Today’s guest is Guy Russo. And unlike the other interviews in this series, this is a retrospective tale recounting one of Australia’s great turnaround stories. The inclusion of a story like this is important. In my opinion, businesses never move in a straight line. Increased competition or poor execution may erode your business to the precipice of failure. Guy Russo is one of Australia’s great business minds. He was dragged into salvage Kmart from the scrap heap and he successfully led it to supremacy in the Australian retail landscape. For me, this is a very powerful and inspirational story of both simplicity and of optimism. A story of the power of long-term thinking, honesty, and how to get the best out of people. Guy was incredibly generous with his time and the resulting nuggets of gold that littered right throughout this podcast will no doubt help clarify the thinking of all business owners, not just those going through a little rough patch.
Guy Russo is my guest today on Scaling Up and it’s just an absolute pleasure to have you on the show. Guy, we could have a separate podcast on your 33 years at McDonald’s, which was an incredible effort in itself. But I’d love today to hone in on your 10 years turning Kmart around from what was pretty much a basket case to a retail darling. And I think I’ve heard you say that one of your strengths is knowing what you’re good at and what you’re not good at, and you say what you are good at is making money. And you certainly did that with Kmart. It was on the verge of shutting down when you took over and when you left only last year, it was making over 600 million in earnings. So let’s go back to the beginning 2008. You walk in, you’ve just been running McDonald’s in China and you are tasked with turning this thing around. You’ve had no hard retailing experience. You’re a consumer expert, I’d say. But no hard retailing experience. Kmart’s doing 3 billion in sales. I think. Correct me if I’m wrong, but it’s not making any money. So tell me what you saw when you walked in.
Wow, good to be here first. Ed after being in business for over 40 years, it was the best 10 years of my life best 10 years of my working life. I think all of us that joined the workforce, either to be part of a big organization or lead it, you want to feel like you can contribute. But at the beginning the first thing that comes to my mind was nervousness. And I’m talking about the first hundred days of can this be fixed? Because when you take up, put money into an investment or you put your life into a job, you really don’t know a lot about it until maybe that I think a lot of people could relate to this until you’re in there and go, oh my God, what if I knew this before I made that decision? And it was the nervousness around, I was trying to understand what were the mechanisms that this business needed to make money.
And I’d figured out it was a product game, so skus and how many skus you had and how much you sold them for and how much you bought them for. So a lot of people listen to this go, well, that’s pretty straightforward product, price, cost. What was overwhelming about that is the world I came from probably had about 50 skus and I quickly learned that this model was based on 200,000 skus. I thought, God, what type of person could get their head around 200,000 skus And no one day, the previous four CEOs I had counted in my mind, had been there before me over the previous decade, had all tried 20 to 30 years experience in that game, which I didn’t and had all unfortunately not got it to where it is today. So initial experience was one of nervousness, real nervousness, but it had a little bit of confidence, which I’ve got to say from the outset.
And the confidence came from the guy that hired me and he has to be part of this story. And that was Richard Goyder, the CEO of Wesfarmers during that decade. And I say that because when Richard hired me, I asked him a couple of important questions, how do you measure success? And he gave me three numbers, sales, EBIT and return on capital. And I fell in love with him immediately. I thought, there are no other measurements. Yeah, this guy doesn’t want to know anything else. But sales Eton rock and doing it the right way. And the other reason for the level of confidence is that Richard said, get it right for the long term. I don’t need next month for it to be right. So I add to the story from the outset, if you don’t have the backing of your investors or your owners or in this case the CEO of one of the largest conglomerates or in the top 10 of the ASX Wesfarmers were I don’t know that I would’ve had the confidence to say, let’s give this a shot.
And how dire was it when you walked in? What were your first impressions?
Many first impressions because you get them from being in the business. You see the business was 40 years of age. I remember within my first few months I was actually taken to the first store at Burwood in Victoria because we were celebrating our 40th anniversary. I thought that was ironic. I thought God, as I was celebrating it with the journalists and the staff, I’m trying to think, will we still be here next year? Reading the newspapers is another way. You get a bit of a feeling of what your business is. Every time that Wesfarmers reported on Kmart, they always used to quote it as the ugly duckling and get rid of it and close it. The third piece of information I had, which was very vital that most people didn’t see which I got to read, were white papers that were done by coals and Wesfarmers within a two year period about what to do with Kmart.
And you could make it work, but then again it may not work. And then the fourth piece of information, which was probably the real telling story, is I’m a real hands-on operator. I visited a lot of stores and a lot of the team members and they were really well warned in battle thinking, here’s CEO number five keep our heads down. They felt like orphan children. They orphan kids that have got good spirit, good heart, good life opportunity, but no parents. And they also felt a little bit like rabbits because when I asked them what was going on, I could see these kids have probably thought we’ve been asked this many times, so why should we tell them the truth? Because the last four guys, all they’ve really done is removed staff, not added staff. So I felt like they’ll, if they could go to a little borough they would and hide. So not good. But all of that sent messages to me was God, the opportunity’s huge, huge.
