Bed Bath & Beyond Inc. (BBBY) CEO Mark Tritton on Q3 2021 Results - Earnings Call Transcript

Woolworths Group Limited (OTCPK:WOLWF) Full Year 2022 Earnings Conference Call August 24, 2022 8:30 PM ET

Company Participants

Brad Banducci – Chief Executive Officer and Managing Director

Stephen Harrison – Chief Financial Officer

Natalie Davis – Managing Director-Woolworths Supermarkets

Pejman Okhovat – Managing Director-BIG W

Conference Call Participants

Michael Simotas – Jefferies

David Errington – Bank of America

Shaun Cousins – UBS

Bryan Raymond – JPMorgan

Tom Kierath – Barrenjoey

Adrian Lemme – Citi

Grant Saligari – Credit Suisse

Ross Curran – Macquarie

Lisa Deng – Goldman Sachs

Richard Barwick – CLSA

Craig Woolford – MST Marquee

Ben Gilbert – Jarden

Phil Kimber – E&P Capital


Thank you for standing by and welcome to the Woolworths Group Limited FY 2022 Full Year Earnings Announcement. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Brad Banducci, CEO and Managing Director of Woolworths Group. Please go ahead.

Brad Banducci

Good morning everyone and welcome to the Woolworths Group’s F’22 full year results briefing. Joining me today are our Chief Financial Officer, Stephen Harrison, who will present our F’22 financial results a little later; Natalie Davis, Managing Director of Woolworths Supermarkets; Amanda Bardwell, Managing Director of WooliesX; Spencer Sonn from New Zealand, looking after our New Zealand business; Pejman Okhovat, Managing Director of BIG W; Claire Peters, Managing Director of B2B and Everyday Needs; and Bill Reid, our Chief Legal Officer.

Before I start the presentation, I would like to acknowledge the traditional custodians of the land on which we meet today, [indiscernible] and I’d like to pay my respects to elders past, presence and future. I will start today’s presentation with an update on the Group performance and our progress on our strategic agenda, including the activation of our food and everyday needs ecosystem. Steve will then present our financials before handing back to me to finish with current trading and outlook before handing over for questions.

For those of you who are following via our management presentation, I’ll just call out that I’m going to start on Slide 4. But let me go into the high level summary of the year and willing to sum the detail. F’22 marked the third year of navigating COVID related challenges, as I’m sure you’re all aware. We’ve started the year with the Delta outbreak with Q2, particularly impacted by disruption and inefficiencies across our supply chain and stores and rising levels of team COVID related absenteeism.

At the beginning of H2 Omicron began to take hold with the half made even more challenging due to inclement weather and flooding events. Combined this led to an inconsistent customer experience and financial performance below our aspirations, particularly in H1. Importantly, we had a strong Christmas trading period and the Group’s operating performance, financial performance improved over H2 with a gradual return to some more stable operating rhythm. On a continuing operations before significant item basis, H2 group sales increased by 10.5% with improved momentum in all segments other than New Zealand Food. Excluding PFD and Quantium, group sales increased by 6.2% and group sales for the full year grew by 9.2% to $60.8 billion or 5.1% excluding PFD and Quantium. Group EBIT in H2 increased 8.1% driven by 9.7% growth in Australian Food and this resulted in a full year EBIT decline of 2.7%, much improved on the 11% decline in H1.

Just moving on to Slide 5. We presented these charts, if you’re looking at Slide 5, which just show you our outbound service level and absenteeism just as a way of contextualizing the operating challenges that we have had and still to some extent continue to have. On the left hand side, you see our DC outbound service levels, which have improved somewhat relative to the low point in February and March, but remains well below pre-COVID levels and even F’21. As hopefully everyone understands this doesn’t equate to 20% of products not been available to customers in our stores, but it does give you a sense of the impact to our suppliers and supply chain from COVID related disruptions. Team absenteeism remains an issue throughout H2 in store above last year and pre-COVID baselines. We expect to see improving trends in F’23, but we are not yet back at a normal operating – in a normal operating environment.

Let’s move to Slide 6. This gives you a sense of our customer experience. And invariably, given what I showed you on Slide 5, our customer experience was not as good as we would have liked during the year and this was reflected in our F’22 customer advocacy scores with all businesses down in the prior year with the notable exception of BIG W. Despite this, the effort and commitment of our team cannot be questioned. They have shown remarkable resilience over the last three years and responded and adapted quickly as each new challenge has presented itself. I and the Group execs are particularly proud of the fact that our customer metric measuring whether our customers felt cared for remained strong for all Group businesses. And I’d like to thank our team for their efforts and for continuing to put customers first.

On Slide 7, F’22 was another record year for digital and eCommerce with Group eCommerce sales increasing 39% compared to F’21 with eCommerce penetration of 11%. Since 2017 Group eCommerce sales have increased at a CAGR of 42%. Customers are also engaging with our websites and apps more frequently with an average of over 19 million customer visits per week across our Group digital platforms during the year, up 24% over prior year. Growth rates slowed a little in H2 as customer behaviors began to normalize, the sales and penetration rates remain well above pre-COVID levels. Pleasingly, we delivered good profit leverage in our Australian Food and BIG W eCommerce businesses. And while New Zealand was impacted by higher team cost due to COVID, it remained profitable at an eCommerce level with a good underlying run rate. Across all of our eCommerce businesses, we are becoming ever more efficient as our scale increases and as we continue to optimize our processes.

Slides 8 and 9 just give you a sense of our progress against our strategic priorities. And I won’t go to them in detail, but a few highlights for me. The launch of our new group brand in February to better reflect our purpose of creating [indiscernible] was very important moment for us. We are very committed to being a purpose-led organization, and it gave us the opportunity to reengage with our team on our purpose of working better together to create better experiences for a better tomorrow. Another one that I think is very important has been the reimagination of our supermarkets and our latest concept stores in Port Macquarie, which is a core store Miller (Value) store and Double Bay and UP store have given us enormous learnings on how we take our core value and up segmentation forward. And then the roll out of RT3, which is a fundamental change to rostering and task management in our business. And it’s a key foundation, both for a better team experience, but also our productivity agenda in the years ahead.

On Slide 10 is just a reminder of our Food and Everyday Needs ecosystem with each segments working to reinforce the other with the customer first, team first focus at the core. And we’ve made pleasing progress on activating our ecosystem, which I just wanted to briefly talk through in the next few slides. Firstly just going into retail platforms, Primary Connect of course is our key retail platform and we materially progressed our multi-year supply chain transformation during the year, this despite the disruptions I talked about earlier. Amazingly, we commissioned six new facilities during the year, including Heathwood Chilled & Frozen DC in Queensland, which opened ahead of schedule in H1 and a new state-of-the-art Auckland Fresh DC, which opened at the end of the year in June.

In addition, MSRDC starting to deliver for us, our automated regional DC down in Melbourne, delivering 2.2 million cartons per week in H2. In July of this year, we opened a new CFC customer perform center in Rochedale, Queensland, which is the first in our network with an attached Direct to Boot. And just this week, we are opening our latest CFC in Caringbah, Sydney, which will also have an attached Direct to Boot and I can’t wait to go and see it hopefully on the weekend. Construction is underway of on our automated CFC in Auburn, together with our partner Knapp, a new regional and national distribution centers in Moorebank, Sydney.

On Slide 12, we just wanted to show you our increased scale across digital eCommerce, loyalty and media. And so this just gives you a sense of where we we’re at. Now, the slide is focused on Australia, but we are making good progress in all of the same areas in New Zealand. Industry benchmark in all of these areas is very difficult, but hopefully it just gives you a sense of relativity and where we’re at on each one of the things, just to call out a few highlights on this page. We are increasingly one of Australia’s leading digital platforms as more and more customers use our websites and apps every week, whether to purchase groceries, pre-plan what they’re going to shop in store, prepare a shopping list or search for a recipe or weekly meal inspiration.

In terms of eCommerce, we are the largest 1P eCommerce retailer in Australia today and of course our aspirations have grown our 3P marketplace presence. And we’re trying to do that both through Everyday Market, which we’ve been incubating inside our business and more recently the deal we’ve announced with MyDeal. As value has become increasingly important to our customers, we recognize the imperative to continue to evolve our Everyday Rewards program and we’ve added over 620,000 new members in F’22 with 13.7 million members at the year end. And our increasingly personalized relevant and timely customer offers have led to about 2.5 million customers activating boosts per week in our stores in the month of June.

