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A Beautiful way to Save Woolworths

Let me state upfront that I have nothing personal against


Woolworths or their team of executives. I believe Woolworths CEO,
Brad Banducci, is one of the good guys in business and by all
accounts, he is well-respected. My comments are designed to
stimulate discussions and regardless of the tone of some of my
comments, I want Mr. Banducci to understand that he has my
respect; I believe we simply have differences regarding the best
strategy for Woolworths. I also want to state that this is not an indepth, scholarly article on the topic of game theory and economics.
This article was first written while I was a consultant with Deloitte
and I have been asked by members of LinkedIn to update and repost the article. In order to minimize the length of this Post, I am
utilizing selective aspects of game theory and economics for the
purpose of demonstrating how the topics can be applied to
business. Everything that I have written in this article has been
reviewed by multiple strategy consultants and leading economists.
Every effort has been made to simplify the topics of game theory
and economics to make the article easier to read and understand.
In 2001, Australian actor Russell Crowe starred in the film A
Beautiful Mind about mathematician and Nobel Prize winner Dr. John
Nash, inventor of the Nash Equilibrium, and an expert in Game
Theory. Referred to as the science of strategy, Game theory
attempts to determine mathematically and logically the actions that
players should take to secure the best outcomes for themselves in
a wide array of games. For the purpose of this article, think of

companies as players and games as competition between


companies. Game theory is utilized heavily in economics, politics,
psychology, business consulting, and the military to identify
strategies that will generate the optimal equilibrium/balance.

Just as Australia produced one of the best actors of any generation


in Russell Crowe, Australia has produced one of the most dynamic
and interesting business climates in any country globally, especially
when it comes to grocery retailing. For years, the grocery industry
within Australia has been characterized by intense competition and
extreme price wars between the two leading supermarket chains,
Woolworths and Coles, who command a staggering 61% market
share. This translates to nearly 80 cents of every dollar spent in
Australia going to Coles or Woolworths. To economists, Woolworths
and Coles are a duopoly - two firms that have dominant control over
a market. Note: this article is focused on Coles, Woolworths, and
ALDI. I have intentionally limited mention of Costco and Lidl.
Woolworths is an Australian company that was founded in 1924 in
Sydney. Founding CEO Percy Christmas stated a key principle for
Woolworths: Every man, woman and child needs a handy place
where good things are cheap. This principle is just as important
today for Woolworths as it was in 1924 as they strive to offer the
best possible convenience, value, range and quality to the 28 million
customers they serve each week. Woolworths has more than 3,000
stores across Australia and New Zealand that span food, liquor,
petrol, general merchandise, home improvement and hotels.
Woolworths is a proud, home-grown Australian business, employer
of more than 198,000 people and committed business partner of
many thousand local farmers, producers and manufacturers.
In April 2014, Coles celebrated its 100th birthday - a whole century
dedicated to giving Aussie families the products they need for a

happy, healthy home life, at prices they can afford. Founder GJ Coles
created a store that would lower the costs of living for Australian
families. This philosophy continues 100 years later: "The customers
themselves really decide what goods we shall stock in our stores."
On average, Coles serves 20 million customers each week. Coles is
owned by Wesfarmers, one of Australia's largest listed companies.
With headquarters in Western Australia, its diverse business
operations cover: supermarkets, liquor, hotels and convenience
stores; home improvement; office supplies; department stores; and
an industrials division with businesses in chemicals, energy and
fertilizers, industrial and safety products and coal. Wesfarmers is
one of Australia's largest private sector employers with around
210,000 employees.
From my perspective, Coles is an exceptionally well-run company
with strong leadership and dedicated associates. I like the fact that
Coles places so much emphasis on reducing costs and utilizing
innovation to create a competitive advantage.

Odds are high that Coles and Woolworths would have continued with
their market domination of Australias grocery landscape had it not
been for a seminal event. As Australians celebrated Russell Crowes
success in A Beautiful Mind in 2001, a German-owned discount
grocery retailer named ALDI opened their first store in Australia in
the very same year.
Unlike traditional grocery supermarkets that can stock 40,000 or
more SKUs (products) on their shelves and who focus on selling and
stocking the leading brands in every category, ALDI is the worlds
leading discount retailer that stocks only 1,350 core items and
focuses on selling their own high-quality, private label brands. With
a corporate philosophy that states All people, wherever they live,

should have the opportunity to buy everyday groceries of the


highest quality at the lowest possible price ALDI has found success
operating over 9,000 stores in 18 countries. In Australia, ALDI was
viewed by analysts and executives at Coles and Woolworths as
being nothing more than a niche player that would find only minimal
success. In discussions with former executives at Woolworths, I
frequently heard the phrase we thought they would fail when
discussing ALDI.