And what was it that opportunity and challenge that really attracted you? In the end?
It was, if you play sport, I said this to my team at Kmart, I’m only here to hit number one spot. I’m only here to hit number one spot. And we only had a few companies in Australia that were listed that were in my world. My DJ’s Target, Big W, they were all listed. And I was at the bottom of that pack and I said to the team, if I was a coach of a football team and we’re in 15th spot, you got to realize this guy’s joined as your coach. Cause I want to win the grand final. I don’t want to come second. And I think that came from the fact that I’d spent 33 years at McDonald’s. I only knew what it was like to be in the first position and I’d watched many McDonald’s countries open later than their competitors. So they were not always number one, not always number one. And fought their way through to the first spot. And maybe it was a false belief, but I just didn’t know any other way of talking to my team about why am I here other than to want to be the best profitable sales revenue standards for customers retailer in Australia.
And it sounds like that confidence rubbed off on them and it says so much about probably you as a person and that optimism that A, you wanted to take the challenge on. So you gave them a clear signal and then to show the intent that you thought and you believed that this could be a great success story, I’m sure rubbed off on them. I know you went on what you call a discovery phase in that first six months. Can you shed some light on that and what that
Involved? I think I, I’d add context to the word discovery because when I went home at night, which is when the true guy came out, which was that peaceful moment, which I think most people would reflect to was when do you go and say, oh my God, is this really going to work? When do you really show doubt? It’s when you’re on your own or with your family. And I thought, I need a game plan that fixes a broken model up. And I’d only done that once with McDonald’s and that was in McDonald’s, China where they were losing money, which was totally foreign to me because the 30 years I was in Australia, it did nothing but grow from strength to strength. And that game plan was, how do I articulate this to people? Because this is a company that is publicly listed, so you need to talk to the investors and the public and your team members and your company, the Wesfarmers itself.
So I thought if I could just get through language that everyone would understand about my road to a turnaround, I use three words, three paths to a turnaround. One was discovery, the second was reset, and the third one was growth. Those three plans seemed to get everyone calm. That guy was going to take a time for discovery. Discovery meaning just listen and shut up. So that worked for my team because they thought, well good, this guy’s not going to change everything day one, he’s just going to listen to us, he’s going to absorb everything. And they got that. And actually they kind of said, thanks for not changing stuff at the beginning because everyone changes stuff straight away. I said, oh, I could be a year in this phase. That worked for the team. It didn’t work for the analysts. I think they went, oh my God, the first time he presents he says he’s not going to do anything for a year. What a mistake. So I took that on the chin because I thought, now you’re going to get negative stuff written about you because
I remember the negative stuff. There was lots of negative press was of there. Wesfarmers have brought this fella in and he is not doing anything. He’s sitting on his hands.
What help me with that again was Richard Goyder. I said, Richard, do I have to please everybody here because I don’t like negative stuff written about Wesfarmers, especially when I’m speaking. He goes, Guy, I’ve got your back. Get it right for the long term. And I thought, you know what? You don’t need to change your style for anyone. Talk to the press and the analyst the way you talk to the, and I thought, how easy is this going to be? I don’t need to be two different people whether I’m on the outside or the inside of a turnaround. That would’ve been very difficult if Richard said, oh, you need to tell them one thing to at least give them hope, but go and tell your team the truth. And he said, no, be yourself. So I would say to my team, we’re bankrupt because I used to measure the business by net income, not ebit which gave us a net income of 20 million.
I think on 3.6. I would tell them that we have an owner that is serious about returns for shareholders. So if we don’t get this right, it’s not about another CEO coming, if we don’t get this right, we won’t be around. And I could use that same language to the analyst. So the discovery phase gave me good time to go and say, find out how this baby can make money. 3.6 billion. My mind was confident that if anyone gave any company 3.6 billion, surely you can make money out of that. And I wasn’t thinking of growth whilst I know the analyst was saying, how’s he going to grow this baby? I thought step one is forget about growth. Find out where you are spending all of your
Stop the bleeding.
Mm-hmm. You got 3.6 coming in one register and by the time you take go to the bank, you’ve got nothing left. So the discovery phase really helped that I’ll get later on to reset and growth because a year later I said, I’m finished discovery. And again, internal and external message, I’m now on to reset. And again, one of the analysts said, what does that mean? I said, I’m now going to reset the business for the next two to three years. And I would’ve loved that That didn’t go down. Well either done nothing for one year. Now he is going to spend three years resetting it. But I figured that what I had learned in discovery would probably take at least three years to reset the things that I had learned from studying global best practice to get this company with my team really up to top shape.
Okay. Let’s dig into this discovery phase one. How did you get the information? And two, what did you discover?