Just in terms of retail media, there’s a slide on the next page Slide 13, which just gives you a bit of context where we are with our retail media business, Cartology, and we see this as obviously a critically important platform for our group. And we’ve had very strong growth from Cartology since its inception with revenue doubling since F’22. And if you look at the slide or you have it near you, you’ll see that it’s – we’ve grown retail media across the board, but in particular in the context of digital. And in F’22, Cartology revenue increased 29% supported by higher traffic in particular, as I said, to our digital properties and the launch of new Cartology media products.

The team also delivered over 8,000 campaigns in the year across all channels and expanded across the Group, including completing its first full year in New Zealand and preparing for the launch of BIG W in F’23. In July, we announced our proposal to acquire 100% of out-of-home media specialists, Shopper Media Group. Shopper currently operates over 2,000 screens in over 400 shopping centers, which will be highly complementary to our current in-store screen network. Subject to ACCC approval, we anticipate completion to occur by the end of this calendar year.

Just on Slide 14, keeping on the thematical platforms in this – in June of this year, we formalized and strengthened our partnership with Quantium and lifted our shareholding to 75%. At the same time wiq, or Q-Retail was originally known, was established and wiq brings together the best of Quantium and Woolworths Group’s collective data science and advanced analytics capabilities to deliver on our aspirations in this area. The team brings together more than 600 professionals and they’re working on over 20 high priority use cases across the Group with early progress already been made on optimizing promotional effectiveness and personalizing customer offers. In addition to this, we are also working on tailored ranging at a store level and enhancing operational efficiencies both in-store and online.

On Slide 15, as I talked about earlier, we announced our intention to acquire 80% of online marketplace MyDeal. MyDeal is an established marketplace platform with approximately 1 million customers of 1,900 sellers and more than 6 million products on the site. It also includes a range as of last week of BIG W products, which we officially launched. The share of non-food retail sales via marketplaces in Australia is well down in other mature countries. And the addition of MyDeal to the Group adds – expands our marketplace ambition, in particular in furniture, homewares and an extended range of Everyday Needs.

On Slide 16 actually a real epiphany for us and the highlights in the challenges of COVID was that our customers told us that in addition to being kept COVID safe and us delivering great value for money, they wanted us to remain focused on creating a better tomorrow, and we were able to make good progress on our sustainability agenda during the year remained our Gold Tier status as part of the AWEI Australian LGBTI Inclusion Awards for the fourth consecutive year and we also made really pleasing progress in particular on team safety with our total recordable injury frequency rates down 9% compared to the prior year. We also continued, of course, our focus on the planet with our scope 1 and 2 emissions down 31% since 2015. And on the product side, we spent a lot of time working to improve the quality of data and working on plastics and how we can take plastic out of our business with over 10,000 tons of virgin plastic removed in Australia through targeted reduction in its initiatives equivalent to a 22% reduction relative to the 2018 baseline. A lot of work still to be done yet as you know and we will be releasing our sustainability report later next week.

I’d now like to turn over to Steve to talk about our financials, and then I come back to talking about our priorities given we are now in the ninth week of the new financial year. Over to you, Steve.

Stephen Harrison

Thank you, Brad, and good morning everyone. I’ll start today with the F’22 Group results summary on Slide 19, and I’ll focus my commentary on continuing operations before significant items, which adjusts for the Endeavor Group in the prior year and the impact of the demerger. Group sales increased by 9.2% on the prior year to $60.8 billion, benefiting from the first time inclusion of PFD and the acquisition of Quantium in June 2021. Excluding PFD and Quantium, F’22 sales growth was still strong at 5.1%.

Group EBIT was down 2.7% to $2.69 billion reflecting the extremely challenging operating environment in F’22, given the significant impact of supply chain disruptions, product shortages and absenteeism. I will talk further about this on the next slide, but half two performance was a strong improvement on half one with H2 Group EBIT up 8.1%. Group impact to the year was up 0.7% to $15.14 million due to lower interest and tax compared to the prior year. And I’ll discuss our dividend later in the capital management section.

Turn to Slide 20. On this slide, we’ve laid out our full year and half two performance by business unit. Half two performance improved significantly compared to half one and I’ll focus primarily on the second half as we discussed the first half performance extensively in February. In half two of F’22, Australian Food’s operating performance improved materially, sales increased 5.6%, with EBIT up 9.27% – sorry, 9.7% to $12.03 million.

H2 benefited from higher inflation, a recovery in store originated sales as well as a gradual improvement in our operating rhythm over the second half. The strong second half EBIT growth resulted in a small improvement in Australian Food EBIT of 0.3% for the year. Growth in Australian B2B is distorted somewhat by the acquisition of PFD and the first time inclusion of Endeavour Group’s partnership revenue. PFD had a successful first year as part of the Woolworths Group with momentum improving over the course of F’22 as restrictions eased.

Our other B2B businesses grew south on the prior year. New Zealand Food had a challenging second half as Omicron resulted in significant supply chain disruption, team absenteeism, and low stock availability. Despite half two sales increasing by 3.1%, sales momentum slowed over the half with item growth below the prior year and EBIT declined 30.8% to $116 million, slightly below the guidance we provided at our Q3 sales announcements.

BIG W sales rebounded strongly from February with Q4 sales growth of 11.9% off to an extended period of store closures in half one. Half two’s EBIT increased relative to half one, but was 23.5% below half two of F’21 due to co related costs, particularly in early Q3 when the impacts of Omicron were most significant. And then finally, other net costs, which includes the Group’s – sorry, includes Group costs and our share of Endeavour Group earnings was $123 million broadly in line with our guidance of $190 million excluded in the Endeavour Group contribution.

The reduction in other compared to the prior year was due to our share of Endeavour Group’s impact and the full year contribution from Quantium somewhat offset for higher COVID costs, including the team, thank you both. The F’23 excluding Endeavour Group, we expect other costs to be approximately $220 million, reflecting increased investment in advanced analytics in F’23 with the benefits from these costs largely accruing to the business units from initiatives, such as NextGen promotions.

On Slide 21, we’ve outlined comparable sales by business unit and the impact of COVID restrictions. We’ve included this slide in our recent presentations to help provide some context on what we’re cycling on a quarterly basis. Given the varying impact of COVID over the past three financial years, we’re now showing three year average growth rates for Q3 and Q4 to better reflect a pre-COVID baseline. In Q4, three year growth rates increased in each of Australian Food, New Zealand Food and BIG W, as we ended the year with good momentum.

Looking forward, consistent with our current trading numbers provided, Australia and New Zealand Food are cycling very strong growth in Q1 due to COVID restrictions in Q1 of F’22. Whereas BIG W is cycling a less challenging base due the impact of store closures in the prior year.

Moving to COVID costs on Slide 22. In F’22 Group COVID costs were $323 million or 0.5% of sales. And we’re broadly in line with COVID costs of $332 million in the prior year. Following the peak in Q2 at 0.9% of sales, COVID costs moderated over the remainder of the year with COVID costs of $18 million or 1% – sorry, 0.1% of sales in Q4. COVID costs are also shifted progressively from the Eastern Seaboard of Australia to Western Australia and New Zealand over the half where the impact of Omicron was felt later with the majority of the COVID costs in Q4 incurred in New Zealand Food.

We’ve consistently stated that subject to health, the health and safety of our customers and team, we did not expect COVID costs to be permanent. So we’re pleased to see the reduction in COVID costs in Q4, and we would expect direct COVID costs to continue to reduce in half one of F’23, assuming no further COVID outbreaks or requirements to return restricted COVID restrictions.

Moving to our balance sheet metrics on Slides 23, average inventory days from continuing operations declined by one day compared to the prior year. This was due to high sales during the year in our food businesses, despite the increase in inventory over half two to mitigate supply chain disruptions. Group average inventory days benefited from mixed following the de-merger of Endeavour Group, which typically carried higher inventory days than our food businesses. The calculation of ROFE has been impacted by the de-merger of Endeavour Group.

The continued operations ROFE has also been normalized to remove Endeavour Group in the prior year, but ROFE now includes our 14.6% investment in Endeavour and its impact contribution for the year together with the first fully impact of PFD and Quantium. F’22 ROFE was 13.7%, a decline of 3.1 point, reflecting higher funds employed from our acquisitions and longer dated capital investment profile and largely flat EBIT given the impact of COVID across the Group in F’22.