ALDI didnt fail. In fact, ALDI did what many considered impossible
they found success. According to an April 18, 2016 Roy Morgan
Research report: ALDIs share of the Aussie market still rising, ALDI
has become the number three retailer in Australia with a 12.1%
market share operating just 400 stores compared to Coles and
Woolworths operating a combined 1,760 stores. ALDI has not

announced how many total stores they plan to open in Australia but
an April 20, 2016 research note by Morgan-Stanley estimates that
ALDI will achieve sales of $15B by 2020.
Based on a review of the leading grocery retailers globally, and
based on my first-hand experience providing supply chain,
operations, innovation, and strategy consulting to the largest
grocery retailers in the world, I consider ALDI and another German
discounter named Lidl, to be the two best grocery retailers in the
world. Although the name of ALDI isnt as well-known as Walmart,
Kroger or Carrefour, ALDI is on a path to becoming the largest
grocery retailer in the world.
Turmoil at Woolworths
For the 12 months ending 30 June 2015, Woolworths Food and
Liquor made AUD $42.1 billion in sales while Coles rang up $30.8B in
sales in 2015. What the numbers dont convey is that for the last 27
quarters, Woolworths has significantly underperformed against their
rival Coles. Simply put, Coles is an immediate threat to Woolworths
whereas ALDI is a growing threat. Woolworths will continue to lose
market share to Coles without a significant shift in strategy. The
danger and challenge facing Woolworths is that they must find a
way to compete against a traditional supermarket, Coles, and a
discounter, ALDI.
Faced with declining sales and increased pressure from
shareholders, Woolworths CEO Grant OBrien resigned in 2015
requiring Woolworths Chairman Gordon Cairns to conduct a lengthy
search to find a CEO to take the reins. Anyone who wasnt convinced
that Woolworths was a company in trouble had all doubt removed

when Mr. Cairns stated publicly that he could not convince a single
executive in Australia to take the job of CEO. Mr. Cairns then turned
his attention to finding an experienced grocery executive in the
United States or the United Kingdom to take the job as CEO. Unable
to find a candidate, Mr. Cairns selected an internal Woolworths
executive, Brad Banducci, to become CEO.
Since becoming CEO, Mr. Banducci has ordered a review of all areas
of the company and has continued with Woolworths policy of
reducing the price of items in Woolworths stores to better compete
with Coles and ALDI. Over the last nine months, Woolworths has
reduced prices by over $400 million with plans to reduce prices an
additional $150 million in 2016. Reducing prices has not increased
sales. In addition, Mr. Banducci is focused on trying to minimize the
damage to Woolworths bottom line after Mr. Cairns pulled the plug
on a losing do-it-yourself retail chain named Masters jointly owned
by Woolworths and the U.S. retailer, Lowes. Woolworths and Lowes
poured over $3.1 billion into Masters only to have Woolworths make
the decision to sell or liquidate the company.
A World of Hurt and Red Flags
As we used to say in the Marine Corps when describing a bad
situation, Woolworths is in a world of hurt. Coles had comp store
sales of 4.9% for the month of April, 2016, while Woolworths
experience a decline of 0.9%. Woolworths also lost customers to
Coles and to ALDI. Big W, Woolworths general merchandise retail
chain, experienced declines of 4.6% to $865 million. Woolworths

share price has declined 34% since February 2015. Worse,


Woolworths $400 million in price reductions failed to translate into
more sales. The fact that Woolworths is the market leader in
Australia is meaningless if all signs point to a continued decrease in
sales and lost market share. More importantly, ALDI's ability to take
market share from Woolworths is a foreboding sign.
I am also concerned about red flags that I have detected related to
comments made by the CEO, Brad Banducci, when discussing the
current and future state of Woolworths. According to Mr. Banducci
The sales performance in Australian supermarkets continues to be
impacted by high levels of deflation, predominantly from our price
investment. It will be a three to five year journey to rebuild
Woolworths Supermarkets, but we are confident we are on the right
track.
Let me be clear: Woolworths does not have three to five years to
rebuild their supermarkets. In addition, how can Brad state that
Woolworths is on the right track when the review of Woolworths
operations arent even complete? How can there be a level of
confidence without a complete understanding of how big the
problems are?
Game Theory
If ever there was a company that should invest the time and effort
to apply game theory to identify their corporate strategy it is
Woolworths. As stated at the beginning of the article, game theory is
the science of strategy. As a former strategy and supply chain

