Woolworths underpayments ‘not a hanging offence’

Sue Mitchell

Oct 31, 2019

AFR

Woolworths’ annual wage costs will rise by $20 million to $30 million a year as Australia’s largest retailer rectifies underpayments to thousands of salaried staff, analysts say.

This is on top of an estimated $100 million to $150 million increase in wage costs from a new enterprise agreement and will offset about $55 million in wage savings from a new store operating model and job cuts at the head office.

Woolworths also faces a $200 million to $300 million hit to bottom-line profits this year after revealing on Wednesday it had underpaid at least 5700 salaried store staff, including store managers, category managers, department managers and nightfill managers in its supermarkets and convenience stores over as many as nine years.

Woolworths has promised to repay staff their full entitlements, including interest and superannuation, assuming the problem dates back as far as 2010, when the modern retail award came into effect.

The group is also investigating whether salaried staff at other divisions including Big W, Dan Murphy’s and BWS were underpaid. If so, the remediation bill and annual wage costs could rise further.

“Woolworths was already facing higher EBA costs, so this review could put further upward pressure on the group wages bill,” Macquarie Equities analysts said on Thursday.

Analysts cut their full-year bottom-line profit forecasts by about 9 per cent to take into account the one-off remediation costs, which are equivalent to about 0.3 per cent or 0.4 per cent of Woolworths’ market value.

Earnings forecast

Woolworths chief executive Brad Banducci said on Wednesday the wage underpayments would “clearly” lead to increases in salaries but it would not be material in the context of the retailer’s total numbers.

UBS analyst Ben Gilbert and Morgan Stanley analyst Niraj Shah said increased labour costs of $20 million to $30 million a year would reduce group earnings before interest and tax by about 1 per cent.

However, Woolworths will be able to offset higher wage costs by reducing costs in other areas including shrinkage and rostering efficiencies and through strong sales growth.

UBS expects earnings (EBIT) to rise about 5.6 per cent this year to $2.88 billion, boosted by 14 per cent earnings growth in the first quarter, when same-store Australian supermarket sales grew a record 6.6 per cent, pushing total sales up 7.1 per cent to $15.9 billion.

Overearning

Woolworths shareholders said the retailer had obviously been over-earning for several years by under-paying staff.

“It means they’ve been fractionally overstating earnings for the last number of years, if it’s $300 million  over nine years that’s a slight overstatement of earnings,” said Alphinity Investment Management fund manager Bruce Smith.

But Mr Smith said it was an “embarrassing glitch” for Woolworths rather than “hanging offence” for senior executives.

“It’s lost the company a bit of the moral high ground but it’s not something we should see Brad Banducci sacked over,” he said.

“The genesis was way before he was involved [Mr Banducci has been CEO since 2016 and was appointed managing director for supermarkets in 2015],” he said.

“I’m sure there will be some impact on bonuses … to have not been paying your people properly is very embarrassing but not a hanging offence,” he said.

Another Woolworths shareholder said the underpayments reflected the complexity of the General Retail Industry Award rather than suggesting that Woolworths’ payroll systems were not up to scratch.

But the fund manager, who declined to be named, said executives nonetheless had to take responsibility for the underpayments.

“Errors that happen in the course of business managers have to take responsibility  for these things and there should be an impact on their remuneration,” he said.

“It’s important for a leadership perspective that managers do take a hit for making mistakes that affect a lot of people – they should cop it on their bonuses and the board will recognise this is important leadership issue and they need to show some leadership.”

Woolworths chairman Gordon Cairns said the board was taking the matter “extremely seriously” and would soon consider the impact on executives.

“The focus of Woolworths management right now is to ensure all the affected salaried team members receive their full entitlements, including back payments with interest and superannuation contributions, as soon as possible,” Mr Cairns said.

“The team has also put in place an extensive plan and process to ensure salaried team members’ pay is correct and compliant. The board will monitor progress against this plan and ensure full reporting on compliance against the relevant awards.”