Moving to Slide 24 and our capital management framework, we’ve included a recap of our capital management framework and called out some highlights. In F’22, we generated operating cash flow before interest and tax of $4.8 billion, which was up $4.2 billion on a continuing operations basis. This was largely allocated to $3.2 billion of dividends and capital returns to shareholders together with growth in CapEx and investments in new businesses. I will touch on some of our other capital management highlights on a later slide.

Moving to our cash flow on Slide 25. EBITDA from continuing operations increased by 3.1% to $505.2 million driven by Australian foods at EBITDA growth. Cash flow from operating activities before interest and tax was up 4.2% to $4.8 billion when we exclude Endeavour Group in the prior year. Investing activities in the current year, primarily related to CapEx with the increase versus F’21 driven by the acquisition of the 65% interest in PFD Food Services.

Interest payments below the prior year due to the de-merger of the Endeavour Group together with the benefits from refinancing borrowings at lower interest rates during the year. As a reminder, following the de-merger in June last year, Endeavour Group repaid into company loan of $1.7 billion to the Woolworths Group, which was used to fund the majority of the $2 billion off market buyback we completed in October.

Cash realization ratio after adjusting for the non-cash gain on the Endeavour Group de-merger was 86%, which is below our target of 100%. This was impacted by a decision to invest in inventory, resulting in higher working capital and non-cash outflows of $235 million and higher cash tax paid relative to the P&L charge, due to F’22 tax payments, including Endeavour Group earnings from F’21. Our effective tax rate was unusually low this year due to some one-off factors and going forward, we would expect it to be approximately 29%, all things being equal.

Moving on to Slide 26 and a quick overview of CapEx, operating CapEx for the year was $1.9 billion. This was marginally below our $2 billion guidance but up on an underlying basis compared to F’21, after excluding the Endeavour Group. The increase in sustaining CapEx compared to the prior year, largely reflected supply chain investments and renewals with the increase in growth CapEx, largely reflecting CapEx related to supporting our growth in e-commerce. In F’22, CapEx also included $150 million of projects with strong sustainability benefits, such as refrigeration and solar.

Moving to Slide 27, today, the board has approved the final dividend of $0.53 per share which is up to $0.02 per share on F’21 when the Endeavour Group contribution is excluded. This brings the full year dividend to $0.92 per share, up 1.1% versus last year, excluding the Endeavour Group. This equates to a full year dividend payout ratio of 74%, which is within our 70% to 75% target payout ratio.

Then moving to Slide 28 and our debt and funding – the Group sources of funding and liquidity remains strong. The total committed undrawn facilities of $2.5 billion in addition to cash. We successfully completed the issuance of $1.6 billion of one-off sustainability linked bonds in the first half. And in Q4 refinance 1.25 billion of the bilateral revolving bank facilities. We remain committed to solid investment grade credit ratings in a significant head room under our current ratings of BBB from S&P and Baa2 from Moody’s with a leverage ratio at the end of F’22 of 3.1 times when measuring net debt to EBITDA.

Thank you. And let me hand it back to Brad.

Brad Banducci

Thanks, Steve. And moving all the way to the back of the document to Slide 46 and just talking about the first eight weeks. Sales in the first eight weeks of F’23 for Australian Food were down 0.5% has recycled two consecutive years of elevated sales growth. However, three year CAGR remained strong at approximately 5%. Team absenteeism, high chain disruptions continue to be above pre-COVID levels. And we are seeing cost pressures in other areas as well, but subject to no further material COVID restrictions, COVID related costs should decline substantially in F’23 compared to F’22 as customer behaviors continue to more normalize. And the operation rhythm of our business continues to improve. Inflation is beginning to impact all aspects of our customer shop. And we’ve seen a gradual change in customer shopping behavior.

We recognize the cost of living pressure has been experienced by our customers and our commitment is for every Woolworths customer and team member to be able to get their Woolies Worth. We’re continuing to work hard on tailoring store ranging, including own brand, as well as our prices dropped low price and low price freeze and promotional programs, both in store and buy everyday awards, deliver value for all of our customers.

Operating conditions in New Zealand remain challenging sales growth declined by 1% in the first eight weeks, but was up 4% on a three year CAGR basis. Due to inflation, materially higher costs and a very competitive trading environment EBIT for F’23 is currently expected to be materially below the prior year. And we will provide a further update at our Q1 sales.

BIG W sales on the other hand have been very strong in the first eight weeks, increasing by just over 30% with a three year CAGR of 10%. We believe that the value, quality and convenience that BIG W offers will be a strength in the current environment. Balancing the needs of our stakeholders is more important than ever in this environment. And we remain committed to offering great value to our customers. At the same time, recognizing the cost pressures been felt by our suppliers, rewarding our team fairly and delivering an improved financial performance in F’23 for our shareholders.

I will now turn the call over to the operator for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] The first question comes from Michael Simotas from Jefferies. Please go ahead.

Michael Simotas

Hi, good morning. The first question from me is on the productivity benefits that you are looking to achieve in FY2023 after three years of delay. Can you talk a little bit more about the source of these and how should we think about the FY2023 year? Is it just sort of going back to where you would have been and kind of starting again, or do you think you’ll get a little bit of a catch up and any help you could give us on the potential quantity of these would be helpful?

Brad Banducci

Sure, Michael and I expect quite a few questions on CODB. So I’ll dive into the specific, but just I guess the one thing I just wanted to reference as you look at our CODB for 2022, it really is an all-in CODB. I think there’s become a bit of a fine arts on classifying COVID costs and first order, second or third order, the investment required in digital or e-commerce, supplier disruption of productivity, you seen a very, all-in cost of doing business, which we think and we are working very hard of course, to improve on the go- forward. Then if I come into productivity, the number one priority for us is to be consistently good on item based productivity in our business and to get ourselves to, or ahead of where we were pre-COVID.

And the name of the game in F’23 is item based productivity because what we’re going to start seeing is a scenario where the top line will be somewhat driven or more driven than not, or by inflation but with items flat or decline. And then you started to see that in Q4, if you look to New Zealand Food and Australian Food, so item productivity’s key. We always talk about our business being driven by items, but we need to ensure that we get and are consistently good on that in every aspect in our business. And that hasn’t been the case in the last couple of years for good reason, with all the disruptions we’ve had, whether it’s – our cartons per hour in our DCs and our top pull rates in our stores, our scan rate at the front end of our stores or whatever the case may be our pick rate for our e-commerce business per hour and so on.

So that is the biggest opportunity. And when we look at our underlying arts and productivity metrics in 2022 and 2021, for that matter, there’s enormous upside that sit there for us. On top of that, then you get into the more traditional programs of how we improve our underlying processes and bank the benefits of that. And of course, there is a lot of work underway there. As I think we were quite avert in the middle of COVID, it was hard to progress those. With all the disruption we had, you just didn’t have a stable foundation of which to do those.

And again there are active programs, as you might imagine, across all aspects of our business. In our supply chain, really we have commissioned a number of new sites. We just need to now effectively wrap those up and achieve what we would like to achieve. We have made good progress on MSRDC, but it was still been patchy. We just want to be consistent on the 2.2 million to 2.4 million crossed since a week there. We want to lift our Melbourne Fresh DC to a consistent 1.5 million to 1.7 million. We want to start seeing the benefits that we know are available to us in Heathwood, same is going to be trained Auckland Fresh our new Hilton facility in New Zealand. At the two facilities, we just transitioned back into Woolworths to Primary Connect for BIG W. So we can just see enormous opportunity and benefits there. We also working very hard in collaboration between Woolworths Supermarkets and Primary Connect to think through the number of deliveries we do to store. There’s enormous pressure in transportation side of the business, not only fuel, but driver availability.

And so we are just been very thoughtful on rosters and we’ve reduced the number of rosters very successfully in Victoria, which leads to better low building logic for the pallets and can create productivity in both DCs and stores. And we’re looking to roll that out across the country. And more with Supermarkets, and we can come back and talk about this more specifically later, if someone wants another question and Natalie will talk to it.

Our focus at the moment is landing RT3, which is really we’ve rebuilt all of our standards in our stores around how we want productivity to work. And then how we would like to roster. The priority in H1 is to land that we’re well on track to do that, that will then give us a very firm platform and we’ll make sure we’ve got a better right time – right person, right time, right task in this half that will give us good foundations to drive a more ambitious agenda into the second half.

Very pleased on our smart series of initiatives. ESLs have been the story of donkey – of donkey and Shrek, are we there yet? Are they ever going to work? They do work now for us. We are very pleased with them. They’re starting to become base just part of what we roll out. We can see the efficiencies that are there.

