How Dan Murphy’s rewrote the rules

It says something about Woolworths’ changes under Brad Banducci that he’s prepared to jettison his liquor habit.

Dan Murphy's dominated big box liquor retailing.

It says something about the change in direction under Brad Banducci — and in the investment markets — that he’s prepared to jettison Endeavour Drinks, the business dubbed Woolworths’ Bunnings.

And its remarkable not just that the chief executive came to Woolworths via its liquor expansion and ran the business that he now wants to farewell.

In some respects the Endeavour Drinks business has been even more successful than the all-conquering Bunnings hardware business built by its erstwhile supermarket rival Wesfarmers.

From a standing start with the purchase of the original Dan Murphy’s in 1998, Woolworths has snagged 52 per cent of the $15 billion packaged liquor market.

Successive CEOs and pubs partner Bruce Mathieson have built a drinks groups that will come to market next year with sales around $10bn and $1bn of earnings.

Wesfarmers decided to exit the Coles supermarket business last year because it wasn’t meeting the group’s return hurdles. But Woolies is ditching the higher growth business to focus on its core supermarkets business at a time when it is under sustained assault from offshore and online competitors.

Woolies is ditching the higher growth liquor business

What it says is that Woolies is judging both will be better off apart than they would be if they extended their 21 years together.

Liquor and gaming are attracting increasing scrutiny from regulators and investors who are ever more committed to viewing investments through the environmental, social and governance or ESG lens. And if they see something they don’t like, that can result in fewer or smaller institutional shareholders and shares of the company trading at a discount

Last month Liquor and Gaming NSW began investigating complaints about practices at two pubs operated by Woolies’ 75 per cent-owned ALH Group involving staff plying patrons with free drinks to encourage them to play longer at the pokies.

The prospect of Woolies being free of that kind of brand damage — even if it is still a year away — gave the fresh food people their biggest one day rise in a year, with the shares rising 89c to $33.82.

It’s partly an accident of local licencing laws that Australia has supermarket-sized liquor stores owned by, well, Australia’s biggest supermarket operators.

It’s part of that same accident that they also ended up in the pubs business, running bars, restaurants, pokie dens, and even accommodation.

Barred from selling liquor in the supermarket aisles and unable in some states to get bottle shop sites without owning the pubs to which their licences were attached, Woolworths and Coles went on a buying spree.

Coinciding with the spread of big box so-called category killers like Bunnings, Toys ‘R’ Us and Officeworks and the spread of poker machines, that late 1990s and noughties spree delivered the supermarket duo two-thirds of the packaged liquor market, turned them into the country’s biggest publicans and, in Woolies case, the third biggest pokies operator behind casino owners Crown Resorts and The Star.

Winemakers reacted to Dan Murphy’s dominance

The Endeavour Group that will be created by merging Endeavour Drinks and ALH will own 1500 BWS and Dan Murphy’s bottle shops, 327 ALH hotels and 12,000 poker machines spread across 286 of those hotels as well as vineyards and production facilities.

Along the way the business has changed the dynamics of the wine industry. Australia already boasted a number of sizeable winemaking groups including BRL Hardy, Penfolds and Pernod Ricard when Woolworths entered the fray.

The creation of a national chain with massive buying power wrested the pricing power away from producers, particularly smaller family-owned houses that wanted to sell through the retail giant.

Industry body Wine and Grape Australia says that far from driving more consolidation in the industry it has made small makers focus on tourism, direct sales via online and cellar door and on exports.

Meanwhile, Banducci hopes to make the most of some of the more valuable bits that have been created from having those businesses under the Woolworths tent. He says there is an “enormous” opportunity to have a better integrated online offering of food, wine, beer and spirits.

While planning to retain a stake in Endeavour, Woolies also hopes to partner with it to make the most of platforms including its rewards program, customer data and supply chain systems.

So it’s not quite last drinks.