Woolworths cops hit to food profits as customers trade down

Supermarket giant Woolworths has warned that its first-half profits will suffer as customers continue to switch to cheaper products amid the cost-of-living crisis. The downgrade sent its shares tanking.

While sales rose 4.5 per cent to $18 billion in the September quarter, the company said that the shift to specials and lower-priced products such as home brands was hitting earnings in its food business in addition to customers shopping at other retailers to cut grocery bills. The profit warning sparked a slump in Woolworths shares, which dropped 6.1 per cent to $30.81.

Woolworths’ earnings have been affected by the cost-of-living crisis.Credit: Getty Images

Earnings before interest and tax from its Australian food division will come in at $1.48 billion to $1.53 billion in the December half, down from $1.6 billion a year ago, the grocery giant said in a statement to the ASX on Wednesday morning.

“Customers remain highly value-conscious and continue to purchase more items on special or trade down to lower priced items, including own brand,” Woolworths chief executive Amanda Bardwell said.

“These competitive factors, together with strong e-commerce growth, is leading to a lower-margin sales mix, which has impacted earnings.”

Bardwell said that, while trading momentum in the lead-up to the key Christmas period was pleasing, “we expect the environment for [financial year 2025] to remain challenging”.

She added that customers were increasingly shopping around at rival grocery retailers such as Coles and Aldi for the best deals and diversifying their shopping to Amazon and Bunnings for cheaper goods.

Bardwell says this would marginally affect shareholders, noting Woolworths would need to see better results as customer broaden their range of where they’re shopping.

As separate data on Wednesday showed a slowdown in inflation across the wider economy, Woolworths said average prices fell by 0.3 per cent in the quarter compared with the prior year. Excluding fruit and vegetables and tobacco, average prices were down 1.8 per cent.

ABS figures showed the consumer price index rose 2.8 per cent in the September quarter - a reading within the Reserve Bank’s target band of 2 per cent to 3 per cent. However, the RBA’s preferred underlying measure of inflation remains outside the central bank’s target band, and most economists believe the RBA is unlikely to cut interest rates until early next year.

Online shopping sales have soared up 21.2 per cent to $2.4 billion from the previous trading year. The Disney collectable promotions drove an increase in profits in addition to online sales of 23.6 per cent, and the Petstock acquisition in January has yielded an increase in sales of 5 per cent.

Yet, customers at Woolworths are trading down to home brand items and specials, which has affected sales figures. Woolworths said sales of own and exclusive brands were up 6 per cent in the quarter.

Woolworths chief Amanda Bardwell says customers are increasingly shopping around for the best bargains. Credit: Renee Nowytarger

“Right now, what customers are going to hear from us is what is happening in terms of value, promotion, specials,” Bardwell said.

“We’ve seen customers shift more into specials and that’s been a pattern that we’ve seen across a number of key categories for us. That is absolutely a factor which has an impact on our margins.”

Woolworths and Coles are set to fight allegations they tricked customers with fake discounts, claiming the cases against them are misconceived. The Australian Competition and Consumer Commission claims the companies violated consumer law by misleading shoppers on hundreds of popular supermarket items with their “Down Down” and “Prices Dropped” campaigns, and illusory discount tactics.

Despite these claims, research from the e61 Institute indicates that Australian shoppers are likely to keep going back to the same supermarket.

Last week, Woolworths’ barrister told the Federal Court that the ACCC’s case was “misconceived.” Bardwell would not be drawn on the specifics of the case on Wednesday.

“We’re engaging with the ACCC on a number of factors right now. Yes there is the court case before the court, so I highly respect that process and will not make comment on that specifically,” she told journalists.

The blockbuster court case comes as the supermarket industry is also facing scrutiny from an ACCC inquiry into competition in the sector, amid political debate over “gouging.”

“There is also the ongoing grocery review that is underway, and we continue to engage all the way through in a very constructive way in that review,” Bardwell said. “As I said before, we will be no doubt learning things that come out of that.”

Woolworths’ update also showed Big W sales were down 0.9 per cent in the quarter, which the company attributed to lower average selling prices and customers trading down to lower-cost options.

Bardwell, who previously ran the supermarket giant’s ecommerce and digital business Woolies X, has been chief executive since the start of September. She replaced former chief Brad Banducci, who announced he was stepping down earlier this year.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.