If I move into WooliesX, a lot of work’s been done in combination between WooliesX and WIC on improving process for picking algorithms of ECF as we call it on what sequence we pick items in the store has had material improvement done with our new refresh program, 15% less steps on average to pick the same basket of items, so a lot of work going into process efficiency, another big opportunity there. One of our big costs actually has been when we have to do a substitution we’ve had a lot of out of stocks. As you know, we do a substitution that was a second process we run through the store to substitute items for customers. We’re now doing that in line with the first pick. So a lot of work going on there.

In our Home Delivery business we are very successfully complimenting right efficiency, which we are starting to get, which is very exciting with point to point deliveries from our store. So we believe rights and point to point actually together give you a better outcome than either one or the other and a lot going on in that side of the business.

So I think it’s a very comprehensive program. It is all based on though, if I come back, item based productivity is the key because we aren’t uncomfortable on the sales headline number, but we need to be realistic on, as we normalize through COVID item growth will be muted at best, probably slightly negative, and therefore it all needs to come back to that foundation. If there’s a bright spot in that, it is that with a more muted item growth, it gives us the ability to really focus and land these productivity agenda that I’ve just talked through.

So happy to come back, happy for Natalie to talk to a BIG W in later question or Natalie and the WooliesX question or Pej or Claire in other parts of our portfolio. But I hopefully that gives you some color of what we’ve got going on.

And one of the key things for me, and we’ll talk about all aspects of F2023 for WooliesX is everything that we need to achieve in F2023, we started in F2022. There’s nothing we want to add to our agenda in F2023. We just want to do a better job of scaling and executing all the things that we started either in 2021 or 2022.


Thank you. [Operator Instructions] The next question comes from David Errington from Bank of America. Please, go ahead.

Brad Banducci

By the way, Michael, I think you didn’t ask two questions, but I gave a very long answer. So I think I should apologize. I’ll try to be a little bit more brief on the go forward. But over to you, David.

David Errington

Good morning, Brad. How are you?

Brad Banducci

I’m well.

David Errington

Brad, look – that’s good, that’s good. Thank you. Look, thanks for that reply, but sort of like to re-ask the question. We’re all trying to work out the latency of what you’ve got in your business when you get back to what you call normal operating rhythm. Now, the slide that you gave on Slide 5 is really interesting, but it raises a couple of issues. Absenteeism is running at very high levels, which is obviously going to cause operating rhythm disharmony. You’ve also got other cost to challenges where your DCs coming on stream, but they’re not running at the levels that you want them to.

So I absolutely understand everything that you said, but we are trying to work out – I’m trying to work out the latency of operating efficiencies in your business in terms of how much costs can we expect to come out when you do get back to that operating rhythm of normality. And really, this absenteeism, is it productivity issue now? A staff is taking the – what, where they can take a sickie whenever and it’s accepted now. Is this the new norm? So we’re trying to get an understanding to elaborate on the previous question is what does normal now look like when you get back to operating rhythm and what is the latency in your business?

Because listening to calls yesterday, you do seem to be two or three years ahead of them. They’ve got to go through their DCs. You’ve got yours on the ground. Now you’ve just got to get them to run. So if you could go and talk about the future a little bit more and give us an understanding of the earnings latency that would be really appreciated.

Brad Banducci

Thanks. Thanks, David. And I’ve got more gray hair, of course correlated with us, so commissioning a lot of these sites, so one goes with the other.

David Errington

At least you’ve got hair on it, Brad. I’ve lost a lot on it.

Brad Banducci

I think on all of these things, if you look at – if we showed you the first half numbers versus the numbers now, we’re in a much better position. We’ve been working hard really since our very painful moments in early December, when we came to you and talked about our earnings challenges of trying to get into the right operating rhythm. And on average, the trend lines have all improved, there are just moments when you still have challenges and it reminds you of the fragility that’s out there.

And so when I look at that absenteeism David, which sort of sits there at 5.3% versus 4% before in the first half, we had peaks inside our stores where it was 10% to 15%, in Sydney it was 20%. If you look to the first half of F2022, we hired over 60,000 people into Woolworths. We normally hire 30,000, this year we’re hoping to hire 20,000. The cost of actually training that team, getting them up to speed, it’s hard to quantify, but is very material. So I’m going to say that’s a much better number than we had before.

We had warehouses with absenteeism of 30%, we’re down at maybe 15s right now. The difference in that in having an experienced team in the store, I couldn’t actually calculate it because it’s hard, but our contractor absenteeism will turnover was running close to 40%, it’s now under 20%. So we’re working hard to get it better, David. It is on average getting better. I just want to be realistic, I hoped we would have it where we wanted it by June.

But now we are sort of looking for October so we can really lock and load for Christmas. But I wouldn’t – what I overplayed it is getting better. The peaks that you’ve seen in June on absenteeism really do correlate with the peak of winter with flu influenza and then COVID BA.2 or whatever it was. And so there is a lot of noise there in it.

So we’re not confident we’ll get to the right place. And actually one of the key things for RT3, which Natalie can talk to later is we want to hire this people and give more hours to our casual and our part-time team. And so that’s a big flex for us, which will really help us because it will just help us address the underlying efficiency of our team members. So our issue is not absenteeism, our issue is someone who doesn’t know our business. It does take them a while to get up to speed. And that’s why you said in the item productivity numbers in my mind.

If I come back to our DCs, and I think we said this in December, I know we said it in February. You wouldn’t have wanted to commission what we commissioned if you knew what lay ahead with the disruptions that we were going to go through. Thank goodness we did it because we did it. And now our focus is on the ramp up. Again, on average, we’ve seen a really positive ramp up into those DCs and have the capacity we need on the go forward.

One of our biggest issues historically has been we’ve had to use overflow facilities going into Christmas, causing us enormous issues in particular in Melbourne. And that caused a whole lot of transportation fragmentation. We are now working very hard to get all of our product into our DCs, stopping to use or reducing our reliance and overflow facilities and been ready to actually have a great service level to our stores, hopefully for Christmas, great on shelf availability for Christmas, which we didn’t have last year.

And we think that can make a big difference. When we look at our first year sale – first half sales, we feel we lost a lot of sales through not being in stock. And so we see a lot there. I can tell you Primary Connect for the first time in maybe 24 months hit all its productivity objectives for us in July. And I think that’s great testament to the team. And I’d say something about stability now.

July doesn’t make a year like eight months done, but eight weeks don’t make a year, but we are starting to see the momentum come through. So David, as you know the virtuous loop in retail is based on actually getting good item based productivity in a world where there’s a slight bit of inflation that is what we are hopefully planning for. There’s no doubt there going to be challenges during the year. We’re experiencing them right now in New Zealand. But we remain optimistic that we can slowly see these things come together.

If our team is stable, which they increasingly are, if we get predictability into our customer shopping patterns, which we increasingly seen, we start seeing the benefits. And that is true even in the eight weeks of this year. But if you and I walk to store right now, or Natalie walked to store with you, we’d be going up and down the toilet paper, I’ll still somewhat despair and we’ll be in the cat food section, wondering what’s going on there. There will still be bad days in frozen vegetables in our stores and so on. So, we don’t want to kid ourselves and there’s still some work to do.


Thank you. The next question comes from Shaun Cousins from UBS. Please go ahead.

Shaun Cousins

Great. Good morning, Brad and team. Maybe just talk about gross margins in Australians food, please. Can you just with that where are you at with stock loss and maybe the burden sort of higher meat costs, if that’s easy at all? And then maybe just how you’re getting a benefit in dry grocery, because there appears a policy almost based on trade feedback of seeking higher margins to accept a price rise, maybe it’s to equalize margins within a category. But can you just talk a bit about some of the components of your gross margin particularly in the second half, please?

Brad Banducci

Thanks. Thank you, Shaun. As with all – the reason we’re in retail is there’s always positives or tailwinds and there’s headwinds, and that’s the way I would think about 2023 and that’s the same case. Stock loss first though, Shaun we had a very strong year in stock loss in particular in the first half of 2022. Stock loss run into about 2.5%, feel free to correct me, Steve in Australian food. And there’s some risk in stock loss in 2023 in particular, we sure what we call stock adjustments, which often are missing items. And we know that there is going to be some risk sitting in that part of overall loss.

We continue to work hard and make good progress, which we are on our fresh loss, which is product as you know that we need to dump because it doesn’t hit our fresh expectations, but the stock adjustments mature in long life. There is a risk of more stock adjustments. We’re realistic about that. We’re closely monitoring it. We’re not seeing it yet in a macro sense, but it is a risk for us and we need to keep right on top of it.

