Thank you for standing by, and welcome to the Woolworths Group FY 2021 half-year earnings announcement. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO. Please go ahead.
Good morning, everyone, and welcome to the Woolworths Group F twenty-one half-year results briefing. Joining me for today's briefing are Stephen Harrison, our CFO, who will present our financial results a bit later. Amanda Bardwell, Managing Director of WooliesX; Natalie Davis, Managing Director of Woolworths Supermarkets; Teresa Rendo, Acting Managing Director of Big W; Claire Peters, Managing Director of B2B and Everyday Needs; Steve Donohue, Managing Director of Endeavour Group; and Paul Reid, our Chief Legal Officer. The agenda for today's briefing will include an update from me on the key highlights during the half and the progress against our F twenty-one strategic priorities. Steve will then present our financials before handing back to me to finish with current trading and outlook.
For those of you who have a presentation in front of them, I was gonna just start with a brief summary of the first half of F twenty-one, and that's on slide four for those who are actually using the slides. In summary, as per our results announcement, we had a strong start to F twenty-one due to the amazing efforts of our team, who have delivered our customers safe and convenient experiences, whether in store, online, or in our venues. This effort was reflected in strong customer brand and reputation metrics during the half. A particular highlight for me was the strength of our customer care metrics in December, in particular in Christmas week. COVID continued to influence customer shopping behavior during the half, with elevated in-home consumption contributing to the group's strong sales growth of 10.6%.
This was further supported by good execution of seasonal events, including record Christmas trading and continued strong demand for our E-commerce services. Australian Food, Big W, and Endeavour Group all reported sales growth well above trends during the period. The material scaling up of our E-commerce capacity and services to meet customer demand resulted in H1 group E-commerce sales growth of 78%, and in the case of WooliesX, 92%. Digital traffic across all platforms within the group also increased significantly, with visits to group digital assets up 62% to 20.2 million customer visits per week. We're seeing more and more customers start their shopping journey with us digitally, and I don't think it will be long before digital visits exceed physical visits to our stores, which, as an aside, they already have in Big W.
Big W was a particular highlight for the half, with H1 EBIT up 166% to AUD 133 million, driven by strong performance across all aspects of the business: sales, gross profit, margin improvements, and good cost control, despite the incremental COVID-related costs. Finally, and despite record trading over the half and a challenging operating environment, it was particularly pleasing to see an improvement in team safety for the half, with a 16% reduction in the total recordable injury frequency rate compared to the same time last year. Our team's commitment to delivering a COVID-safe Christmas, despite record volumes and localized outbreaks, was a practical demonstration of us living our purpose of creating better experiences together for a better tomorrow.
Turning to our progress against our key strategic priorities, for those again with the slide presentation in front of you, on page five, you will see the group strategy hub, but it is a reminder of all the things we are setting out to achieve during the year and despite it being an incredibly busy half for our team on the trade front, we made pleasing progress against all of our strategic priorities. Slides six and seven outline some of our achievements against each priority in the first half, and I would like to touch on some of these briefly in my summary.
And the ones I'd like to emphasize are as follows: firstly, scaling up E-commerce capacity and services across the group was an incredible achievement by the team across, by our team across all of our X businesses, whether it's Australian Food, New Zealand Food, WooliesX, Big W X or EndeavourX. In Australia, in Food, we opened new CFCs in Rockingham, Western Australia, Lidcombe, New South Wales, and Wellington in New Zealand, and commissioned our first micro-fulfillment facility using Takeoff Technologies in Carrum Downs. We've actually now opened our second unit in New Zealand, in Penrose. One of our priorities for the second half is to better optimize this capacity to deliver better customer experiences and operating efficiency. But the focus in the first half understandably was on just lifting our overall capacity, and that was a particular highlight.
In terms of our Australian Food customer proposition, we continue to differentiate that with record sell-through of seasonal products during the period, as well as the successful execution of our fresh campaigns, including Summer with a Healthy Twist, Fresh Ideas for You, and the launch of the new Healthier Options online tool. We also continued to evolve our in-store experience with new store concepts landing at Crows Nest, Park Sydney, Cabramatta, Mount Druitt, and Emerton, amongst others. Trading momentum in Endeavour Group was particularly strong during the half, with good progress in digital and E-commerce. Hotels, while still down year-on-year, also performed more strongly than we had anticipated. Preparation for the separation of Endeavour Group is well progressed, and as we outlined in our separate announcement this morning, we are targeting June for a separation, most likely through a demerger.