consultant, I learned to apply game theory to supplement traditional


strategy frameworks utilized by consulting firms. Based on my
experience, when applied correctly, game theory is superior at
identifying the optimal strategy for a corporation to follow;
especially when a corporation is faced with competitive threats from
new entrants. This is not to say that strategic frameworks utilized by
consulting firms arent valuable, I am simply stating that game
theory provides better results.
Let me clarify that the game theory modeling I recommend is not
focused on predicting a single outcome, with all factors balanced, as
is the case in traditional game theory. Instead, the game theory
modeling I advocate provides executives with the advantages and
disadvantages of strategic options at different progressions.
Additionally, the model finds the best fit option considering upside
potential and downside risks under all likely scenarios, assumptions,
variables, and sensitivities; such as price. This approach is different
from attempts to look for equilibrium in an artificially simplified
world in traditional game theory modeling. According to Dr. Miaoyu
Yang, PhD University of Washington A proper game theory analysis
requires quite a bit of data, assumptions, and modeling. Your
recommendation for Woolworths to utilize game theory is sensible
and warranted. Woolworths would also benefit from applying
Industrial Organization theory, the study of behavior and
competition among firms in a duopoly or oligopoly.
A Sisyphean Task
In Greek mythology Sisyphus was the king of Ephyra. He was

punished for his self-aggrandizing craftiness and deceitfulness by


being forced to roll an immense boulder up a hill, only to watch it roll
back down, repeating this action for eternity. Many executives over
the years have been faced by what turned out to be a Sisyphean
task, trying to rebuild their companies into sustainable entities only
to watch all of their efforts fail. I believe Brad Banducci and the
Board of Directors at Woolworths may very well be facing a
Sisyphean task in rebuilding Woolworths supermarkets. Let me
explain using economics.

In 2001, when ALDI opened their first store, the executives at


Woolworths, the leading grocery retailer in Australia by size and
revenue, let out a collective yawn. As I stated earlier, in discussions
with former Woolworths senior-level personnel, ALDI was not viewed
as a threat. This proved to be terrible mistake on the part of
Woolworths. Instead of ignoring ALDI, Woolworths should have
implemented a strategic movement known as Deterrent with
Credible Commitment whereby Woolworths, through their actions,

would convey to ALDI that under no circumstances would


Woolworths allow ALDI to be the everyday low price leader for
groceries.
An example of how Woolworths could have conveyed the message
to ALDI would have been to identify the store opening and
expansion strategy that would most benefit ALDI. In turn,
Woolworths could have opened small format stores similar to ALDI
and saturated the geographic regions where ALDI could potentially
operate with the stores. The impact of such a strategy is that it
would make it more difficult for ALDI to differentiate their business
model, reduce demand for a new low-cost entrant, and force ALDI to
compete on price much faster than anticipated. A deterrent
movement with credible commitment using harsh competition would
more than likely have deterred ALDI from entering additional cities,
and it would have greatly made store expansion more difficult. The
effect of such a strategy would also have reduced interest in ALDI by
Australian consumers who would have found little incentive to
switch to ALDI from Woolworths.
The problem facing Woolworths is that they didnt implement a
deterrent strategy with credible commitment using harsh
competition in 2001. When ALDI didnt face harsh competition, it
made it easier for ALDI to expand and increase the demand for a
new low-cost entrant as an alternative to Woolworths and Coles.
Although ALDI is in a much stronger position in 2016 than 2001, the
game that Woolworths, Coles and ALDI play is essentially a repeated
game where in every new city, a new strategy has to be picked