So we see some negative there. If I look at margins in general and I said this in the media call and it is true in a macro sense, in the second half of this year and to some extent we might see it in 2023 the expansion in margin in the second half – first half was stock loss. The second half is really about mix Shaun and a mix benefit that we are seeing. It’s not through us putting our prices, we’re in a good place in a price sense and delivering value for our customers. But it is actually just mix.

And so logically, as you would expect, as we’ve seen vegetable prices increase for fresh vegetables and we’ve seen beef prices hit extraordinary highs. We’ve seen a customer shopping more of our long life in our frozen and chill business and it is a slightly higher margin business as ESL come through. Importantly, you’re also seeing come through there, the early benefits from us in our investments and collaboration between Woolworths’ markets and work on promotional effectiveness.

Our biggest use case, as you would know, given we spend $3 billion on promotions is to improve the promotional effectiveness of what we do to make sure we deliver for our customers, but also make sure we are investing forcefully. And we made really good progress on that in the second half, which was a big – one of the highlights for us and is a massive opportunity and a massive area of focus, as you might imagine, going into this year.

The third part of one question, this is how you get three questions in one, I guess, Shaun is coming back to, do we have some policy where we ask or we somehow pass on more on shelf than we accept from suppliers. We don’t and that policy on average, our cost increases from suppliers are reflected on shelf. That is not going to be true for individual products or individual categories or individual suppliers. I think 50% of the cost increases we’ve had in 2022 came from 20 suppliers. Most of those are global consumer goods companies. Most of those are in long-life sections. Most of those are – some of those would be where the product that they also increases on is below our category average margin. So, you will see adjustments pricing that as and so on. Given the prevalence has been, I say on a very small number of global CPGs where that is the situation. But there is no policy on that. What we’re trying to do is navigate that very specious balance between doing the right thing for our suppliers, except in legitimate cost increases, but also trying to deliver value for our customers. And that’s what you’re seeing going through in [indiscernible].

I think your last but really was on meat, every six months in my time, we’ve talked about, hopefully we are going to do a better job on meat the economics, and it never quite gets there. And there was no – there was no less true in the first half. Beef prices continued to go up and up. That slowly started to trend down in the last couple of weeks, given how long it takes to flow through, which is sort of somewhere between 90 days and 120 days. I don’t want to over talk, but I was incredibly challenged half for red meat in particular, and the margin pressure, we feeling there’s material, there comes a point where you can’t actually pass it on to customers. So, we are in effect having to, I guess just take a low margin there, because of way for our customers. But hopefully that will slowly rebalance over the, I just don’t want to be too optimistic on it. But hopefully that gives you some color, Shaun, and some sense of where the positives negatives are in what we’re up to at the moment.


Thank you. The next question comes from Bryan Raymond from JPMorgan. Please go ahead.

Bryan Raymond

Morning. My questions just around the changing customer behavior that you called out earlier, and in terms of the timing and magnitude of it, whether that came through much in the fourth quarter? Or whether that’s predominantly come through in July and August? And then just to follow up to that is, how you plan to respond to this changing customer behavior, and really try to capture that value shopper, which I’d expect to become more prominent over the course of FY 2023? Thanks.

Brad Banducci

Yes, thanks Bryan. It is a very discombobulated as you know right now, and actually the major driver of our very low sales number for the first eight weeks really is the normalization of the world in New South Wales. We are very indexed in New South Wales. We have a strong position there, but if you look at New South Wales and Queensland are really driving the sales number, because of what we recycling from last year and it’s very clear to us. And slightly different scenario than you would see in a Queensland or in a South Australia or WA and in the western [ph] states and so we indexed it to them.

So the headline reduction is based on what recycling from this period a year ago. And it’s amazing, we’ve all lost track of time, but I was in Berala, which is a value store and I’ll come back to it, Bryan on Saturday. But Berala was at the epicenter of Fairfield. And what happened during the Delta outbreak this time a year ago in the extreme lockdown we had in Sydney. I think we saw e-commerce go up to 20% Amanda of penetration of our thoughts in Sydney and was just an amazing time. And of course it was a sadly in the context of Victoria continuation of what we’ve seen there. So, I don’t want to get caught up in that the headline doesn’t show what we see, and this is just a normalization you see going through, but we are seeing customers normalize. The good news and what you see in our numbers, we are seeing the normalization between standalone in m malls that has been going on, in fact, through Q4 and into the first eight weeks. So, we’ve seen a rebalance where people are going back to malls. We started to see the growth more in the mall than the neighborhood.

So, we’ve seen that normalize in our business. We’ve seen the normalization come through of Delta, as I saying, the two big states. And then we always look at normalization is a Saturday bigger than a Sunday. I know it sounds crazy, but it is. And it’s back to where the normal shape was. And kids’ sport has started to happen again on a Saturday, which I think most families are hopefully happy with. And we started to see people starting to change and change the shape of their shopping. And we’re starting to see the same happen in e-commerce. So normalization is taking place.

Then coming to your question, we’ll only know in the next couple of months, what normalization means in terms of customers shopping. And I don’t know if I even like these words trading done or trading across or trading, but anyway, that words, I guess we all use them what’s happening on average. What we’ve seen today, Bryan is there are slightly less items either in a e-commerce or a physical shopper’s basket. And sure they shop a bit more frequently now that we through COVID, but that is not off sorting the decline in items in their basket. And what we see on average is it would appear that our value shoppers or what we call our traditional and favor customers are shop into budgets versus items. So that makes logical sense to us. We see them shopping to a total. And so some items are falling out of the basket.

The items that are falling out the basket tend to be the more expensive items in our thought it’s unsurprising. It is red meat or beef. It is some of our expensive, well, relatively expensive vegetables as they move into the frozen or can categories as we talk. And actually material stepped down in our business in tobacco or smoking. So, we started to see those categories, which are fresh categories reduced. So, we, our hypothesis is it has been continues to be that our value and traditional customers will shop to dollar numbers and look for value within the dollar number. And so we see that happening in the items, we also see that happening in the way people start use shopping lists in our business, we’ll start using online as a way of discipline way of budgeting what they do.

If you then move to our business, we are very focused on segmenting as, you know, core value and up stores and delivering different experiences in those and value has different meanings in each one of those stores, value in Mount Druitt, Emerton, Berala, where I was Blacktown, where we had our executive meeting week before last of value stores. Right? So, if I look in that, you’re going to see a very different scenario than you’re going to see in enough store in a Double Bay or Neutral Bay wherever the case may be. If you look in those stores we are starting to see customers being a little bit more thoughtful on value.

Now that those thought will spoil themselves. So, I wouldn’t like to underplay that you’ll see impulse categories or strong people are a lot of away from home is the sorted by material inflation hopefully you’re aware. So the headline number is big, but the physical occasions is not quite as big as the headline number. But we’re starting to see snacking is still very big. People are still doing a lot of treating themselves in those categories, but in other calories, they’re making conscious choices, and that might be the move from beef into to pork or into chicken, which would make sense to us or the move from fresh to frozen vegetables, which I know was talked about yesterday.

All makes sense. So we started to see those queues and it’ll depend on the store and what’s happening. What I’m excited about is, we have last value that we can deliver through that. And it does not necessarily need to be less at the detriment of our underlying economics, we can thread the needle if we are thoughtful and careful of delivering value for our customers and making sure we get the right balance in our economics. So as you would know, our long-life categories, our can categories are a strong part of our business. We can deliver the value we want there. So, I think we can thread, we can thread that needle. As I said, I come back to the point we made today, we’ve got to be realistic on item count that goes through the store and item productivity, because it won’t be at the GP line that we’ll be exposed, it’ll be at the item and making sure we do the right thing and do the right forecasting at that transition level. If you know what I mean.


Thank you. The next question comes from Tom Kierath from Barrenjoey. Please go ahead.

Tom Kierath

Good morning guys. Maybe just to change type on New Zealand, just be interested if you think that business is kind of recoverable and you can get back to maybe where you used to be from a margin sense. Obviously there’s some short term impacts but you got the regulator making some decisions there. So just be, yes, just be interested in how you look at that business, maybe on a three year or four year view rather than kind of the next six or 12 months.

Brad Banducci

Yes. Thank you, Tom. And I think it’s, it’s a great question. The impact as you know, economics are not based on the regulator or any of the other announcements that we seen, although we are engaging constructively, we understand the issues at that at a government or political level, they’re based on just the challenging economics we’ve had and our New Zealand economics. If we talked about what happened in Australia, as you get into a smaller environment, you get a more extreme what saw in the economics. And that’s really what we’ve seen in New Zealand.