Finally, while COVID has slowed some of our progress in supply chain, now known as Primary Connect, volumes in MSRDC continue to grow, and we successfully opened our Melbourne fresh DC during the half, and received DA approval for our Moorebank development in Sydney. Slide eight is a reminder of the Woolworths Group food and everyday needs ecosystem. I've covered off some of the highlights in some of the areas already, but in summary, we made good progress in our core businesses and adjacencies during the half. Turning to slide nine, in November, we also launched, importantly for us, our Group 2025 sustainability plan, which is underpinned by five guiding principles and organized into three focus areas of people, planet, and product.
For each focus area, we have over forty commitments that we aim to achieve by 2025, including the establishment of the Woolworths Future of Work Fund, which is our commitment to deploying funds towards identifying skills and capabilities for the future, and putting in place programs of work that will support the upskilling and reskilling of our team. We aim to source 100% renewable energy to power our business by 2025 and have zero food waste going to landfill from our operations. We also aim to achieve net positive emissions from our operations by no later than 2050. Then on the product side, a number of initiatives around packaging, but also I just wanted to call out our commitment to increasing healthier choices in our customers' baskets.
Since its launch, we have continued our progress with the rollout of solar across our network, with a total of 174 sites by the end at the end of H1. We're also making it easier for our customers to choose products that are healthier, sustainably sourced, and responsibly packaged. By the end of the half, we had removed 20 tons of saturated fat, 71 tons of sugar, and 5 tons of salt from our own brand products when compared to equivalent own brand products in since eighteen. And finally, we were also delighted yesterday to achieve, actually this morning, sorry, to achieve a WGEA Employer of Choice for Gender Equality citation, which was a focus and is a focus for us as part of our 2025 plan.
So a good progress both on the trading front and on our overall strategic priorities. I'd now like to turn over to Stephen Harrison to talk about our H1 financial results, and then I'll come back and talk about our outlook in H2. Over to you, Steve.
Thanks, Brad, and good morning, everyone. I'll start this morning on slide 12 with our F 21 half-year group results summary. As you can see on this page, group sales were AUD 35.8 billion, up 10.6% on the prior year, with strong sales growth in half one, driven by a continuation of COVID-related in-home consumption, as well as strong execution with above-trend growth in each of Australian Food, Endeavour Drinks, and Big W. Sales growth in New Zealand slowed in Q2 with lower market growth rates impacted by a reduction in international tourism. In hotels, sales trends improved over the half but were below prior year due to continued COVID-driven operating restrictions. EBIT before significant items increased by 10.5% to AUD 2.092 billion.
NPAT before significant items increased by 15.9%, with greater leverage now evident between EBIT and NPAT due to the lease interest being reported below EBIT post the implementation of AASB 16. There were no significant items in the half, so any references to significant items relate to the prior year. The group's H1 2021 statutory NPAT attributable to shareholders, including significant items in the prior year, increased by 28% to AUD 1.1 billion. I'll turn to slide 13 and looking at EBIT by business unit. Starting with Australian Food, EBIT was up by 13% for the year or for the half, to AUD 1.329 billion.
H1 EBIT growth was driven by strong trading momentum over the half due to COVID, a strong washing program and the successful execution of our key Christmas trading period. E-com sales grew by 91.8% in the half, while store-originated sales remained strong with 7.2% growth. Gross margins increased 11 basis points to 29.2%, with stock loss gains and mix benefits somewhat offset by higher e-com costs and investment in Everyday Rewards, promotions, and personalization activity. Australian Food CODB decreased one percentage point, or one basis point, sorry, to 23.6% of sales. While lower as a percent of sales due to sales fractionalization, a portion of the CODB increase was due to incremental COVID-related costs, which I'll talk to on the next slide.
CODB in Australian Food was also impacted by volume, volume increases, impacting costs across supply chain, team costs, as well as ongoing investments in technology and digital. The increase in E-commerce penetration saw further capacity added in half one to support the rapid growth in e-com, which drove some adverse mixed impacts in CODB. Supply chain costs also increased due to the Melbourne Fresh DC transition, with modest benefits achieved in MSRDC in half one, somewhat impacted by COVID restrictions in Victoria. New Zealand half one EBIT increased by 4.4% on the prior year in New Zealand dollars, with earnings ahead of sales by modest sales growth and COVID costs.
