Woolworths profits slow as $150m of virus costs hit

Supermarket giant Woolworths says profit growth is slowing as $150 million in extra costs from operating its business in the COVID-19 pandemic hits the bottomline at the same time as the at-home consumption shift eases, with shoppers returning to more normal habits and backing off from pantry hoarding.

Woolworths shares slumped by 8.6 per cent in early trading on Tuesday to $37.06 after chief executive Brad Banducci said profits in the Australian Foods division are expected to be weaker for the first half 2021-22 compared with a year earlier. They are also being restrained by between $60 million to $70 million in indirect costs from supply chain disruptions and higher fuel costs.

For the first half of 2021-22, earnings before interest and tax from the Australian Food division is expected to be between $1.19 billion and $1.22 billion, compared with $1.312 billion for the same period a year ago.

Mr Banducci said Woolworths wouldn’t be forcing through price rises to try and claw back the cost pressures, and prices were only going up on items where the underlying costs of that particular product was on the rise. “We are seeing some inflation creeping into the market,” he said. Inflation pressures are at their highest in red meat. “It’s just been unrelenting on beef and beef prices,” the said.

Shoppers at the group’s 1,000 supermarkets are now reverting back to more normal patterns as the NSW and Victorian economies re-open. Woolworths said it wasn’t losing market share. Sales across the supermarkets thus far in the December quarter are up 2 per cent to date, compared with 3.9 per cent in the first quarter.

Mr Banducci said it had been a tough first half. The biggest impost in managing COVID-19 had been in the group’s distribution centres. Every staff member at a distribution centre needed to have a rapid antigen test, and then wait for 15 to 20 minutes for the result. “That’s been a very material cost,” he said.

Mr Banducci said Woolworths had also implemented a split shift system in its distribution centres to avoid crossover of employees as a preventative measure. That had introduced extra costs. The company had also recruited an extra 2,700 people to boost staffing levels at its warehouses and distribution centres.

The provision of personal protective equipment, having “ambassadors” at the front of supermarkets helping customers with COVID check-ins and the general extra spending needed to operate in a COVID-safe environment had been a handbrake on profits.

About 18,000 Woolworths staff members had been forced to isolate at various periods over the first half after being deemed a close contact of a COVID-19 case. He said there had been “far-reaching impacts” of the COVID-19 delta strain and this had impacted on the group’s end-to-end stock flow and operating rhythm. He expected the overall supply chain disruptions may only right themselves in three to six months’ time.

Mr Banducci said sales growth in its Australian Food division is positive on a one-year basis and strong on a two-year basis.

He said there was still “enormous pressure in the supply chain”, with pallet shortages and general disruptions in shipping and transport. But there would be no stock shortages in the supermarkets in the main product lines which shoppers wanted in the lead-up to Christmas. He said it would be a “white knuckle ride” in ensuring the shelves were fully stocked because of the supply chain disruptions.

Some industry players had been expecting shoppers to shop earlier than usual for Christmas items, but Mr Banducci said that hadn’t occurred.

“It hasn’t proved to be true. There hasn’t been an early bump,” he said.

Mr Banducci said the national shortage of diesel additive fluid AdBlue wouldn’t prevent Woolworths trucking deliveries being made in the short-term, but it was something the company was monitoring closely in readiness for January.

“That will be a new year issue I think,” he said.

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