The impact of COVID on our supply chain, into our thought has just been for as big in Australia’s double that in New Zealand. And that’s what we’ve seen, with much more import or indent driven in New Zealand on long last category. So when the shipping gets con populated into Sydney or Auckland Harbor has a software glitch, and the ships don’t want to go there because they’re going to get stuck on a 24-day weight and they divert into to LA you just end up with huge exposures. And so we’ve seen just this massive challenge having flown through our New Zealand business, and then in that market value is even more important. We actually do sit against one of the best value competitors in the world pack and save. It is just a fabulous business. It’s very competitive. And so we need to be very focused on executing relative to them. And so you start seeing the pinch a lot more and a lot more acutely there. So that’s what you’re seeing. And again we’re commissioning DCS and so on.

We, we are slightly underinvested though, to your point. And this has been our issue for the last couple of years, and we are changing that we have been underinvested in New Zealand. We haven’t done the same renewal program we did in Australia. We haven’t invested enough in our supply chain. We have actually fun enough in our digital assets is the one place I call out. We have done that. And so, that’s caught us out and if we continue to be thoughtful and executed against our investments, I’m confident we will have a good business in New Zealand in the medium term, but we need to be thoughtful, continue to deliver value, continue to constructively, engage with the government, continue to constructively, show them the reality and the fact of what we can deliver for New Zealand, which is our commitment.

I think we can get there and I’d call out if there’s positives, there are many negatives we’ve got, but if there’s positives, our last five store openings, both new and renewals have been fabulous in New Zealand. They’re delivering for the community. They’re delivering value Melbourne Fresh DC, which is collated with the Hilton multi-protein meat plants that does all forms of protein. And has the ability to deliver off standing fresh in New Zealand. It has not been done very well to date, in New Zealand, but we have the ability to really lift the bar there and drive huge value for Kiwi through giving freshness at home for long periods. And we are very committed on the digital front to continue to lead and we have an opportunity. So, we’re trying to be very transparent. We see it as a tough year. We’re not trying to yield the Gill Bilaly [ph] on this one, but do I think if we look into the midterm we have a good franchise in New Zealand and even better one. Yes.


Thank you. The next question, come from Adrian Lemme from Citi. Please ho ahead.

Adrian Lemme

Good morning guys. Look, I just wanted to explore the cost inflation a bit, so we understand the install wage inflation quite well, but can you talk about the cost inflation you’re seeing in other areas like digital, what are your hiring, intentions there and what are the unit costs going up there? And then also just, I guess, insurance in utilities, I imagine saying that might be up double digits this year. Just some overall comment, please. Thanks.

Brad Banducci

Yeah. Thank you, Adrian. I’ll talk broad and then I’ll get Steve Harrison to give a bit more color. I guess, if you looked at our second half year the results, the point I made at the beginning remains true to me, you see an all in kind of number with a whole range of different cost issues in there. Those include from our perspective, having to invest in talent retention in particular, in, in digital advanced analytics and e-commerce. So, it has been a real challenge in those areas has been a, I suppose, a war for talent, and we have had to be proactive and invest in there and continue to do, to do that that also impacted materially actually quantum by the way, which is probably most exposed, given everyone searching for analytical talent Australia, I just say the board was a great achievement for us to be rated number two on LinkedIn as the best, second, best place to work in Australia, but it cuts both ways we all of a sudden to the great irony I think of the circumstance of being targeted by a whole range of institutions who wouldn’t have historically targeted us.

And so you are seeing an all in cost, I think on our digital side there we are very happy with the science of change capacity we have in digital, and e-commerce, we don’t have great plans to step that up. We’ve already invested materially as many on this call would know, but we need to hold our fabulous team and keep them focused on delivering against the use cases that we’ve outlined. So, you’re seeing that there on the energy side actually I’ll get Steve to talk about it. We’ve been quite privileged to date, I’ll talk energy and we’ll come back to fuel transportation, fuel costs separately.

We’ve been quite privileged to date that all the hard work we’ve done, reducing our intake of energy has offset the cost increases we’ve had. We need to continue very much on that line and move to the internet of things shutting down and managing energy consumption at the store level. Our solar programs have positioned us very well, but we need to continue to work on that and Steve will talk about that in the second half.

The fuel cost is a big one for all of us in transportation, and I don’t think I’d avoid it. We’re fortunate is not our biggest cost, but Steve will come back and give you some context. I think, I was thinking very judiciously though about the number of rosters two store consolidating our DC to stop split loads, will materially help us there. But yes, lots to do, but I think pretty decent plans. The biggest individual cost we have as an increase is construction, just to be clear. And so it’s nice to be well underwear and a number of our store in your programs or DC construction, because cost of return right now as material, and we’re in a fortunate position to have got those tenders in place, but Steve a bit more color from you.

Stephen Harrison

Yes, I think you’ve covered the majority of brevity on the digital and talent front. I mean, if I think about cost inflation, clearly, the biggest cost in our business is our team cost. And so, Adrian, you reference, you’re very well aware of the inflation we have on our store teams and our teams in our DCs. That is by far our biggest area of cost inflation. We do have inflation across the board. We’ve got a procurement team, very focused on how do we mitigate that by looking at contracts, but also the volume of things that we use in our stores or across our business, or the specification to try to offset some of those cost increases.

You mentioned and referenced energy and we’re all seeing our energy bills right now. I think one of the things we’ve tried to do as an organization is have a degree of staggered contracts on energy at a state level. And so, yes, we try not to have anyone or any more than one or two states coming up in anyone particularly year. And so we typically get a degree of smoothing on some of those energy impacts, but I think it’s fair to say we will see some exposure.

But as Brad said, we’ve got a lot of focus on productivity initiatives. And have we investing capital actually really for a number of years on energy reduction initiatives, be it solar or refrigeration or HVAC or LED lighting. And so I think insurance is really not a material number for us. So, overall, we’re conscious of it. We set our teams, the ambition of trying to cover product – cover inflation with productivity, the extent that we can that will be difficult on the way just front, just given the size of the inflation next year. But we’ll be working hard to offset it.


Thank you. The next question comes from Grant Saligari from Credit Suisse. Please go ahead.

Grant Saligari

Good morning. Maybe just quick question on BIG W. I mean, a while ago, now a year or so ago, or even longer, you close some of the DCs. But I think at the time you said you hadn’t reached the sort of the productivity benefits from that. So maybe just a quick update on where you’re at in terms of resetting the cost base for BIG W and whether what we’re seeing at the moment in the second half is the cost base we should take forward, or whether there’s more productivity to come through that business?

Brad Banducci

Thanks, Grant. Good to hear the question on BIG W. I thought you were going to ask me the weighted average lease expiring term, which has moved, I think from eight to seven years when you talked about the past and we’ve very focused on that number. But on productivity, it’s sort of the same narrative as Woolworths Group. I will let Pej Okhovat talking more detail to it, I mean, covered it overwhelm in terms of what we needed to do, and we needed to go slow and thoughtfully on what we did. I guess one of the things that it’s important to reference is that as you move into eCommerce, it might be profit accretive, it drives a lot of cost into the business. And so our balance on our first half of having a very high eCommerce mix really does sort of reflect itself in our CODB. And I think, mixing the first half, Pej was sort of running them 30% or something in penetration. So as that normalizes, there’s one nice tailwind there. But let Pej talk more broadly to any of the other thematic.

Pejman Okhovat

Yes, thanks, Brad. I think in terms of answering the question, you’re absolutely right. Couple of areas to perhaps put more color on what are our supply chain and distribution costs. As we’ve transitioned through two of our main DCs from a third party to the Primary Connect and with the change in the trade pattern from half one to half two. More importantly, as it’s improved from quarter three to quarter four, we’ve seen a significant improvement in productivity of our supply chain at item costs as Brad discussed and also in our stores. So similarly we have productivity initiatives for our stores, as well as our end-to-end supply chain planning for F 2023 and also going into F 2024. So we actually see that our unit, the cost will continue to be improving pattern as we go into F 2023.


Thank you. The next question comes from Ross Curran from Macquarie. Please go ahead.

Ross Curran

Hi, team. Sorry about this. Can I go back to New Zealand again? I just would like to get a better feel as to whether New Zealand is the canary in the coal mine for Australia coming forward? Can we read consumer behavior there and how it’s shifted over the last six months? Is that what we should expect for Australia over calendar 2023?