related to store location, number of stores, pricing, and competitive


strategy. Due to the maturity of Coles network of supermarkets
Woolworths has fewer strategic options they can utilize against
Coles.
However, Woolworths hasnt lost all its leading/advantageous
positions in the cities where ALDI hasnt opened stores. Therefore, it
is still worthwhile for Woolworths to send a message to ALDI that
Woolworths is up for competition at any cost. By message, I mean
the deterrent strategy with credible commitment. Note: Due to the
financial impact of Masters; the continued investing in prices to the
tune of $400 million with an additional $150 million slated to be
invested; and the fact Woolworths would have to invest hundreds of
millions of dollars, if not in excess of a billion dollars or more to
design and open smaller stores, finances may prevent Woolworths
from actually implementing a deterrent strategy with credible
commitment. This is one of the reasons why later in the document I
broach the importance of Woolworths reducing costs. The more that
costs can be reduced, the easier it is to secure loans and free up
capital to be invested in a deterrent strategy with credible
commitment.
Another issue facing Woolworths is the issue of competing on price
with the leading discount grocery retailer in the world, ALDI. In
discussions with Dr. Jan Van Mieghem, Kellogg School of
Management, Northwestern University, regarding Woolworths and
game theory, Dr. Van Mieghem stated Woolworths and ALDI are not

head-on competitors but rather pursue differentiated positions in the


space of cost and X (where X represents choice, variety, quality, and
service). My suggestion would be that Woolworths must decide
whether to differentiate further/better or whether to compete headon with Aldi.
Compete head-on or differentiate...which one is best?
Attempting to compete with the best discounter in the world on
price would be a form of corporate suicide for Woolworths. The
primary issue is that ALDIs operating and labor costs are much
lower than Woolworths. ALDI has also mastered a business model
that allows them to significantly sell their products much cheaper
than the competition. In order for Woolworths to compete with ALDI
on price, Woolworths will more than likely have to utilize Breakeven
Pricing. Breakeven pricing is the practice of setting a price point at
which a business will earn zero profits on a sale. The intention is to
use low prices as a tool to gain market share and drive competitors
from the marketplace. The danger of breakeven pricing is that a
price war would more than likely result. In a price war, competitors
respond with even lower prices so that the company does not gain
any market share. ALDI is in a strong enough position within
Australia to consistently beat Woolworths on price so a price war
would be much more detrimental to Woolworths.
This is not to say that Woolworths can do nothing in terms of
competing on price.There are in fact strategies that I have identified
and tested that Woolworths can utilize to actually beat Coles and

ALDI on price as well as achieve the desired profits when doing so.
The strategies simply change the focus to maximizing value vs.
head-to-head competition on price only. However, implementing
such a strategy requires a significant amount of business model
transformation, vertical integration, supplier relationship
management, and innovation. Out of respect for Woolworths, I am
not presenting the strategies I have identified in this article as doing
so would provide ALDI and Coles with an unfair competitive
advantage.
What about differentiation? The process of creating a competitive
difference from a competitor usually by focusing on the following
key areas:
Location
Store Format
Merchandise and Assortments
Visual Merchandising
Staff
Service
Mass Communications
Price
Woolworths can certainly pursue a differentiation strategy against
ALDI and Coles. I believe a key focus area for Woolworths should be
on segmenting customers and focusing on Price Discrimination to
extract the most Consumer Surplus - If a business can identify
groups of consumers within their market who are willing and able to
pay different prices for the same products and charge the

consumers what they are willing to pay, a business can make higher
revenues and profits. For example, identify more niche markets and
work to satisfy those consumers.
Woolworths can also expand product selection within their stores
based on customer segmentation. Since ALDI only sells 1,350 core
items, Woolworths already has a product selection advantage.
However, against Coles, Woolworths does not have an advantage as
Coles and Woolworths sell nearly identical items. A challenge faced
by retailers who attempt to gain a competitive advantage by
increasing product selection is tying up working capital in inventory.
Expanding product selection only works if an equilibrium to
maximize profit and minimize carrying cost can be achieved.
Back to the question: compete head-on or differentiate?
Differentiation is the better strategy but doubts remain if
Woolworths can differentiate to such an extent that they reverse
losing market share to Coles and ALDI. The reason why I advocate
the use of game theory and Industrial Organization theory is to
provide an additional level of analysis and understanding to
Woolworths executive team that doesnt exist today. Woolworths
runs the risk of being in a position whereby none of the strategies
they implement result in increased revenue or market share and
losses continue; a Sisyphean task.
Woolworths Achilles Heel
The cold hard truth about Woolworths is that theyre too big, too
inefficient, and they have too much costs based on the new reality
of the grocery market within Australia. A favorite saying of mine in