Big W delivered a very strong result, with EBIT growth in half one of 166%, as a result of strong sales growth, gross margin improvements, and good cost control, despite higher COVID-related costs. Endeavour Drinks' half one EBIT increased by 24.1%, driven by continued elevated in-home consumption, trading up, and strong Christmas trading. Higher CODB was a result of salary and wages increases, investment in digital and E-commerce, as well as some one-offs from the review of digital and IT asset lives, and incremental salary remediation costs. Hotels' sales and EBIT continued to be impacted by varying level of operating restrictions by state.
Pleasingly, hotels returned to profit in half one, with EBIT of AUD 122 million, which was a decline of 45.4% compared to the prior year, but a material improvement on the loss of AUD 52 million in the second half of F20. Excluding hotels, EBIT before significant items increased by 18%. Central overheads were AUD 92 million for the half, and this includes incremental COVID-related costs, the cost of additional risk and compliance resources supporting pay remediation efforts, as well as higher insurance costs. For the full year, central overheads are expected to be in the range of AUD 165 million-AUD 175 million before Endeavour Group-related separation costs.
The Endeavour Group separation costs in half two are expected to be in the range of AUD 45 million-AUD 50 million, taking the total separation cost to around AUD 275 million, in line with our previous guidance. Turning to slide fourteen, and covering group COVID costs. Total COVID costs in half one were AUD 277 million, which is approximately 0.8% of sales. COVID costs moderated in Q2, as restrictions eased across the country, and the group became more efficient in operating in a COVID-safe way, with these costs including a conscious investment in a COVID-safe Christmas. COVID costs are expected to moderate further in half two, but remain difficult to predict precisely, given localized outbreaks. Turning to slide thirteen, and covering some of our key balance sheet metrics.
Average inventory days declined to 3.1 days on the prior year, due to strong sales growth, driving faster inventory turns, despite higher inventory levels held across half one to mitigate both supply chain risk and to support elevated sales. Return on average funds employed on a rolling twelve-month basis declined by 25 basis points compared to half one of F20, due to the reduction in hotels' EBIT. Excluding hotels, ROFE, for all other businesses, increased, and compared to F20, ROFE increased by 74 basis points to 14.4%. Turning to slide 16, which is just a reminder of our capital management framework.
As you can see on this page, we've continued to generate strong cash flows in half one, which we're using to fund both sustaining growth CapEx, to pay down debt, and to distribute profits to our shareholders through increased dividends, and I'll go through the details of this on the following slides. Turning to slide 17 and our cash flows. EBITDA increased by 8.7% to 3.415 billion due to strong trading across the group. Working capital and non-cash movements contributed 358 million, due largely to the timing of creditor payments. I'll cover CapEx on the following slide. Dividends and share payments of 525 million declined in the half, reflecting a lower F20 final dividend compared to the prior year.
Free cash flow generated was AUD 1.027 million, an increase of AUD 978 million on the prior year, which flowed through to a reduction in net debt at the end of the half. Our Cash Realization Ratio for the half was 115%, which benefited from some creditor payment timings and seasonality. For the full year, we continue to target cash realization of 100% or above. Moving to slide 18, as a reminder, sustaining CapEx includes spend in areas such as maintenance, safety, store renewals, IT, and supply chain spend, and investment in productivity initiatives to sustain and improve the efficiency of our business. Growth CapEx refers to spending in areas like new stores, E-commerce, digital, and other projects that are expected to either drive higher sales growth and increase margins over time.
Operating CapEx for the half was AUD 835 million, driven by an increase in renewals, IT, and spend across digital and E-commerce. Including property development, gross CapEx in half one was at AUD 1 billion, with higher property sales in half one, leading to a net CapEx for the half of AUD 784 million, slightly above the prior year. F21 CapEx is expected to be in the range of AUD 1.8 billion-AUD 1.9 billion, driven by investment in e-com, digital, and supply chain. Turning to supply chain slide nineteen, I just want to briefly give you an update on our supply chain, which, as Brad mentioned, we now refer to as Primary Connect. At MSRDC, carton throughput continued to ramp up during the half, albeit more slowly than we originally planned due to COVID restrictions in Victoria.
