Woolworths to shave IT costs, duplicate best practice

Five-year Quantum program to see supermarket giant focus on improving efficiency across divisions

Woolworths Limited (ASX:WOW) will continue to shave IT expenditure and increase efficiency as it moves to consolidate its assets over the next five years.

The supermarket giant spent $229 million on its "Stay in Business" fund throughout the 2009/2010 financial year, largely relegated to improving the supermarket giant's IT merchandising system. The expense was only half of the $427 million cost spent on the same fund two years prior.

Capital expenditure for the group’s supply chain and data centre operations also decreased to $119 million over 2009's $145 million.

Those costs could be further reduced in coming years with the launch of the company’s Quantum initiative aimed, according to an ASX statement, “at reducing costs and better leveraging synergies from all areas of our business over the next five years”.

Headed by former head of Woolworths’ petrol division, Ramnik Narsey, the program will focus on upgrading end to end supply chain systems, lowering ongoing procurement costs, improving operational efficiency, enhancing global direct sourcing and improving support structure efficiency.

While some new transformative IT development programs remain likely within the business, its financial earnings report indicate most technological processes will be a duplication of existing best practice.

"The intellectual property developed in the supply chain teams, IT systems and distribution centres for our Australian Supermarkets business is now being applied to other Woolworths' businesses including New Zealand Supermarkets, BWS, Dan Murphy's, BIG W and Consumer Electronics,” the company’s ASX statement reads.

Despite the lowering IT costs, Woolworths has continued to focus on IT transformation restructuring its telecommunications procurement protocol following a 12-month review and moving to Microsoft's Exchange 2007 email platform. The giant is also in the process of building a 3000 square meter data centre in Western Sydney, according to media reports, which would use ambient cooling, though has an as-yet-undisclosed purpose.

Woolworths has also begun implementing IT system relating to its high-profile purchase of the Danks hardware distributor, with $5 million spent so far on transitioning systems and processes from the US hardware group Lowe’s, with which Woolworths jointly purchased the distributor. The company hopes to roll out 150 hardware sites over the next five years on the back of its purchase, forming a significant competitor to Wesfarmers’ Bunnings and the Mitre 10 franchise.

While consumer electronics sales were largely stable across Woolworths-owned Dick Smith stores at $1.5 billion, the company reported earnings before interest and tax (EBIT) of $30.2 million in 2010, a 45.2 per cent shortfall from the $55.1 million seen the year before.

Woolworths pre-empted the fall in costumer electronics sales in July, pointing to several concerning market conditions.

"The second half was disappointing and impacted by a combination of factors namely cycling the Government stimulus package, lower consumer confidence and spending, intense competition in the Consumer Electronics sector as participants chased lower consumer spend levels and some industry product supply shortages in the fourth quarter," reads the ASX statement.

The year saw Woolworths open 24 Dick Smith stores, though closed 19 Dick Smith and 25 Tandy stores. An additional 40 Tandy stores were rebranded as Dick Smith, for a total of 416 consumer electronics stores under both brands.

More broadly Woolworths said it had increased its online sales by 59 per cent for the year. The overall group reported EBITDA of $3.879 billion, a 9.4 per cent growth on the previous financial year.

The past financial year has seen the supermarket giant begin reselling Optus mobile phone services, while locked in a legal battle with Apple over its new logo.

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