around, for example, the strength of competition, particularly from supermarkets and specialists that cater better for customer needs. Many of its stores are in secondary locations and are not close to the shopping centres where people now shop. Woolworths stores have been marginalised and rely on local customers. The concept of the variety store in the 21st century really doesn't work any more. It's an outdated concept."

Robert Clark of the Retail Knowledge Bank agrees. Woolworths spreads itself too thinly, he says, and it has turned into little more than a sweet shop in recent years.

"It's a jack of all trades and master of none. Just being a big sweet shop isn't really good enough, I'm afraid."

According to Clark, the first task Johnson should turn his mind to is to decide what precisely he wants Woolworths to be, and who exactly it intends to target. Its current jumble of stock is failing to grab shoppers' imaginations, Clark suggests, but there are individual areas of strength which the new chief executive should play to. For example, in homeware, children's clothing and toys.

Clark points out: "It owns Ladybird (the children's clothing brand] and it has never made as much of that as one might have expected or hoped. It also has some authority – or it did have – in music."

Although he admits Woolies faces stiff competition even in those areas, Clark says the 99-year-old brand can still count on a strong sense of loyalty among blue collar shoppers and young families on a budget, and Johnson should research how to target those groups better.

"It's going to be a struggle under any circumstances but the one thing is not to underestimate the loyalty of its key, target market - blue collar housewives and the youngish family who have very stretched budgets."

He also suggests the option of breaking up the group needs to be brought back to the table after plans to sell Woolworths' stake in 2 entertain, its profitable DVD publishing joint venture with BBC Worldwide, were torn up last month.

"It has to be an option although it then leaves you with a high street brand that is past its sell by date," he says.

Others, including Gladding of Verdict Research, propose Johnson should hold on to 2 entertain and EUK, Woolworths' wholesale distribution business which supplies CDs, DVDs, games and books to rival retailers, until the markets recover and he can secure a better price for shareholders. Gladding argues: "They really need to hold on to it (2 entertain] in the short term until they can get a better price for the business. What they really need to do now is cut down the number of stores Woolworths has."

Matthew McEachran, retail analyst at Kaupthing, Singer & Friedlander, says if Johnson reduces the number of stores Woolworths owns from 800 to around 500, the chain does have a reasonable chance of survival. He recommends that he concentrates on its stores in smaller locations such as market towns. McEachran said: "I believe there is a space for Woolworths in certain catchments in the UK – small market towns, more local catchments. In the big cities there is much greater competition and rents are more challenging."

But he adds: "A pretty big rationalisation still needs to take place. The jury is out as to how quickly that can be done."

However, as the share price plunged a further 3% to 7.15p on the day of Johnson's job announcement, he may have a more immediate challenge to overcome: persuading the City of his ability to do the job.

There was a mixed response from the City on Tuesday – particularly given the board's decision to appoint Johnson over Woolworths' rising internal star Tony Page who, it is feared, could leave his current job as managing director for commercial and marketing after being overlooked.

While some analysts pointed to Johnson's "relevant" experience of overhauling Focus DIY, which was weighed down by a staggering debt burden, others mocked the fact that he sold the chain for a grand total of £1 on behalf of shareholders last year to the private equity group Cerberus.

"You couldn't by any stretch of the imagination say that Focus set the Thames on fire," said Clark of the Retail Knowledge Bank. "Could this be the beginning of the wind-down for Woolworths?"