Brad Banducci

Look, there are lots of learnings we’re trying to share both sides of the Tasman. I would say Ross fun enough. We’re in New Zealand right now is with the inefficiency in sort of the overall operations is where we were in Australia last October, November. So in an operating sense in a very broad sense of that, what they’re experiencing now is what we felt between October and November last year with us just ginormous challenges of being in stock, in store and getting the right flow through the supply, the DCs into the store. So I sort of feel that in an operating challenge, which we talked about as you know in December. So there’s lots of upside there as they get that right.

If I then come back to the customer actually we’re not trading badly in New Zealand in a customer sense. What you’re seeing is the cycling of much more extreme COVID peaks. And so if you look at the numbers, you’ll see the huge peak that we had in the first half of last year that were now starting to cycle. So actually, if you start looking for, like-for-likes over a three-year period, you’ll see just over four I think in New Zealand and close to five in Australia. So it’s just – it’s a more volatile environment, probably not surprising, a smaller country and so on. So I think that’s what you see in there.

If I then come back to how we work our economics of our business between Australia and New Zealand. New Zealand has actually had more challenges on stock loss in Australia. And I think that’s one of these opportunities I say they can come through, but both sides are very focused on delivering on price for the customers. And they can in both in the relatively the same place on doing that. And the underlying customer trend for both sets of customers is the same. So I think in a consumer commercial sense, I’m not certain, I would agree with that view that it’s a canary in the coal mine at all. Obviously, very different predictive [ph] landscapes and context in both the countries.


Thank you. The next question comes from Lisa Deng from Goldman Sachs. Please go ahead.

Lisa Deng

Hi, Brad. Just a question on actually new businesses including Cartology and marketplace. So with the two pending acquisitions, obviously, we are looking to scale sooner rather than later. So can you please talk us through, the timeline of scalability? What does it – what does scale actually mean? And the profitability profile in us getting there? Thank you.

Brad Banducci

Two very different scenarios. Lisa, Cartology is at scale and I think we referenced. We always get stressed talking about headcount. The team will know, but we – I think we even referenced to 200 people who work in Cartology. It is at scale. It is performing well for us in Australia. And we’ve been very successful in one in and out in New Zealand and we early sign of promising in BIG W although still a long way to go. So Cartology at scale shopper just really helps extend our overall proposition. We’ve known the shopper guys for a very long time actually, and always engaged with them their capabilities in helping us improve, how we manage screens is particularly attractive to us. They run a very good screen business, which is only part of the Cartology proposition.

So it really helps us both for more capabilities in screens. Most of our effort in Cartology is really going into building our digital capabilities and being – actually being providing the right products to our clients in the digital environment. And one of the major opportunities there will be in the context of marketplaces, marketplaces are very strong media platforms. You can see that in the case of Amazon, we do see that even benchmarking our colleagues at Walmart or Loblaw. And so, we’re probably not quite at scale in Cartology yet in eCommerce or digital, but the rest is at scale. And what chop it does is just give us real capabilities or enhance our capabilities in screens, where we think we’ve got a lot full to learn and develop.

Marketplace, we’re at ground zero, I would say. And not to be our [indiscernible] Management Director of WooliesX. We’re still learning our way through it. And what we found with everyday market was there is a very long learning curve. And so when there was an opportunity to partner with my dealing, particularly in the context of BIG W was attractive to us, because it will help us get more rapidly up the learning curve. There’s a big difference to dealing with the supplier and to deal with the seller. They may end up in the same organization, maybe in very rare circumstances the same skew, [ph] but there’s very different ways in which you provide seller services, seller experiences than you do supplier experiences. And so we did feel that my deal would really help accelerate our learnings. Recognizing everyday market was very focused on associated selling around food and we needed to get a marketplace quite urgently into BIG W.

And so we did a build versus buy comparison and felt buy would get us there quicker and also give us better group capabilities. So both are pretty different. We look forward to having my deal as part of our team. They will say really help us move more quickly to scale. When they’re in the team, we still won’t be a scale. I guess you a scale when you make money. If you don’t mind me saying Lisa and we won’t be there yet, but we’ll look forward to engaging with them and see how quickly we can get there in the next 12 months to 18 months.


Thank you. The next question comes from Richard Barwick from CLSA. Please go ahead.

Richard Barwick

Good morning to all. Can I go back and talk about eCommerce profitability. You talked about it materially improving, and it looks like that’s true for WooliesX and BIG WX where you obviously call out the profitabilities growing ahead of sales, but not true for Countdown X. And I know you touched on a couple of things, Brad, in your answer to Michael earlier, but can you actually talk in a little bit more detail what’s actually changed across the WooliesX and BIG WX to drive that profitability and also to give us a sense just how dilutive to margins the online sales still would remain?

Brad Banducci

Thanks, Richard. Look, I mean, New Zealand by the way has been our strongest performing online business. And the problem with availability we’ve had when you start doing substitutions, as I was saying earlier, and you do a second run through a store and you have all these, otherwise you substitute more expensive product, which would be our policy versus the existing one. We – it costs you a lot of money. And so that’s what you seen in New Zealand. The online operations they’re likely the rest of our business are getting better. But what you’ve just seen in these businesses in my view, if you got a macro level, everyone underestimates the learning curve. So you can talk about scale curves and whatever else, all experience curve running these businesses, running them over time, you just get better and better at understanding where the issues are, where the bottlenecks are and addressing them.

So you just seeing the benefits of that experience flow through what we do. And so I think there’s still enormous ways still to go. And the nice thing here is that you can productize that. So, just as I say, picking in a store, looking at the average items we pick per hour, we can see it, we can benchmark it as we redesign a process, we can put it in a store, we can see the improvement.

So it’s very – if we weren’t in a time of COVID disruption, you can really apply the learning curve with experience curve quite rapidly. And so, that’s what I think you’ve seen happen in our business. And these are big businesses now, whether it’s $1 billion in a BIG W or $4.5 billion in B2C, eCommerce inside, WooliesX that big businesses, they have commercial teams, they have finance teams, they’re analyzing the numbers, the reporting we get monthly. And I know we don’t yet show it to you is lots of data what we used to get a year ago, we know the profitability of a directive versus a store based pickup versus truck roll, a CFC, a Metro delivery. Now we know them done in every aspect. So that’s what you’ve seen in aggregate. Just like in our normal business, we didn’t get the efficiency we wanted to in 2022 to be clear. But we hope, that’ll address itself in 2023, in particular, I need to call out our CFCs when we put COVID safe practices in there. It was very costly into a DC, but it’s even more costly into a CFC. You end up with one way out, a whole range of changes that are very costly. And so I look at it and say on a good week what we can do $3.5 million to $4 million a week with COVID restrictions. We were restricting ourselves to about a $1.5 million a week. And so, we can see that – unwind come through.

So eCommerce back to your second part of your question is less profitable than store based performance. But any increasingly less so, and we need to continue to work hard to ensure that it’s the case going forward. If there’s a positive going into 2023, it’ll be that our percentage growth in eCommerce will be much lower just as we cycle through some of the COVID bumps in particular, in New South Wales. So it gives us hopefully, the ability and we’ll work through it to further reduce the gap and get the right balance between store growth and eCommerce growth.


Thank you. The next question comes from Craig Woolford from MST Marquee. Please go ahead.

Craig Woolford

Good morning, Brad and Stephen. I wanted to ask a question about price inflation more about the go forward, but I will try and squeeze in two parts to it. Firstly, can you clarify the comment you made in response to an earlier question about the top 20 suppliers? I think I heard you say they were 50% of the price increases. That’s my first part. And then what are you seeing in July and August as far as further supplier price rises, and what you’re seeing in magnitude and whether it might Peter out later this calendar year or next year?

Brad Banducci

Thanks Craig. I’ll make some clarifying comments in the last Natalie Davis to sort of talk about it since, she’s really on the front line on this one. Just to clarify my point, we’ve had cost increases from around 60% of our suppliers. When we look at the quantum of increases, we’ve had 50% of it is related to really the top 20 suppliers we deal with, so most of those also tend to be global CPGs. Generally, most of them, all the people you’re talking to as you do benchmarking in the background on us.

So I think we should just thought be clear on this one. And that’s the point I was making, maybe too subtly. But that is true. And that’s what you see coming through the numbers. So there is still a lot of pressure in the system and Natalie and Paul and team are working through it, and we still running four to one in terms of elevated cost increases, but I’ll turn over to Natalie to give you a little bit more color and how we’re thinking about it.