So I used a little formula called the six P’s and C’s, which I often talk about. You can Google the four P’s or if you went to university, I think they teach it people price, product, place, promotion, profit and customers. The reason I do that is that when I get the information which I got thousands of people giving me feedback,
Just staff on the floor giving written submissions
Or I employed 30,000 staff. So my note went out really simple. We’re here to discover what went wrong and what you would do to fix it. Go ahead and shoot it through. I gave them no rules other than tell me what you think’s
Not right. And they would email back all their thoughts,
All their thoughts. I used the six P’s and C’s to work out which boxes to put them into because I had learned very clearly that you get your people right, your pricing right, your product, right, your promotion, right, your profit, right, your property and your customer. You have got a AAA business. That’s why I said if you Google the Ps in where they get taught at a higher education, they kind of teach you that everything in a business in retail fits under those four. It’s just that I wanted to clearly articulate all those peas and see, I mean nothing was bad. Team members would say the uniform hadn’t been changed for 10 years. It was blue, it should be a different color. People would say the carpets were dirty and smelly. Again, all of my information as I’m taking this three to nine months would all be validated by walking the stores, carpets about it. I didn’t know we had carpets
And did you spend a lot of time in stores during the time?
Always lived in them, lived in them. And I mean language around emails on those. What’s wrong during discovery was one way of getting it. My best way of confirming what was wrong with shopping, I would take three hours to do one store visit and people that used to come along with me from the office would all of a sudden start to fall off. I’ll go, I’ll go make a phone call. Not because they were impatient with me doing what I did, but they probably got it within a minute. Whereas I used to take longer. I mean the person that was in the intimate department selling bras and underwear and socks and pans, I was interested in listening to them for 30 minutes, even though I had no knowledge on that area. I’d get to the barbecue area and the barbecue team member would talk through barbecues and the utensils and all the add-ons you can get with the barbecue.
And I just write all that stuff down. When I got back at the end of the day of what people said, married that up with emails, I had the head office team giving me feedback. I got customer research, although I must admit the research team was one of the teams that I had removed because I said How many people we got on the research team and it was half a dozen. I said, well let’s remove them for now. They said, why? I said, well, it’s pretty straightforward. No one loves us. I said, they’re not visiting us. The stores are dirty, they’re poor. I don’t need to spend a million dollars on a research team to tell me that. Let’s save that money and give it to shareholders. So prices, the price, feedback, prices are too high, prices are too low. You got percentage offs, buy one, get one free.
They only buy you when you’re on sale. So as a great consultant that I had helping me during that time, a guy called Archie Norman who was renowned for the turnaround of Asda in America in uk, he was also consulting Coles. He said, you’re starting off with a blank canvas and you are starting to just slowly but surely put the puzzle together. And that feedback, whilst there was a lot, I had to figure out a way of how do you now bring all those comments into a nice little package to reset? And that’s probably phase two. But discovery, discovery was probably the most hardest and the most difficult piece of all. I added one more thing to discovery. I mentioned the team members both at the office and the stores, but I also went around the world and studied the world’s best.
What did you find out?
The rule of who was the world’s best was by returns to shareholders. And so I came up with Primark, Zara, Uniqlo, and Walmart. I wrote to them all the CEOs asking them if I could have lunch with them for an hour. Archie had got me in contact with a couple of them next and forever new. But the one I really wanted to have lunch with was the Primark guy because I could see so many similarities with low low price, what I call gobsmacking lowest price, and being a volume retailer in the soft part of the business, clothing poor. I wrote to him every six months and on the third year he finally replied, yes, let’s have breakfast next Thursday. It was Tuesday morning, got on a plane, arrive Wednesday night, had breakfast with him on Thursday morning. He said, whereabouts do you live in London?
And I said, I live in Australia. And I thought there’s a story in itself. Yeah, just don’t assume that every time you write to a CEO that he’s actually read everything in your note. And when I told Paul the reason I wanted to have breakfast with him or lunch with him, I just wanted to understand the DNA of how to make money out of selling clothing. Cause a lot of the other retailers that said no to me, oh, he’s going to steal my design. He’s going to steal my fabric. I wasn’t interested in stealing anything. My team were perfect at buying product and we bought heaps of it. We were not perfect at making money. And that hour he ended up giving me a whole day before I got on my flight about two days later because I visited another number of primarks. And in that time it’s a little bit like if you took me to lunch, probably in 30 minutes I could tell you how to make money out of McDonald’s or out of a fast food joint. I was just interested, what is the equation to make money out of selling a pair of jeans that I added to discovery. Problem was, it was in the second year, but I think he gave me the impetus and the fuel to do reset probably even better than what I was planning to do.
That’s a nice way to get into the reset phase. I’m keen to hear what this equation was that became the secret source because from the outside it looked like the value proposition changed for Kmart, it became very customer-centric. I think you halve the skew count, you halve the prices and you made your inventory work better for you. I think you had incremental sales coming through on barely any more inventory. And from a retail point of view, how valuable that is. So I’m keen to hear from you what that reset phase involved and what the secret source was.