We're pleased with the progress and operation of the site, with over two million cartons now consistently being shipped per week, and we have plans in place to transition remaining volumes from other Victorian sites in half two to further increase carton throughput. A contingency site in Somerton, in Victoria, operated throughout the half and was closed in January, which will assist with scaling MSRDC to capacity in the second half. The fresh Melbourne Fresh Distribution Center opened ahead of schedule in August of 2020, with the Mulgrave Temperature Controlled Distribution Center closed in December, and the transition of remaining 3 PL volumes is expected to be completed in Q4. Our Heathwood Temperature Controlled DC in Queensland remains on track for completion in October of 2021, and is expected to go live in February 2022, post-Christmas.
As Brad mentioned, our New South Wales supply chain transformation is progressing to plan with the full DA approval for both the Sydney RDC and the NDC at Moorebank being received in December. Finally, turning to slide 20 on capital management. The board today has approved an interim dividend of AUD 0.53 per share, which is a 15.2% increase on the same time last year, broadly in line with our NPAT growth of 15.9%. Looking at debt and funding in the half, US senior notes and yen-denominated European MTNs matured and were repaid. These maturities had been pre-financed through the issue of Australian MTNs in May 2020.
So in summary, the group's sources of funding and liquidity remain strong, and we're well positioned to get that credit metrics with an ongoing commitment to a solid investment grade credit rating. And so with that, I'll hand back to you, Brad.
Thanks, Stephen. Turning to slide 51 at the back end. The first seven weeks of the H2 half. Group sales for the first seven weeks have remained strong, benefiting from continued at-home consumption. Australians are traveling abroad and a weaker prior year where sales were impacted by bushfires on the East Coast of Australia. However, growth rates have generally continued to moderate over the period in line with the overall market. COVID costs for the first seven weeks have also continued to moderate as restrictions have eased. In Australia, food sales increased by 8% in the first seven weeks, with New Zealand food's total sales remaining subdued at 1%. In WA, the Big W, drinks total sales growth has slowed moderately compared to Q2, but remains strong at 18% and 14% respectively.
Hotel sales are tracking 12% below the prior year, but with a lower rate of decline than Q2. Turning to the outlook. We expect sales to decline over the March to June period in all of our businesses as we cycle the first phase of COVID, with the exception of hotels, where venues were closed for much of the final four months of last year. However, we also expect COVID-related costs to be materially below the prior year. Hotels H2 EBIT is expected to be well above H2 last year, when the business reported a loss of AUD 52 million. And while we will continue to spend what is required to be COVID safe, all of our businesses have an enhanced productivity focus for the second half.
Increases in E-commerce capacity across the group in the first half will put us in a position to continue to meet our customers' demands, and as growth rates slow in the second half as wEe cycle peak COVID demand, we have an opportunity to optimize E-commerce and scale to improve the customer experience and deliver further efficiency. We haven't yet seen material flight to value among our customers, but expect value to become more important over the next few years as we emerge from a period of unprecedented stimulus. We are focused on trying to personalize value for our customers through our various rewards programs and through our increasingly differentiated store propositions.
Finally, on the final slide 52 of the document shows the sales growth by business for the second half of F20, so that you can see by month the COVID-driven impact of sales that we will cycle in H2. In closing, by living our purpose, we have had a strong first half for all of our stakeholders, and while we are fortunate that COVID continues to be well managed in Australia and New Zealand, we will continue to do what is necessary to remain COVID safe. Thank you, as always, to our customers, team, and partners for their support and for continuing to choose Woolworths Group businesses for their shopping needs. I will now turn the call over to the operator to ask questions. In order for everyone to get a chance, we're trying something new this year.
We're going to ask everyone to ask only one question at a time, and if we have time, then you're welcome to join back and rejoin the queue to ask another question.
Thank you. If you wish to ask a question, please press star one on your phone and wait for your name to be announced. If you wish to remove your request, please press star, then two. If you are using a speakerphone, please pick up the handset to ask your question. The first question today comes from Ross Curran from Macquarie. Please go ahead.
Hi, team. Congratulations on a great result. I was wondering if I could get a bit more color around the current trade in the first seven weeks. How much of that is a reversal of the three Q20 numbers, where Coles printed 13.8% comps versus 0% and 10.3%? How much of the 8% to 3% gap we're seeing across both of them is explained by closing that versus just market share gains that you're printing at the moment?