Natalie Davis

Thanks Brad. I think in terms of package, if I start there in July, we continue to see very elevated levels of cost ask and, they remain probably five times our normal rates. So we haven’t seen that subside yet. And the level of cost ask remains high, very high. There are a number of suppliers now coming back for a second or third time requests. We do, it’s difficult to say when is this going to peak, but at the moment we do expect a peak somewhere around November, December this year.

And that’s largely as we begin to cycle, the start of this elevated cost ask situation. So in package, the requests are still there and they’re still relatively high. And suppliers are referencing commodity prices, manufacturing costs, labor shortages. There are still things that our suppliers are experiencing pallet shortages is also a significant issue still at the moment. And then I think Fresh is the one where you actually Fresh inflation at the moment is higher than package and that’s being driven by vegetables in particular that Brad has spoken to. The good news is we have seen an improvement. We have had strawberries come in, in the last two weeks and, we are at $2.50 on strawberries, lettuce we’re at $2.50 New South Wales.

So when we do get that value as the supply improves, we’ll pass it on to our customers. So we do expect which fruit and veg, that level of inflation, we will drop off. But our farmers are also experiencing increasing costs such as labor, fuel and fertilizer. We are very conscious of that.


Thank you. The next question comes from Ben Gilbert from Jarden. Please go ahead.

Ben Gilbert

Morning, Brad and team. Just another sort of clarification from Craig and I thought it was very short as well. Just in terms of, I think you said a couple of times in response to previous questions Brad, that you’re sort of expecting volumes flat at best in food. Just wondering to confirm that for what period? And then secondly, just following on from the latency, the investment you put in the business over the last sort of number of years around tech, supply chain, et cetera. Do you think you are now in a position where you can accelerate your share gains are real, I suppose start to demonstrate, more obviously or clearly to do us around sustained leading comp trends, et cetera that we’ve obviously seen through Q4 and presumably we’ve sent into the start of fiscal 2023.

Brad Banducci

Thanks, Ben. Look on the item front. It is just recycling through COVID. So if you look at three-year CAGRs and I think the best way to look at our business is through three-year CAGRs, not three-year absolutely it’s three-year CAGRs and you see, I think, quite good trend lines but if you look at unit growth of the first half last year, Ben and all the COVID disruptions, we do expect that to normalize out and that’s what we see, and sort of reversion to mean, and it’s happening. And therefore you end up with a very low or negative item growth. And it can get a little bit hard to be quite precise on a given, vegetables has a lot of items actually.

And so when that falls away, it can distort numbers. And so on it’s not an easy number to be precise on. So it’s going to be low if not negative growth, so at least for the first half and maybe into the second half as well. On a three year basis, it’ll be slightly positive in line of population growth we think. So the reason I reference it is just as much talking to ourselves in our business on how we set our plans, our resourcing and flow. And I’m very focused as is Natalie and Pej care, the rest of the team on looking at volume share and value share. So we just keep a BDI [ph] on both and we’re as focused on wanting to make sure we’ve got our volume share position right as value.

So yes, I don’t know if there’s anything more color I can add there, but it’s just a really important underlying metric. Its important productivity, it’s important for share. So we don’t see anything getting away from us and we’re not kidding ourselves. And it just is the flush out. I think of COVID, that we see in, that’s a pretty consistent, pretty consistent trend. And it does play a little bit back into value of people balancing to budgets and tailoring their cloth, equivalency. So I think that’s what we seen. In terms of the latency issue Ben, it’s a really hard question to answer, and I thought – it was a great question from David.

I think the way I would answer it is we’re pretty avert in December and January that we didn’t get the balance right. In terms of how we monetize the investments in the context of the F 2022 year, we just didn’t get the right balance. It was a great story to tell on strategic progress, but the numbers weren’t there for our shareholders. So it was not a pleasant experience for us. We felt we got a much better balance in the second half. And our commitment is to get that balance into F 2023. And it is a really important point inside our business. We work to our quarterly agile operating rhythm. In fact, we’ve got our okay our conversation underway at the moment for Q2, nothing we need to do in F 2022.

We haven’t started in F 2022. There’s nothing we look in and saying, we need to go big on X or Y. We just need to monetize better. All the plans that we put in place for F 2022, whether that’s productivity plans, whether that’s advanced analytics use cases, whether that’s continuing to progress and stand up some of our new incubations, which we started to gain with the benefit of hindsight, we just started in a tough year. I’m not certain, but they’re all making good progress.

So I feel we’ve got a much better shot at getting the right balance in 2023 and to be honest in 2024 as well. So it’s nice to be underway. It’s really unpleasant to get underway when you, but it’s nice to be underway and be continuing to try and rapidly it’s right now. Sorry, it’s a bit of a wishy-washy answer to a really good question, but it’s kind of hard to quantify. I don’t know, Steve is there anything you feel we can add?

Stephen Harrison

No, that I don’t think so. I mean, yes. The other component of Ben’s question was on share and comps. I mean, I think, yes we would say we’ve had a good two years actually through the COVID period and the approach that we’ve taken, we’ve delivered consistently strong comp growth ahead of market. And that’s reflected in our share results as well. And so, yes we would look to just continue to hold that share and continue to gradually build that share, reflecting the investments that we’ve made over a series of years.

Brad Banducci

Yes. I mean, I think, even if you look at format, Ben our biggest individual investment. Our format team we’re very emotional during the year of Port Macquarie, which is a new core format basically because it was 500th renewal in the last sort of six years and then sort of that halfway across the Harbour Bridge, we told them painted on the way back now as well. But I’m painting it on the way back if you look at it, we’re doing our 60 or 70 renewals year but they are different today, materially different than they were a year ago. You’ll see core value enough, you’ll see smart tech overlay. You’ll see a lot more operating efficiency embedded into the structure of the store for the team to be able to operate. So there’s nothing new, but it’s each iteration is just trying to be more precise, more efficient than the previous one. So that’s really where we’re trying to get to.


Thank you. The next question comes from Phil Kimber from E&P Capital. Please go ahead.

Phil Kimber

Hey guys, just a quick one. And on Big W, you talked about consumer trends in the supermarket business, but are you noticing any particular trends in the Big W business from a, consumers getting more value conscious?

Brad Banducci

Yes, I think it’s a great one Phil. I’ll let Pej talk to the thing that really struck us in the second half that was a big highlight was our existing customers when our stores open, came back and they put an extra item in their basket and we’ve always felt, and we still feel actually, even with the extra item in the basket, if you don’t mind me saying Pej, that we don’t get as big up basket as we would aspire to in a Big W and if when we look at our competitors, they still get into much bigger basket than we do, even if we’re at four and a half items. So customers that come back, they’re starting to shop across the store more, putting more in the basket. And that means, we obviously doing a better job of showing the value across the store, but I know Pej you can talk to the peculiarities of us moving away from buying consumer electronics when we locked up at home to buying clothes and we will be loud out and about.

Pejman Okhovat

Yes, thank you. Great question. I probably answered in two ways, just in terms of number of items and what we’ve seen our customers do, it’s been really encouraging in the second half as we’ve seen the bounce back from half one and continuing into quarter one. Our items have actually grown even on two-year and three-year CAGR. So shows customers continue to be engaged with Big W, in terms of the specific shopping patterns or category changes as the consumers are facing into some of their inflation challenges. Areas are related to kids, our customers are continuing to shop really well.

Our apparel programs and home programs as our customers are seeing; we’re developing new product ranges and invested into value and quality. Again, we’ve seen a good uplift into those. Whereas about a year or so ago where customers were probably spending a bit more money to tame their home with some and element to shift back into normal trading patterns for us. But we remain pretty optimistic. And the other area our customers are continuing to be heavily engaged with us is what we call our big events. Coming out of Q3 and Q4, Easter program was fantastic. Our toy sale was a growth on last year, and of course we go into Father’s Day right now, and we’ve seen in our customers really enjoying investing a better time and celebrating those special family moments.


Thank you. That does conclude the question-and-answer session. I’ll hand the conference back to Mr. Banducci for any closing remarks.

Brad Banducci

No, thank you for the great question. Sorry, If we didn’t answer them as well as we would’ve aspired to remind, we since the new financial year. Our mind is very much on this, and it’s not fun [ph], to be talked to you about Q1 sales. So look forward to coming back and updating you on our progress. As we said in the media, call them as I think you’ve all heard us say, before the truth is in our thoughts. So if you want to know what’s going on in our business please shop us. Look forward to speaking to you soon.


Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.


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