Yeah, again, I’ll now add my team into this story. I don’t work on five people reporting to me only, although that I had the best six direct reports that I’ve ever had in my life. Three amazing men and three amazing women that were part of that turnaround. But I included the top 16 in the turnaround. I’m one for believing that I want all of the team to know what the turnaround is, not six, telling another six because by the time the third six get to find out I didn’t want my message or our messages what the executive team agreed to be watered down one little bit. So I, I’ll give you the formula very simply because I used to want to articulate the formula as simply as I could, but it was so simple. I thought to myself, why hasn’t anyone ever done this? And I was also fingers crossed thinking I hope it works because if it doesn’t, it’s the end of this.
And the formula was go direct on buying something, go direct. So remove all the middle men. If you go direct, that reduces your cost significantly. Reduce your skew count and just focus on being at a bottom end of the retail scale. So I think Kmart was trying to be all things to all people from the reject shop to hers. So when you’re trying to be all things to all people, then you are obviously confused to your consumer base. Who are you really? So we decided to focus on as far as skus were concerned, just things people needed every day and let everyone else do all the other nice stuff. And that way you’re talking to 25 million Australians instead of different segments of Australian. Because a lot of people said to me, but who are you targeting? And I said, anyone that breathes, if you breathe, you’re our customer.
You need underpants, we want you need socks, we want you need a black shirt. We want you want a pair of jeans, we want you, if you want a Louis Vuitton dress, that’s kind of who we don’t want now, go into the kitchen. If you use white plates, we want you use white mugs, we want you, if you want a Villeroy and Boch, we probably don’t want ya. So getting the skus down and only being relevant to everyday items nearly took the 200,000 skus down to 100. And I thought, okay, 100,000 skus. Remember what Paul said, get your skus down. And I think he told me he was down to 25,000. So I said to the team, how do we go from a hundred down to 50? And we looked at every skew again and then went to the stationary department and this was the next unveiling of the truth.
We had 10 rulers. Now they were everyday items. Every kid needed a ruler. But did they need a wooden one, a wooden one with a metal piece, a plastic wine? Why not just sell one or two rulers that way? We get rid of another eight suppliers. We still sell a ruler. They still measure 30 centimeters that they do. And we did the same with pens. We had 10 different blue borrows, 10 different red borrows. And we went, why don’t we get rid of all the borrows and just go with one blue, one red, one black. And then we did the same with jeans. We maybe had 30 different skus on jeans. I didn’t even know there were 30 different varieties of jeans, but we just want a plain pair of blue jeans. And that’s when we got into unveiling another part of our reset branding the genes.
We’re calling them different names. If you call a gene a name, that means you need to market it. That means you need to tell the customer the benefits of the name and the benefits of the genes. I thought I just want to get a pair of jeans under 10 bucks. So that we said to the team, these 25, $30 jeans, we just want a normal pair of jeans at the lowest price, at the lowest cost. And what are we going to call it? We said, we’re going to call it nothing. And they said, well what do you mean? I said, well, it’s a pair of jeans, it’s a buyer, it’s a ruler, it’s a barbecue, it’s a pair of undies. Even the undies had names. We stopped calling undies names. It then removed marketing costs.
I was about to say the marketing team would’ve looked at you a bit spare and wondering what is this bloke doing?
And remember the three measurements of success, which is why I said to everyone, whilst there will be doubters, I had no problems with people doubting. The last thing you needed the team to do is just say there’s a new emperor in town. Just let’s go along with this. So we did have to have our ears wide open for critics because I said to the team, please criticize because we are going to make some mistakes here during the reset. And I’m glad you brought that up because I wanted people to doubt the leadership team are in the cockpit and we are, we’ve got a big three 80 plane that we are driving and we want you to trust us. But do us a favor. If you’re sitting in seat 78 F and you see one of the engines on fire, please don’t just say, well, I believe in Guy and the team, he will know that the engine’s on fire do us a favor, walk up to the front of the plane and say the fourth engine’s on fire cockpit door will be open.
You need to tell us, because we are making so many sku changes from 200 to 100, this next 100 to 50,000, you really do need to tell us we will use sales growth, transaction growth, profit, and return on capital as our critical measurements. But some of that stuff that we are making changes on may hurt us down the road. So they were giving us feedback and we encouraged it. But I do love it that when we removed the skus and we dropped the price, we found our customer, they were a customer that really wanted value and we stopped the percentage offs. So we wanted them to know that the $8 genes were available 365 days a year. Why would we want them only every four weeks when we went on promotion? The removing of brands. I think that was the other master stroke because we used to some really significant brands. But when we dropped the price of our underpants down to a buck each, the brands weren’t selling at 10 bucks each. And so all of a sudden the brands just took a natural death over a slow period of time. But over two years, I think all of our clothing brands are gone. And some of that was us branding clothing ourselves, but some of it were well known Australian brands whether it be towels or shirts or jeans or business suits. It all became unbranded and priced became king.
