Cheap ? and still trying to be cheerful

Woolworths' demerger from Kingfisher is imminent. How will the old 5 cent store fare?

ir Geoff Mulcahy is not known as the most emotional of businessmen. But even he may pause for just a moment on the morning of 28 August. For that it is the day when Kingfisher and its stores group Woolworths will, after almost a year of planning, go their separate ways, with Woolworths becoming a public company in its own right, quoted on the London Stock Exchange.

Sir Geoff would have to be supremely unemotional to be unaffected by the demerger of Woolworths – the company that has been at the heart of his retailing career. After all it was Sir Geoff, Kingfisher's chief executive, who led the successful buyout from its American parent company nearly 20 years ago.

The next phase for Woolworths, however, has not got off to a particularly good start. The group has been plagued by controversy. It has been attacked by shareholders, disgruntled by the length of time the demerger has taken. And the spats, particularly between Sir Geoff and Gerald Corbett – the controversial former chief executive of Railtrack who hit the headlines over his £1.3m severance deal – have been legendary. The tensions have even cast doubts on Woolworths' chances of future success.

Sir Geoff is reconciled to the fact that the split has to happen, and that it is best for both organisations. "The management of these two businesses can now focus on the separate growth opportunities their markets offer," says Sir Geoff. Mr Corbett is due to get a £500,000 bonus for carrying out the demerger, and will get a £375,000-a-year salary when he becomes executive chairman of Woolworths.

It is clear that the City welcomes the demerger as being necessary to get one of the UK's best-known high-street names back on track – even though demergers are not always instantly successful. And the rebirth of Woolworths is unlikely to be a smooth process.

The company, with 904 stores across the country and famed for its pick'n'mix sweets, may also be one of the leading retailers of entertainment products, toys and children's wear in the UK, but its move to independence has not been a happy tale.

Sir Geoff has been increasingly pitted against Mr Corbett, whom he appointed to Woolworths in March, and there has been intense speculation surrounding their relationship. The low point was reached when the row surrounding Mr Corbett's Railtrack pay-off erupted. According to insiders, Sir Geoff was keen to keep control of Woolworths and saw the Railtrack debacle as something that could derail the demerger plans through the resignation of Mr Corbett.

At the demerger announcement the two still appeared to be at loggerheads over the size of Mr Corbett's bonus. Mr Corbett says the £500,000 was agreed in March – but Sir Geoff says that it has still to be decided. "[The rows have] been overstated. Our personal relationship is fine and there is nothing Geoff and I want more than for Woolworths to get back where it was," says Mr Corbett. "We just want to move forwards and get on with the business and the recovery of it."

The farce continued last week when Jonathan Fry, former chief executive of oil group Burmah Castrol, entered the row. Mr Fry had been offered a position as senior non-executive on the board of Woolworths, but he says the offer was withdrawn after he clashed with Sir Geoff after publicly backing the former Railtrack boss over the bonus row.

Woolworths has also been faced with an immediate financial problem – the demerger got underway with a profits warning. The group said like-for-like sales at Woolworths had declined in July. This has won the firm the unenviable status of being what is thought to be the first company in history to issue a profits warning before flotation.

Woolworths has seen its financial performance deteriorate over the past two years, becoming a victim – along with some of the biggest names in retail – of the changing nature of retailing and the intensification of competition. Woolworths last year saw its operating profits drop by 25 per cent to £91m. The fall follows a period of growing managerial instability with four managing directors in the past three years.

To make matters worse there has been overstocking of around £100m, losses of £15m on internet investments and even larger initial losses from the roll-out of its new concept stores – the convenience General Store, specialising in health, beauty and food; and Big W, the new out-of-town superstores. "The basic business is sound. There is a good market position and an excellent brand. Most of the problems of the last two years have been self-inflicted, and we have a plan to fix it," says Mr Corbett, who believes Woolworths can be taken back to its former glory in two years' time.

Woolworths directors accept they face tough challenges, but believe the power of the brand, its reputation for value, wide range of products and visible high-street presence will win through in the end, with the help of a clear strategy. "The group will be principally a UK retailer focused on the home and family, offering its customers value for money on an extended range of products. It is built around the well-known Woolworths brand," the company says in its demerger documents.

Priority will be given to improving the performance of the 788 conventional Woolworths stores – "the high-street retailer of everyday requirements" – and they will increasingly be tailored to the differing needs of different areas of the country. Attention will also be given to cost control, inventory management, with the help of a new £70m system.

Then there are what Sir Geoff calls businesses designed for "the customer of the future" – the Big Ws and General Stores that are open from 7am to 11pm. Four more Big Ws are planned this financial year, taking the total to 13. Five more will follow. Seven new General Stores are in the pipeline, too. The rate of growth, however, has been significantly scaled back because of the huge costs.

Home shopping will focus on entertainment such as CDs and DVDs, through the merger of its e-commerce entertainment into Streets Online, the internet retailer. In turn, Streets Online will be merged with MVC, the music stores. The remaining e-commerce division, Woolworths' online site that cost £15m last year, is to be closed.

"For the next six months we are going to get the stock down, and close e-woolworths and restructure Streets Online. We are also slowing down the investment in the new formats to conserve cash and get them right before we roll them out again," says Mr Corbett.

As he prepares to hand over, Sir Geoff is optimistic about the future of his retail baby. "Woolworths is an excellent business. Its got 6.5 million customers a week going through it and a huge amount of growth potential," says Sir Geoff.

Richard Hyman, chairman of Verdict, the retail analysis company, says: "As far as its future is concerned, it's about defending its existing market shares and making sure it continues to have the optimum-size stores with the optimum product mix in the right locations."

As for Sir Geoff, he will have plenty to do at Kingfisher. The manoeuvre will give the company, already the third largest home-improvements retailer, £1.1bn to expand its DIY business.

But even after 28 August, when Sir Geoff has nothing formally to do with Woolworths anymore, he may just occasionally glance over to see how Mr Corbett is doing. But will this raise a smile or will Sir Geoff look back in anger?