Woolworths feels profit pressure as customers shop around

Woolworths has reported an almost 21 per cent drop in underlying profit as cost-of-living pressures force the supermarket giant to offer steep discounts to attract budget-conscious shoppers.

The company’s profit came in at $739 million for the first half of the financial year, compared to a statutory loss a year earlier, but the underlying performance declined.

Sales were up 3.7 per cent but group earnings dropped 14.2 per cent in the half, led by a decline in Australian food earnings of 12.8 per cent to $1.4 billion.

The impact of a two-week strike last year cost the business $240 million in sales. If the strike and supply chain issues were excluded, Woolworths said Australian food earnings would have only declined about 5 per cent.

Job and product cuts on the cards

Chief executive Amanda Bardwell said the decline was “a difficult and disappointing result”, and “financial pressures” and customers “cross-shopping significantly more” were her top concerns.

She said the group was aiming to cut $400 million in costs and would achieve that by examining how Big W and its New Zealand supermarket arm could “reach their full potential” over the next three to five years.

Cost savings would “regrettably” come from cutting support office roles, including existing vacancies and contractors, and reducing the range of products Woolworths sold.

She said non-food items, such as pet supplies and cleaning, were where shopping around was happening the most, and called out Bunnings as a dominant competitor.

Customers continue to shop around

One of the major reasons for the company’s loss, Ms Bardwell said, was more customers shifting their shopping behaviour over the second half of last year.

Customers wanted to be able to “realise value” while suppliers wanted less complexity when navigating the company’s internal systems.

“The consistent message we are hearing is they all want better experiences when they shop with us, when they work with us, and when they partner with us.”

George Boubouras, managing director of research and investments at K2 Asset Management, said the results were “high level” and sales were in line with expectations.

“There’s a lot in there to unpack: the interim dividend of 39 cents is a positive and will be well received.

Coles will release its half-year results on Thursday, and Mr Boubaras said he expected the group to post stronger results than Woolworths, given it did not experience industrial action or the same wage cost pressures.

“[We should see] an increase in profit for Coles.”

ACCC inquiry report likely to impact competition

Mr Boubouras has also weighed in on the consumer watchdog’s ongoing inquiry into supermarkets to examine pricing practices and competition in the sector.

He said the final report — expected to be released in coming weeks — would have a big impact on competition.

“When you have dominant market players like Woolworths and Coles that have two-thirds of market share — and Australians are conditioned for oligopolies — the margins historically and currently are still quite high relative to the European Union and the UK.”

The “large footprint” of supermarket giants allowed them to control margins and prices and was stifling competition, Mr Boubouras noted.

He said it was yet to be proven whether supermarket giants were “price-gouging” Australians.

“I would describe it as very aggressive, oligopolistic pricing power that should attract more global players into the local market to create more competition.

“Aldi should continue to launch as many stores as they can, given their margins are so healthy.

“At the end of the day, competition is a good thing. Australians are conditioned for these dominant market players, so it’s a slow change that’s underway.”