business is "Costs are like fingernails, they need to be trimmed


constantly" spoken by Carlos Alberto Sicupira, a a Brazilian
businessman, and a partner in 3G Capital. I believe firmly that
Woolworths should immediately implement the operating model
utilized by 3G Capital, a private equity firm with a laser-like focus on
cutting costs, utilizing Zero-Based Budgeting, and increasing value
for shareholders. If Woolworths gets to the point where they cannot
mount an effective strategy against Coles and ALDI, and they
choose to entertain discussions with a PE firm, I strongly recommend
that 3G Capital be at the top of the list followed by KKR.
I understand that Mr. Banducci has ordered a review of all operations
within Woolworths. However, my concern is that neither Brad nor
the Board of Directors at Woolworths will be willing to make the
massive cuts across divisions and programs that I believe are
necessary for putting Woolworths on the path to profitability. Based
on a review of available financial statements, I believe Woolworths
has an opportunity to reduce costs by $4 billion. 3G Capital would
more than likely review Woolworths operations and costs and
consider $4B as being too low.
Another area of concern is Woolworths supply chain. A review of the
supply chain is warranted to identify how to design and implement a
low-cost, highly efficient supply chain that can be leveraged to
enable growth and provide a competitive advantage based on the
changing reality of Woolworths' operations. I strongly recommend
that Woolworths not rely on Board members with prior supply chain
experience to be the resources to identify the optimal supply chain
strategy. Far too many retail executives were promoted into a supply

chain leadership role at a past employer even though they had no


prior supply chain experience or an advanced degree in supply chain
management. Woolworths requires expert supply chain personnel to
conduct an end-to-end assessment of the supply chain and experts
to design and implement the optimal supply chain strategy.
The Case for Collaboration
Turning once again to economics, there are multiple examples of
when two firms, primarily duopolies, should collaborate for the
benefit of each without giving up market power or market share. I
have no doubt that what I am about to write is going to generate the
most comments from this article.
When viewed from the perspective of game theory, several things
become abundantly clear regarding Coles, Woolworths, and ALDI:

Coles is in a stronger position than Woolworths and Coles is


running their operations better than Woolworths

Woolworths is under extreme pressure as a result of falling


sales, falling market share, and a falling stock price

ALDI, even though they have the lowest market share, they are
the biggest threat to Woolworths and to an extent, Coles
Although not covered in this article, I would be remiss if I didnt
point out that once Lidl expands in Australia, they too will find
success similar to ALDI. Lidl will take market share from Coles and
Woolworths but little if any market share from ALDI.
If we fast-forward to 2020, what will the grocery landscape look like
within Australia? Based on the completion of several What If?

modeling and analysis exercises and game theory strategy session, I


believe the following will more than likely occur:
1.

ALDI will continue to take market share and do so at a pace


faster than industry analysts currently predict. Sales will exceed
$16B in 2020. Note: If Woolworths is acquired by a PE firm, I
estimate ALDI will be the primary beneficiary thus increasing their
market share and sales revenue above current estimates.

2.

Unable to face the new reality of grocery retailing and


competition, and unwilling to place the required laser-like focus on
reducing costs; divesting all but food, fuel, and liquor businesses;
and continuing to believe they can compete on price; Woolworths
will experience continued lost sales, falling market share, and a
falling share price. Woolworths will be acquired by a PE firm no later
than Q2 of 2018. Once Woolworths is acquired, they will quickly
cease to be a factor in the grocery market.

3.

Unfortunately for Coles, their world is going to grow much


darker. ALDI, Lidl, and Costco will mount an extensive price war
against Coles, a price war that will severely impact Coles. In fairness
to Coles, they have a strong leadership team who will not make it
easy for any retailer to take market share. However, when
confronted with three retailers utilizing harsh competition, Coles will
be the underdog.
I do not take pleasure in what I have written about Woolworths but
without drastic changes, what I wrote will more than likely come

