Covid Costs Woolworths

Australia | Dec 16 2021

Brokers were caught out by the extent of covid ramifications to date in the first half and the level of cost increases hitting Woolworths’ bottom line. But there is some light at the end of the aisle.

-Woolworths shocks with its earnings update
-Cost increases everywhere
-Online investment ongoing
-Margins should improve into FY23

By Greg Peel

Supermarkets in general proved a lockdown winner in 2020, and again for NSW and Victoria in 2021, as consumers had little choice but to cook at home. Hence analysts were expecting Woolworths’ ((WOW)) pace of growth in grocery sales to ease off once restrictions were again lifted.

Lockdowns also encouraged an uptick in online grocery shopping, particularly in the “click & collect” option Woolworths was offering. The company continues to invest in its online business, assuming, no doubt correctly, that many shoppers will stick with this option post-covid. Online retailing in general has seen a huge covid-driven boost and there’s no going back.

Some retailers have responded by boosting their online capacity while reducing their bricks & mortar footprint. This is not an option for supermarkets. The shift to online shopping means a shift away from in-store shopping, which supermarkets still have to staff and supply. Online sales are lower margin compared to in-store sales, but Woolworths is pressing on with its online investment.

Management decided it could counter lower margins by increasing in-store efficiencies and staff productivity. At least that was the plan. What management didn’t anticipate, apart from delta, was that the restrictions on households that drove more grocery shopping also meant restriction issues for in-store staff.

Cost Explosion

Staff were required to be tested for delta every three days. Then they had to wait a day for the results. For a labour-intensive operation like a supermarket, the impact was significant. Efficiency and productivity plans went out the window.

Woolworths, like many other large retailers, also had to employ more security staff to monitor QR and mask compliance, and presumably to break up fights in the toilet paper aisle.

Such restrictions similarly impacted on the company’s distribution centres. This on top of supply shortages and delays caused by covid among suppliers. These led to a sharp increase in wholesale grocery prices, and the big rise in oil prices flowed through to transport costs.

Management knew they could not just pass on these prices rises immediately to retail prices, as consumers would simply abandon Woolies for the competition down the road.

But wait, there’s more.

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