Woolworths ramps up online and COVID-19 safety measures

Sue Mitchell

Aug 27, 2020

AFR

Woolworths will increase online shopping capacity and launch new safety measures in stores in an attempt to maintain sales momentum after pandemic-fuelled buying underpinned the best growth in revenues in more than a decade.

Australia’s largest retailer doubled online capacity in 2020 to cope with booming digital orders and chief executive Brad Banducci plans to increase capacity by another 30 to 50 per cent this year to ensure Woolworths can satisfy an anticipated 40 to 50 per cent increase in online demand.

At the same time, Mr Banducci wants to make sure customers feel comfortable shopping in Woolworths supermarkets, liquor shops and BIG W stores, especially in the lead-up to Christmas.

The retailer plans to install hand sanitising stations around stores, rather than just at entrances, install automated customer counting technology, roll out its Scan&Go payment technology to supermarkets as well as express stores, and replace paper receipts with electronic receipts.

It is also testing rapid COVID-19 tests, new, more comfortable masks for staff and better trolley-washing methods.

“It’s not a one-off crisis, we need to engineer things to make it not inconvenient for people and to make it safe,” Mr Banducci told The Australian Financial Review on Thursday, after reporting a 1.2 per cent fall in underlying net profit to $1.602 billion in the 12 months ending June.

Strong sales growth in supermarkets, New Zealand, Big W and packaged liquor offset a drop in sales at ALH, which fell into the red in the June-half after it was forced to close more than 330 hotels for several months.

Panic-buying of food and groceries boosted Australian supermarket sales by as much 40 per cent in March and was followed by more at-home consumption and cocooning, a trend Mr Banducci thinks will prevail for the foreseeable future, even when restrictions ease.

‘Boot service’

However, the strong growth in sales was all-but erased by higher costs for cleaning, hiring extra staff in stores, distribution centres, security and scaling up e-commerce capacity, particularly home delivery.

Woolworths racked up COVID-19-related costs of about $400 million, including about $30 million net in bonus “recognition” payments to staff, reducing operating leverage and disappointing shareholders who hoped the boom in sales would flow through to profits.

Online sales soared 42 per cent to $3.5 billion and now account for 5.5 per cent of total sales. Woolworths’ online operations are profitable but margin dilutive.

“What COVID appears to have done is brought forward a couple of years of consumer demand for digital and e-commerce services,” Mr Banducci said.

“The major growth in our online database has come from slightly older couples and as far as we can tell they are continuing to use them – the online run rate may slow but we wouldn’t expect it to go backwards,” he said.

Woolworths plans to increase home delivery capacity, using last mile delivery services such as Sherpa, Drive Yello and Uber to deliver express orders, and open more click-and-collect and drive-and-collect services, where groceries are delivered to customers’ car boots.

“A COVID-safe Christmas requires us to have enough online capacity for not only home delivery but pick-up and ideally boot service,” he said.

Woolworths cut its final dividend to 48¢ from 57¢ a share after COVID-19 expenses and large one-off costs led to a 22 per cent fall in bottom line net profit to $1.16 billion.

The retailer booked $591 million in one-off items, including $185 million to repay staff underpaid over the past 10 years, supply chain transformation costs of $176 million, and $230 million in restructuring costs at its liquor and hotels business, Endeavour Group.

Excluding these one-off costs, normalised earnings before interest and tax from continuing businesses (excluding fuel, which was sold in April 2019) and excluding the impact of lease accounting standard AASB 16, fell 0.4 per cent to $3.22 billion. This was in line with Woolworths’ guidance in June for underlying earnings before interest and tax between $3.2 billion and $3.25 billion.

Strong start to 2021

Mr Banducci said the new financial year had started well, with total sales rising 12.4 per cent and online sales up 85 per cent in the first eight weeks. Cost pressures had moderated, although another $107 million in COVID-19-related costs was incurred.

Australian food sales were up almost 12 per cent in July and August, from 9.3 per cent in the June quarter, even though the business is cycling strong 6.6 per cent sales growth triggered by the Lion King ooshies promotion last year.

New Zealand food sales rose 8 per cent, and BIG W sales soared 21 per cent, despite the closure of 22 stores in Melbourne.

Liquor sales rose 24 per cent in July and August, with consumers trading up to more expensive products such as gin and craft beer. However, ALH sales fell 31 per cent, hit by further pub closures in Victoria.

Mr Banducci did not give guidance but was assuming “some level of elevated sales and costs will remain for the first half”.

The result was marred by costs associated with Woolworths’ wage underpayments scandal, which have blown out to $500 million, including $390 million in compensation and $110 million in interest and other remediation costs. Woolworths has repaid 4.5 years of underpayments to date.

“It’s a large number but the key focus we’ve had is on making sure we address it,” said Mr Banducci.

Woolworths shares rose 2.8 per cent to $40.38 but remain below their February high of $43.60.

Citigroup analyst Bryan Raymond said the outlook was improving as sales growth remained strong and COVID-19 costs eased. He expected consensus forecasts for 2021 to be increased by 3 or 4 per cent.