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According to Woolworths Group chief executive Brad Banducci, the business was hit on all sides by supply chain disruptions, product shortages, team absenteeism, and flood damages, while also witnessing a shift in consumer behaviour driven by rising prices.
“FY22 marks the third year of navigating Covid-19 related challenges… with Q2 particularly impacted by disruption and inefficiencies across our supply chain and absenteeism,” Banducci told investors and analysts.
“Our customer experience was not as good as we would have liked during the year, which was reflected in our customer advocacy scores, with all businesses down on the prior period with the notable exception of Big W.”
This was largely due to the lack of supply for fresh fruit and vegetables during the fourth quarter in Australia, prompting customers to trade across to frozen and canned offerings, while also moving to more affordable sources of protein, as Woolworths’ prices rose on average by 3.6 per cent.
“Inflation is beginning to impact all aspects of our customers’ shop, and we have been seeing a gradual change in [their] shopping behaviours,” Banducci said, adding that the business is juggling putting through legitimate price increases for suppliers while keeping prices down for customers.
“What we’re going to see in FY23 is a scenario where, more often than not, the top line is going to be driven by inflation, with [basket size] flat or declining. We’ve always said our business is driven by [basket size], and that hasn’t been the case in the last couple of years.”
Is New Zealand the ‘canary in the coal mine’?
Questions rose during the investor briefing around whether Woolworths’ New Zealand business Countdown is a sign of things to come in Australia, with inflation higher and customers more frustrated with price increases.
Countdown is also under pressure from the local competition regulator, the Commerce Commission, for operating as a “duopoly” with local supermarket group Foodstuffs.
“We’ve been engaging constructively, and understand the issue [there], but the impact we’ve seen is not based on the regulator,” said Banducci, referring to the Commerce Commission.
“As you get into a smaller environment…We have much more import-driven categories, so when shipping containers can’t go there, they divert [the goods] and you just end up with huge exposures.”
Banducci said this has actually been a problem for several years, but has become exacerbated now that import prices are increasing. One of the biggest challenges Woolworths has in Countdown is that it hasn’t invested enough in modernising its supply chain, unlike the vast investment seen in its Australian business.
Despite this, Banducci is bullish that Countdown will recover in the medium term, with more investment and effort put into it.
FY23 starts slow
Following on from a year that fell below Woolworths’ expectations, the start of FY23 has been impacted by sales decline in Australian food when compared to the first eight weeks of FY22, with the business now cycling the beginning of the Delta outbreak.
Team absenteeism and supply chain disruptions continue to be above pre-Covid levels, though the business believes that, subject to no further material Covid restrictions, Covid-related costs will substantially decline in the upcoming months.
Operational conditions continue to be an issue in New Zealand, with sales down 1 per cent on the same period, and Big W sales have grown 30 per cent.
“We expect the trading environment to remain volatile and challenging due to endemic Covid disruptions, ongoing supply chain challenges, higher costs across our business and cost-of-living pressures for our customers,” Banducci said.
“However, we are increasingly more agile and purposeful in responding to these challenges, and are focused on improving our underlying operating performance across all aspects of our value chain after three years of disruption.”
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