And the underwear is a great example. Cause I think you were selling what, 250 pairs of undies and as you say, two thirds, one where you can join the dots. I think you were talking about Pacific brands and Bonds, but that basically you rubbed them out of the entire game.
And when I say I used language like anyone that breathed, I just thought I worked in the probably world’s finest marketing company in ever with McDonald’s. We just knew everything about every customer even before they were born, their needs, their wants, what color they like, what color they didn’t like. We knew everything about marketing. And here I am in a world of same to the team, I’m going to strip marketing out of this equation for now. I could get the world’s best advertising agencies to come in and help me fix Kmart, but that’s not what was needed. I didn’t need to put perfume on a pig. I needed to get back to the product. And I told the underwear team, stop telling me that I’ve got 30% market share of a particular brand. I said, we only selling 200,000 a year. They said, but guy, 200,000 pairs of underwear a year is a lot. I said, where do you get that from? There are 25 million people in Australia. They’ve all got 10 pairs of undies, each. That’s 250 million pairs. We’ve got no market share. So I said, until we get to 20 million pairs of underpants, then we are talking, maybe we’ve got some, which
In there. You did. We got up to over 30 million pairs of undies, correct. And then the team started focusing on not this marketing market share jargon. When someone says you got 20% share, you then go, oh, that’s good. I’ll get to 23%. Where did you get your maths wrong? Do your maths based on population. I did get that from McDonald’s. You’d always say, how many mouths are there to feed? And in Australia there’s 25 million and you go, well, they eat three times a day, some eat more. That’s 75 million meals a day. Well, we’re only serving a million, so we’re only at less than 1% of the population. Let’s get to 2%. So just use those basic sensible things and later on you can go into bringing in a marketing company to help us out, which they did to tell the story to the 25 million better.
It sounds like you needed to find the brand first before you could market it. And the genius in calling jeans, jeans and white plates, white plates and selling them for a dollar. All of a sudden the customer proposition was so clear the marketing was done and the brand story could emerge.
And the marketing got done by our customers, which was the best part, which I hadn’t imagine relied on is that when the jeans went down to $10, the best news I’d hear when I walked in the office, the jean girl had told me, we’ve run out of jeans. I went, wow, no radio. No tv, no catalog. And we’ve run out of jeans. So we then said, how many did you order? She said, we ordered a million. And I said, okay, well I mean obviously my team did this, not me. Let’s get it to 2 million and let’s get it to 3 million. And then we started later on during the journey of introducing the other gene fits that Levi’s and the other great companies have, but kept the word jeans as the product just said, their slim fit or their wide fit or their skinny fit or long fit but make price the lever.
And you know what? It was so much easier. We eventually got down to below 50,000 skus and replenishment became a lot easier. So back to the formula, less skus and then give the factory the one order I want white plates, not dome plates, not moon plates, not square plates, white 30 centimeter dinner plates and I want 20 million of them. And right at the early stages we said to our team in Asia, find the Walmart factory, just find the Walmart factory and tell them, do you make white plates? Yep. Can you add to the billion you’re making for Walmart? Can you add another million to it and just call them white plates? We don’t want a brand on them. We want them to be dishwasher proof. Of course the quality aspect was really simple at the early days. If it goes in a dishwasher, we want it to survive, that’s all.
And if it goes into a washing machine, we want it to come out. Now later on we could work out whether we could do some other marvelous things, but let’s dumb this thing right down so that way the customer sees price, lowest cost, lowest price, which drove volume. Then I used to visit my suppliers in Asia. They’d say, how are you doing this? I said, all of you can participate. Give me the lowest cost and I can give you higher volume because then we’ll do a lowest price. The lower the price I drop, I will order more from you. The more I order from you, we’ll do even better at lower cost. But the one rule I had for the factory owners is ethical sourcing. And their team members in Bangladesh, India or China with dignity and respect was right up higher on my list.
So I have to add that in because ethical sourcing way before even the consumers were demanding, where is it made? How are they doing this? We removed SKUs and we bought volume and by buying volume, we bought it up lower costs and we’re passing that benefit onto you. But I was conscious of we were buying products from developing nations and I knew because of the McDonald’s world I lived in that they probably don’t operate under the same strict guidelines and corporate governance that we do. So the way around that, I made sure that our team and I and my leadership team, we visited factories, we visited factories, we watched where the team members worked, we went and visited where the team members slept and we went and visited where the team members ate. And many a times when the factory owner would say to me, guy, we want to take you to lunch.
