Woolworths rides a structural shift in retail

Woolworths boss Brad Banducci says Australian retail is undergoing major change, as online sales are boosted in the pandemic.

A sign of the times: a masked shopper at a Woolworths supermarket. Picture: Getty Images

Woolworths boss Brad Banducci says the nation’s retail sector is going through a cyclical and structural change alongside the pandemic, boosting sales across digital platforms as households buy more fresh food and cook at home.

The spike in activity was witnessed in the fourth quarter as scenes of people stripping products from supermarket shelves left many homes with crammed pantries, and Woolworths with a giant 8.9 per cent leap in sales, with the buying spree still evident in July and August.

Woolies is swallowing as much as $50m a month in coronavirus-related costs, but Mr Banducci said this would be more than offset by a new way of living for his ­shoppers.

“Obviously with lockdowns you consume more at home which drives sales, but one thing we are certain of is that the proportion of home delivery food sales is not going to go down. We think that will continue to go up as people get more accustomed to using it,’’ Mr Banducci said, unveiling a 56.7 per cent fall in full-year profit to $1.165bn in a result hit by one-off items and restructuring charges.

“One of the things that has happened is people getting into a really nice habit of eating at home. It’s healthier.

“For our food customers not only are they buying more fresh food, they are shopping less but (with) bigger baskets, moving from weekends to weekdays.’’

The health crisis touched every part of the sprawling Woolworths retail business, robbing sales at its hotels arm but elsewhere proving a boon by boosting sales at supermarkets and liquor stores, while its general merchandise chain Big W turned profitable for the first time in four years.

Woolworths CEO Brad Banducci with a delivery truck. Picture: John Feder

The statutory profit was dragged down by more than half as it cycled a one-off gain of $1.2bn from the sale of its petrol business in 2018, while there was a raft of other costs totalling $591m, including supply chain transformation costs of $176m, reshaping the Endeavour Drinks liquor business that booked $230m in charges and paying back staff wages of an incremental $185m. The total cost of the underpaid wages is quickly heading to $500m.

Profit from continuing operations after significant items fell 21.8 per cent to $1.165bn. Revenue for the year rose 6.2 per cent to $63.675bn.

Investors will feel some of the earnings pain from 2020. The final dividend was cut to 48c a share, down from 57c in 2019, and is payable on October 6. The interim payment brings the full-year dividend to 94c a share, down 7.8 per cent.

Woolworths chairman Gordon Cairns said that, excluding the petrol sales gains and accounting for the one less week of trading in 2020 against 2019, the dividend was “in line” with the prior year, while the company said later the “normalised dividend” matched last year’s.

Woolworths was forced to invest heavily in COVID-19-safe systems and products as the pandemic emerged, which amounted to $404m in the June half alone, or 2 per cent of sales, with bills such as $105m on cleaning and protective gear and $54 on contractors and security a new cost of doing business.

But Mr Banducci said that cost had started to moderate in the first eight weeks of 2021 to $107m, or 1.1 per cent of sales, as items such as face masks that earlier this year cost almost $1 each were soon to cost as little as 8c.

“I think we will continue to finesse it down without compromising safety, so there are a lot of tech solutions on the horizon that I think will help us to continue to bring it down,’’ he said.

The pandemic resulted in shoppers switching to online shopping, helping ­Woolworths’ various digital platforms, with online sales across its divisions up 39.1 per cent to $3.523bn and now making up 5.5 per cent of total group sales, up from 4.2 per cent in 2019.

COVID-19 has changed the Woolworths shopping experience. Picture: Dean Martin

At its core Australian supermarkets business sales rose 6.3 per cent to $42.151bn, Big W reported an 8.2 per cent lift in sales to $4.1bn. General merchandise chain Big W was profitable for the first time in four years, posting earnings of $39m, from a loss of $85m in 2019, while earnings at its ­supermarkets rose 22.2 per cent to $2.232bn.

Mr Banducci said that at the company’s half-year results in February he spoke about the many challenges the communities they operated in had faced, including drought, bushfires, the White Island tragedy in New Zealand and unrest in Hong Kong.

“At the time, no one could have imagined how the rest of the year would unfold with the devastating impact of COVID-19,” he said. “COVID-19 had a material impact on the group’s financial performance for the year. After a strong first-half group EBIT growth of 11.4 per cent, EBIT growth in the second half was distorted by COVID. The closure of hotels for much of the last four months of the financial year led to a material decline in its second-half EBIT compared to the prior year.

“However, the impact of the closures was partially offset by strong sales-driven EBIT growth across our retail businesses.”

Mr Banducci said Woolworths had got off to a strong start in 2021 but there was still uncertainty due to coronavirus outbreaks.

In the first eight weeks of 2021, Australian supermarket sales were up 11.9 per cent, Big W sales were 21.1 per cent better, Endeavour Drinks had 23.7 per cent sales growth and hotels were down 31.3 per cent. Group online sales were up 84.6 per cent.

Shares in Woolworths ended up $1.11, or 2.83 per cent, at $40.38.