true. But does it have to? Isnt there something that Woolworths can
do? Is there no hope? Let me remind the reader that the title of this
Post is A Beautiful way to Save Woolworths.
Although challenging due to regulations in Australia governing
business and competition, and made even more challenging by the
intense and somewhat toxic environment between Coles and
Woolworths, a strategy worth exploring is collaboration between
Coles and Woolworths on two key areas of their businesses:
procurement and supply chain/logistics. I need to inform the reader
at this stage that I received several different opinions on the topic of
collaboration between Coles and Woolworths from several key
officials in Australia who asked not to be named. Each agreed with
me that what I am about to propose would provide the desired
benefits to Coles and Woolworths. However, there was disagreement
on whether or not such collaboration would be approved and/or
whether or not Coles and Woolworths would ever be willing to
collaborate.
For the sake of this Post, I have chosen to be optimistic at the
prospect of Coles and Woolworths collaborating as well as regulators
providing all required approvals. I can hear the collective howls and
laughter here in Seattle from Australians who will think Im naive
and crazy for thinking that Coles and Woolworths would ever agree
to collaborate. However, please allow me to present my argument
and then judge me based on the merits of my argument and not on
my optimism.

By collaboration what I mean is nothing more two or more people


working together to create something or achieve an agreed upon
output. In no way, shape, or form am I advocating collusion secret or illegal cooperation or conspiracy, especially in
order to cheat or deceive others.
Specific to Woolworths and Coles, I believe the threat of ALDI, and
eventually Lidl and Costco, is so great that Coles and Woolworths
have an incentive to set aside their differences and collaborate.
What is the incentive? Survival. If Woolworths fails, Coles will be the
focus of a deterrent movement with credible commitment using
harsh competition from ALDI, Lidl, and Costco. If I was writing about
a war, Coles would effectively be surrounded by the enemy. Simply
put, it is in the best interest of Coles for Woolworths to retain and
even increase their market share as doing so limits the competitive
strength of ALDI, Lidl and Costco.
As stated earlier, I believe the two areas Coles and Woolworths can
effectively collaborate without ceding market share or minimizing
their ability to compete in the market are procurement and supply
chain/logistics. A review of this section by strategy and supply chain
consultants, including consultants currently working in Australia,
produced extensive discussions with the consensus being that
regardless of the challenges, Coles and Woolworths collaborating on
procurement and supply chain management would be a game
changer. The Australian consultants identified additional areas
where they believed Coles and Woolworths could collaborate but for
the sake of this Post, we are only focusing on procurement and
supply chain management:

Procurement To effectively operate, Coles and Woolworths must


purchase dairy products, eggs, fruits, vegetables, baked goods,
meat and so forth to stock their shelves and provide consumers with
the goods they desire. Doing so requires billions of dollars of spend
on the part of Coles and Woolworths. Essentially, Coles and
Woolworths negotiate prices individually with suppliers and
negotiate as low a price as possible for each item purchased.
However, if Coles and Woolworths contracted a 3rd party
procurement company with no relationship of any kind to
Wesfarmers or Woolworths to combine the total spend from each
company, the 3rd party could leverage the larger spend to negotiate
even lower prices for Coles and Woolworths resulting in significant
savings.

Supply Chain and Logistics Coles has their own supply chain,
logistics network, and transportation needs requiring hundreds of
millions of dollars of investment and costing hundreds of millions of
dollars to operate. The same can be said about Woolworths.
However, if Coles and Woolworths collaborated, they could conduct
an end-to-end supply chain network optimization engagement to
identify the optimal low-cost supply chain capable of meeting all
service level requirements, and profitably meeting customer
demand across all channels. Collaborating on such a level would
result in Coles and Woolworths utilizing 3rd party logistics providers

and divesting assets to reduce costs and streamlining operations.


More importantly, collaborating on supply chain and logistics would
reduce the costs of each company by hundreds of millions of dollars.
Note: such an exercise is extremely complex with many legal and
tax implications. However, I have seen first-hand the value
companies can achieve through supply chain collaboration.
For the record, there is value for Coles and Woolworths to
collaborate. Each would reduce costs without losing their ability to
compete at the store level. I have been involved with several supply
chain collaboration projects with companies in Europe who faced
regulatory challenges similar to the regulations in Australia, as well
as competitive friction - the companies found success through
collaboration. I need to remind the reader that the primary
incentive for collaboration is to increase the ability of Coles and
Woolworths to better compete against ALDI. According to Dr.
Miaoyu Yang Given the common threat from ALDI, collaboration is
very a good idea for Coles and Woolworths to pursue.
In anticipation of questions I may receive asking why wouldnt ALDI,
Lidl, and Costco create their own collaborative agreement, or why
wouldnt Coles reach out to ALDI, Lidl, Costco, or a combination
thereof to collaborate, I have researched the possibility of such
scenarios occurring but I simply cant find a logical path for how
such agreements would work. In addition, there isnt an incentive for
Costco, ALDI, or Lidl to want to collaborate with each other let alone
collaborate with Coles.