And I’d say to the team that was with me, tell the owner I want to eat where the team members eat. And he said, well, we’ve got a lovely boardroom lunch for you. I said, no, no, no. I could do boardroom lunches anytime I want to eat where your 3000 staff are eating. I want them to know my time here will be three hours but I’ll be dealing with you for 10 years. I want them to remember that came out, Australia cares about that $1 pair undies they’re making or the $10 genes they’re making. And tell the owner that if he doesn’t do anything, that’s right. From an ethical point of view, while he’s operating in a third world country, he needs to operate under western governance because I work for a company that puts integrity of how we buy products at the highest levels.
That’s a fantastic value to hold. And that integrity has served the company well. And it shows I think the value that you can impose your own personal values onto a corporation and phenomenal story. We’ve kind of gone through the customer proposition, but what about the actual stores themselves? Things as a customer that I noticed more 24 hour stores self-serve checkouts. I’m never waiting in line. You just made it really frictionless as a customer, apart from the price
That felt under P for place. And under each of the six P’s and C, there was probably two or three nuggets. So you got the P for price, I think P for price probably only had one nugget underneath it and it was gobs making lowest price. We could. That was it. When the team got down to $2 undies, I said, and now find out a way to get to dollar 50. And when they got to a do, we said, work out how to get to a dollar. So it really is important to say during discovery, thousands of things were found under each of the six Ps and C, the truth of the matter is only did one or two of them. So the 300 peak the place was get the real estate right. That’s mission critical. So I just went and did what I was taught to do.
Go study the top 10 highest volume Kmarts in Australia and go study the top 10 lowest volume Kmarts in Australia with my real estate hat on to work out why are these 10 outperform the rest and why are these 10 dogs, took my real estate team with me. We understood that dynamic of real estate. McDonald’s is a lot easier. We just put them on the corner of Main and Maine and if you put them one block up from the corner of Mainer, Maine, the volume would be halved. So this was a little bit more complex because we fitted into huge shopping centers. So anyway, we studied that and found out what Maine and Main was for Kmart and we started opening 10 shops a year during that 10 year period to make sure that we got our right profitable market share growth. The second one under that P was trading hours, which you hit before I bumped into one shop out of our 200 that was open 24 7.
I wish I bumped into it earlier because I visited it a number of times, but it didn’t dawn on me that it was 24/7 because I was visiting it in the daytime. And then one night I was coming home late from a family function and went past this shop at two o’clock in the morning I went, holy Moses. And another light bulb went off and I got so excited at two o’clock in the morning. I can’t wait to go to the office tomorrow to say how many others are 24/7. And they went, none. I went, none. How many others have a car park at the front of them where you can park at the front and walk into a Kmart? And they said, guy 24. I said, okay, I open all 24 stores 24/7 as quick as you can. And I said, and you have got my support.
This will take two to three years to figure out because you will have some problems with costs because the labor costs of operating after 9:00 PM to 9:00 AM is huge, but you’ll have my support. We’ll have some profitability problems in these 24 stores. But I knew from McDonald’s, a 24 hour, seven day a week store takes about two years for it to take off. Fast forward three years, we shut down the 24 7 operation, about five of them and went from 24 down to 19. And those babies, the best baby I can think of as an example, was a Blacktown store was doing about 22 million a year operating nine till five or nine till eight, seven days a week. It’s now doing over 40 million a year, 24 7. It was losing about 2 million in ebit the year Wesfarmers took over that business and was sitting at around $4 million EBIT in around its fourth or fifth year.
But I also did trading hours and told the team with the other 180 stores, look at your opening hour and your last hour of closing. And if you’re doing two or $300 in that first hour or last hour, open another hour either side. So we had stores starting to open at 6:00 AM instead of nine. And we had stores closing at 10:00 PM instead of seven. So trading hours real estate. And the third one was make them look like Disneyland. Now that was a little bit more difficult, but that was the dream. How can we make them look really attractive? And then I found out one horrible piece of information was it takes about $3 million to fix a Kmart or 5,000 square meters. And I thought, well, the 3 million I could get, but I needed to have a return on that investment. It took us nearly four years with my right hand guy, his name’s Ian Bailey who replaced me after I left.
I gave him and the team the responsibility of how do you get the $3 million to give us a return on capital $3 million to make it look pretty anyone could do. And I said, Ian, when we get that right, we are going to change all 200 of them, but we need a nice return on capital on them. He did a test in one store to Eastlands. It looked awesome and he took his time doing it, but sales went backwards and profits went backwards. We took that test to a second store at Frankston. He tweaked it one more time. At Southlands, we went to double digit sales growth. We added two or 3% to margins because of the way he positioned what was
The secret sauce in getting that right.
