Woolies races to keep up with online shopping revolution

The COVID-led surge in Woolworths’ online sales is far from over, but chief executive Brad Banducci needs to race to keep up with this dramatic shift.

AFR

Nov 4, 2020

If you want to know how COVID-19 will change Australia’s retail sector, just look at what’s happening in the aisles of Woolworths’ supermarkets, discount department stores and bottle shops.

Or more to the point, look at what’s happening beyond those aisles.

Woolworths’ sales numbers for the September quarter suggests that the surge in online shopping caused by the pandemic is not just holding but accelerating, even allowing for the fact that Victoria spent most of the quarter in one of the world’s strictest lockdowns.

Brad Banducci is racing to keep up with a surge in online sales.  David Rowe

Food sales in its Australian supermarkets rose 11.5 per cent during the quarter on a same-store basis, easily eclipsing analyst forecasts for growth of about 9 per cent. But it was the growth in online sales in the Australian supermarket division – a staggering 100 per cent across Australia to $661 million – that grabs the attention.

The online sales surge took online as a percentage of total Australian supermarket sales to 8 per cent, up from 6.3 per cent a year earlier.

Will this new level hold as the Victorian economy gets back towards COVID-19 normal and restrictions are lifted? Chief executive Brad Banducci doesn’t know, and cautions that the online penetration figure is very much a whole-of-business average – in some geographical areas online penetration is running at between 12 per cent and 15 per cent, while in some product categories, penetration is running above 20 per cent.

Banducci is personally pleased with the strong rise in penetration in fresh food, which has been something of a laggard in terms of online sales.

Averages aside, it’s clear something has changed across the Woolworths Group, and Banducci is racing to keep up.

At the Big W discount department store division – where a resurgence in sales that looked unthinkable a few years ago saw comparable sales surge 22.3 per cent in the quarter (or 28.5 per cent excluding the chain’s shuttered Victorian stores) – online penetration jumped from 4.1 per cent to 9.3 per cent, as online sales leapt 175.2 per cent.

At Endeavour Drinks, which includes Dan Murphy’s and BWS, online sales rose 57.6 per cent, taking penetration to a record 8.6 per cent. (By the way, 2020 appears to have driven Australians to the hard stuff, with spirits, particularly gin, flying off the shelves.)

It’s also worth noting that online sales growth remains strong in New Zealand, which is further ahead in the fight against COVID-19 than Australia. Online sales rose 50.6 per cent in the September quarter, taking penetration from 8.5 per cent a year ago to 11.5 per cent. Banducci points out that Woolworths has a better online offer than its main Kiwi competitor, but nonetheless the growth remains impressive.

But the online surge does create pressure, and Banducci concedes Woolworths is supply constrained when it comes to e-commerce – every time it rolls out new home delivery slots at a store, or builds a drive-through or drive-up collection facility, the capacity is quickly sold out.

“Customers want these services and therefore it’s imperative that we provide them,” he says.

Woolworths’ focus is using that most old-fashioned of assets – its physical supermarkets – to bolster online sales capacity by creating more space at the back of stores to pick and pack orders, and by building more collection points where space allows. Where it doesn’t, new fulfilment centres are being built, including a mini automated centre that opened in Melbourne last week.

The online sales surge also raises an obvious question about the future shape of Woolworths’ store network. Banducci says a major piece of work on store openings is under way, but he still expects the group will open 15 to 20 supermarkets a year, albeit with more space dedicated to online sales capacity from establishment.

“Our store network certainly won’t become redundant, it may change in shape and in terms of activity that it does. Clearly we have to continue to invest in the online space and we certainly plan to do that. ”

Another cost issue for Banducci is specific COVID-19 related costs. Woolworths spent $147 million on cleaning and protective equipment, contractors and security, extra staff and its supply chain during the September quarter, although this was down from $228 million in the June quarter.

Costs will likely fall further now restrictions have eased in Victoria, but Banducci remains cautious on this. He candidly admits he made a mistake in June by assuming that the pandemic was over, when he should have been preparing for a long fight against the virus.

“That was a tactical mistake and we don’t want to make the same one again.”