The Bottom Line


Australians are proving every day that Woolworths has lost value in
the eyes of consumers. According to multiple surveys, consumers
believe Coles and ALDI have lower prices, and there is no
measurable difference in terms of quality and service between
Woolworths, Coles and ALDI. The bottom line is that Woolworths is
becoming irrelevant.
Although not capable of working miracles, game theory and
Industrial Organization are legitimate methodologies that
Woolworths can utilize in conjunction with traditional strategic
frameworks and supply chain modeling to answer these questions:
1.

What scenarios and disruptions may we encounter? For


example, what if Amazon enters Australia?

2.

How do we achieve equilibrium?

3.

What is our winning aspiration? How will we win customers?

4.

Where will we focus? How do we take the focus off pricing and
put it on providing value?

5.

How do we reduce our operating costs to their lowest levels?

6.

What organizational structure will maximize execution at the


lowest cost?

7.

How do we create a supply chain to enable growth while


achieving a competitive advantage? How do we maximize cross-

border commerce?How do we achieve a competitive advantage


through cross-border commerce?
8.

How do we leverage big data to our advantage?

9.

How do we create sustainable value for customers and


shareholders?

10.

How do we become the dominant grocery retailer in Australia?

Can Woolworths be saved? That will depend on Brad Banducci and


Gordon Cairns. The one thing that Woolworths doesnt have is time.
However, Im not convinced Mr. Cairns and Mr. Banducci would
agree with me. Based on my experience working with companies in
similar situations, there is always disconnect between reality and
perception. The reality for Woolworths is that Australian consumers
increasingly choose Coles and ALDI. The perception of Woolworths
executives appears to be that they have three to five years to create
a new reality. Such a perception is dangerous. Let me repeat what I
stated earlier: Woolworths does not have three to five years to
rebuild.
In many ways, I view what is taking place within the grocery
industry of Australia as a modern-day version of the HBO TV series
Game of Thrones. Estimated to be in excess of $88B, Australias
grocery market offers successful grocery operators tremendous
revenue potential. The size of the market will also continue to drive
extensive competition among the players already in the market.
Imagine the increased pressure on Coles, Woolworths, and even
ALDI if Amazon enters the market and introduces Australian

consumers to what is arguably the most innovative grocery business


in the world, Amazon Fresh?
I believe I have provided an effective argument for the use of game
theory and by proxy, engaging experts in game theory to provide
Woolworths additional insight into achieving the optimal strategy
specific to the competitive landscape in which Woolworths operates.
A challenge for companies such as Woolworths is that theyre
usually staffed with a team of individuals who may have some
expertise in the grocery industry or even strategy and when faced
with a crisis, they turn inward. I strongly advise against such a
strategy. It is well worth the time and effort for Mr. Cairns and Mr.
Banducci to embrace the value of game theory and Industrial
Organization theory. Expert economists from leading universities
reviewed my recommendations and signed off on their value to
Woolworths; I didnt just present opinions.
Mr. Banducci and Mr. Cairns may not agree with what I have written
but I bet Russell Crowe will. After all, Russell brilliantly portrayed the
man who made this article possible, Dr. John Nash. Russell portrayed
the man who proved there truly is a beautiful way to save
Woolworths.
Special thanks to Dr. Miaoyu Yang for her tireless review and editing
of the material related to economics and for her expert opinion on
the value of game theory and Industrial Organization as strategic

tools, and to Dr. Jan Van Mieghem for his comments related to the
Nash Equilibrium and Woolworths.
This article incorporates primarily my own opinions but I have
utilized information from Coles, ALDI, and Woolworths annual
reports as well as financial data pulled from numerous sources.
Since this is not an academic paper, I did not utilize the APA format
for writing or sourcing. Not utilizing the APA style and format is
standard practice on LinkedIn.