What the designer did. That was the easy part. It was working out where to put product and I don’t know, it’s easy to tell you one secret element. Cause anyone listening to this that’s got 5,000 square meters working out whether to put blouses with jackets or shoes with the socks, sounds easy, but it’s not. Cause you then need to refresh it nearly every day. I think the secret source was we had an electrical department and put all our electrical stuff in the electrical department and you go, well, that’s obvious, but think about it, we put hair dryers with irons, with toasters, with microwaves, with vacuum cleaners. That’s the electrical department. Go to level six on David Jones, you’d find electrical department. That’s how we all did it because that’s how the buyers operated. I think the secret change was we decided to put the kitchen and have all things for the kitchen in the kitchen department.
So when mom, 85% of our shopping was done by women. Mom went to the kitchen department thinking she needed new plates and knives and forks. Then the toasters were in our kitchen department as were the kettles. If you went and needed laundry detergent, she’d go to the laundry department, but she would find the iron in the laundry department and she’d find the vacuum cleaner in the Lord News Department. But getting back to the kitchen, we used to put all our cloth together. So our T towels and our tablecloths were always in the towel area, what they call Manchester. Well, we got the TALs in the tablecloths and put them into the kitchen department. So we went and reshaped where our skus sat. Now when you’re talking 50,000 skus, I I’ve just given you 10, this is a lot of limitations, a lot of re-engineering. Yeah, that needed to be done.
So to Ian’s credit, and there were a number of people that he would give credit to. That’s why the three changes were done slowly at Eastlands, followed by Frankston, followed by Southland. And when we saw Southland, we just had the biggest smile on our face. We went, wow, 10% growth in sales, 2% lift in margin. We’re doing about average of 20 million in revenue in the average box back then. So you can do the mass on 2% margin lift with nothing. That margin lift just happened because she was adding another item to the box. So when she was in the kitchen, she goes, oh, I need plates. Oh, there’s a there. There’s a toaster and a kettle. Oh, and there’s the teals. She didn’t need to move into another department because her mind was already, I need to go to the kitchen department. She won’t walk the other side of the store to go, oh, there’s some lovely details in the Manchester department.
The mine was already in that frame of mine. And then I went to Wesfarmers and said, we need to revamp all 200 stores. So 3 million bucks each, 600 million. We’ll do I think we’ll doing 40 a year because I knew how valuable it would be if the stores all looked similar. And then the last little master stroke, although we got a lot of criticism for it, as we put the registers in the middle, now we got criticism cause they had them for 40 years at the front. But I didn’t want to be a supermarket where you’re going up and down with trolleys in, you check out the front. I wanted the registers in the middle to allow that to be the center place of everything. So I’ve given you a lot about PFA Place, but that’s kind of how it went for each of the ps price, product and place. Were probably the three critical ones. And I don’t want to undervalue the people part of it because you
Beat me to it. My next p I was going to ask,
We put a lot of people, we dignity and respect is all I’d have to say. When I arrived, I think I lost one critical, one key player in my leadership team. But I did stay with the same team. I remember Richard Goer saying to me in my first 30 days, Wesfarmers believed in attracting the best talent from around the world. Please feel free to go anywhere you want. Use Ben Lawrence, who was an awesome assistant too from Wesfarmers to select the best people from the world. And I remember turning up to my first board meeting in the early new year of 2008, 2009, and the Kmart team was selected and Richard grabbed me during one of the breaks. He goes, it’s the same team that was there during the year before you took over. I said, yeah, why? The finance guy’s got a finance background.
The lawyer’s got a lawyer, legal background. I said, the merchants have got a merchant background. They’ve been doing it for 20 years. He goes, yeah, but nothing changed in the last 12 months. I said, no, lot’s changed. He says, well, what’s changed? He says, why do you think this team could do it? I said, Richard, during the year before you bought me on, they thought you were going to sell it. So they weren’t sure whether they were staying or going. The guy that was running, it was called Deputy, not CEO or not md, he was called Deputy md. So he wasn’t even making decisions for what you told me, get it right for the long term because he wasn’t sure whether he’d be here for a short time or a long time. And after interviewing them all, their cvs are perfect, these guys will fix it faster if we have the right plan.
And I ran home that night and told Deanne, I said, Richard was a bit surprised I didn’t change the team. And she just politely said, well, in a year’s time you’ll either be you or him, he’ll figure it out. And I thought, so you just got to back yourself. I was brought up in the era that I lived in Sydney when I was a kid. If you went to Grace Brothers and they didn’t have it, they would tell you to go to David Jones. So when I was in front of the team members, I said, look, when you’re losing all these skus, your customers are going to ask you what happened to the barbecue. And just politely tell them where Bunnings is. Now, obviously, I didn’t want to tell them to go to Big W, but I literally said to them, if we don’t sell it anymore, tell them where they can buy it.
They will love you for it. Now, if they want a pair of those special underpants before you tell them where they can buy it, tell them that ours are a buck, give them a pair for free. As I said to the team, we’re not trying to put a man or woman on Mars. We’re just selling undies and socks and some white plates and some jeans. We’re not really here to reinvent the world. And the thing that really will the customers will love is they’ll have some money in their pockets now to help them out with a holiday, help them out with their kids’ education, help them out, maybe replace that car they were trying to do or fill the tank.
That’s amazing. Having sat here and listened at and you summed it up perfectly then, but it keeps coming in my mind, the simplicity of the plan. It wasn’t rocket science, it was clear, it was concise and most importantly, it was simple and it was effective. And do you think the effectiveness of the plan inspired the staff or did you have to continually find new ways of almost reinventing your leadership style to ensure that they were at the top of their game from the floor staff to people that were your direct reports?
I have to give them credit. The team had a little flame inside them already, their retailers. And when I came home from doing store visits, the Kmart team had been around 20, 30 years working in the shops. I, I really took, I still today take my hat off to them. And retailers love selling. So while I love being a cheerleader the cheerleading that they needed was if they could find that, if the buyers could find a product that customers would turn left to Kmart instead of right to Big W, my team. That light would go so bright that you could see it from the moon. I mean, it was such a simple strategy. And the strategy was lowest price for everyday items, lowest price for everyday items. So wherever we were, we’d always say we’re trying to get the lowest price for everyday items sitting in tea rooms.
That was my most common finale. When I’d done my three hours in a shop, I’d finish it around two and a half hours in the tea room and sit there and the team members probably were oblivious to who I was. And the lamingtons would come out and the cakes would come out and they’re celebrating somebody’s 20th year or 30th year anniversary. And then eventually the team would start telling you who you are and what you’re doing. And again, started giving your feedback. And I just thought, you get sales up and you get profits up, you light the world for these guys. But then the criticism from the journalists, I love them. I think that in the year four and five starting to make more money, sales are starting to go up and then the glass half full came through again. But can it continue? I thought, can’t win the press, I can’t win.
And I don’t know, I loved everything except the stories I suppose. And I always used to say to myself, was that me being self-conscious about someone writing about me? Or was it me being self-conscious of them writing about my people? And I truly believe when I watched what happened to them for 10 years prior to Wesfarmers buying it, they were battered around the heads forever by not being given any credit by the Coles Empire to give them an opportunity to change. So I kind of wish that maybe that story got written a little differently to give the team a lot more credit for what they did for the turnaround. When people say, what was your main focus? I said, sales, ebit and rock. And then they hear the story, they go, well, your story’s really about people. I go, it was about people, but I told them that all that matters was sales, ebit, and rock. It was the people that turned the business around and it was the people that, especially the team members, the 30,000 of them that were like they were at war forever, but no one told them that they were losing that war and they should come back. So when we eventually won yeah, it was an amazing feeling. Best 10 years, as I said.
And what are you most proud of in achieving
In the team? Oh, we hit number one spot.
Yeah, I thought you might say that.
We hit number one spot. I was proud of the team. Still to this day, I can see the smiles on those team members’ faces because there was not a high turnover in this retail world. As I said before, they stayed even when it was tough, they still stayed in sport. An analogy I used before, the good players on the bottom teams used to get bought out by the best teams in my world. No one from my competitors were trying to buy any Kmart people out of the stores. So to see their faces at the end saying, we hit number one spot.
Maybe you can give those statistics as of last year when you left, compared to 2008?
I’ll let you do it. I’ve got them here.
Because I don’t want to
I’d love to hear them in your voice
Yeah, yeah. No, no, no. Let me think. So the 2009, the revenue was 3.7
Billion, that is
3.7 billion. And let’s just do revenue in nine years later at 5.6 billion. Yeah, it was pretty amazing. And then I go to the ebit. So as I said, I used to measure net income, but EBIT was reported at 90 million in 2009 and was 558 million in 2018. And the return on capital was 10% in 2009 and was 32% in 2018.
Incredible. And one last question is, what’s the greatest lesson that you learned from your experience of turning Kmart around over that 10 years?
That’s hard one, ed. I think, I’ll go back to what I said at the beginning. Richard Goyder, the person that you report to, if you don’t have the support of the person that hires you, don’t fly. I did the CEO role for 20 years. 1999 was when I first got promoted to CEO in McDonald’s, Australia and retired in 2019. And when I watched, not just my 20 years as a leader, but watched a lot of other leaders that I watched and observed around the world, especially with McDonald’s, if you don’t have the backing of the guy that hires you, you’re gone. And if you do, you can make ordinary people do extraordinary things. And the world I operated in for all of my life. So 45 years I worked with everyday Aussies. When people talk about the average person earns 40, 50 grand a year, that’s who McDonald’s hired. We worked with everyday Aussies, the average person the person that worked at Kmart was the average person. And I’m just an average person too. I often told them, I said, my upbringing was one of seven kids, and the entrepreneur I learned from was my daddy was a taxi driver. He was the person that I, without a doubt, got no doubt that he trained me how to be an entrepreneur with mom. A taxis driver’s license, bringing up seven kids. There’s the Kmart story.