Sorry, Ross. It's a really bad line, so let me take a crack at it, and if we haven't got it right, you can, you know, come back and elaborate some more. Apologies. Look, as always, it's very hard to disaggregate a result, but clearly, we are cycling, you know, weaker numbers last year, so that is to our benefit. No question about that. So that is a contributing fact. So I think that's important. But that said, you know, when you look at what strikes us about our business, and we talked about in the media call, is we've got really nice consistency across all of our business, and so every state has got relatively similar momentum.
You see ups and downs, depending on when we have a lockdown, the more recent one in Victoria or the one that we had in Perth, but it really is a consistent trend across the business. So it's consistency that I would call out that is the hallmark of what you're seeing. And then we are seeing our sales results moderate in line with moderation in the overall marketplace. So that is the, I think, the highlights I would call out. You know, cycling a slightly softer number last year, so we should always keep that in mind. But so, you know, good consistency and good rhythm and momentum in the business right now.
Thank you. The next question comes from Michael Simotas from Jefferies. Please go ahead.
Good morning, everyone. I've got a question on inflation. So you obviously saw inflation taper off during the quarter, and you've sort of attributed a lot of that to the base. But looking forward, a lot of macro thought leaders are starting to have some concerns about pretty serious global inflation. How do you think your business would be positioned to pass price through to consumers if they do prove to be correct? I know you've had some issues with red meat passing input costs through, but I'd just be interested in your comments more broadly, please.
Michael, thanks for asking such a hard question. Incredibly, incredibly challenging one, as you know, and it's always a hard question to answer, but it's particularly hard, you know, given what we're cycling and just remembering the sheer volatility that we're cycling from last year, where there were periods of time where we had to actually stop our promotional program, just given the surge demand we had in our stores, and so we have to cycle that, which will be challenging in a reported number, but it's just, it's really about just a function of the market point, so there's immense volatility out there, so any comments I need to make need to be caveated by that.
Charles, let me give you a few thoughts, if I may. Firstly, we're all aware that there is input pressure in general, and in particular now we've seen a material increase in freight, sea freight costs, across the globe, so those are there. That said, with where the AUD is, actually we're starting to see a bit of a hedge against that, and we'll need to work through how that plays out, so there's a lot of input pressures in general, and there's a lot of cost pressure coming from imported products into Australia, driven materially through some of the very material step-ups we've seen in sea freight, but then we've got the AUD, you know, touching 80 cents.
We're just needing to work our way through that, given it's priced in U.S. dollars. There are some hedges there. If I then come into Australia, specifically in product made in Australia, we need to obviously separate fresh from long life. We do expect to see continued meat price increases, and meat has been very challenging, as you know. And really, we've seen with the rains we've had, that you know, a lot of cattle has been kept on the land or whatever the right expression is. And so there will be continued meat price pressure coming through in the short term, given that there's a six-year cycle in growing conditions on these things for red meat.
We will need to kind of actively work on getting efficiencies in that part of our business, and we're making some progress and being very thoughtful on how it, we, with prices come through. That said, with grain, the grain crop being pretty good, we should actually expect to see some moderation in products that are grain-fed in that part of the business. So we'll see how that plays through, but there again, might be a bit of a hedge there. In fruit and veg, then very importantly, actually, we do expect to see, we've been going into a more deflationary period of late. This was surprising to me, given we thought some of the labor shortages, but actually not really when you think about the drought previously and then the bushfires.
And so we've got quite a large demand coming on board. So we do expect to see some just demand, supply-driven deflation, both in fruit, but actually, interestingly enough, in vegetables. And so, generally in fruit, we managed to offset deflation with increased demand, but that's not so in vegetables. So that, we'll have to continue to watch that, but we do expect to see some deflation. We're expecting very large crops, for example, on the fruit side, in avocados, across the country, including New Zealand. So we'll need to monitor those prices. So a lot of going on there. You know, so there will be a possibly continued, whether the meat inflation offsets the deflation in fruit and veg is something we can't talk to, but we'll work it through.
On our long life products, actually, we still have material cost input pressure, and we generally have been accepting, as we always do, cost increases that are legitimately verified, and you've seen that manifest in shelf prices. How that then manifests, though, in net price through promotions is something we'll just all need to monitor going forward, and that is going up and down. It's, it's very messy, as I say, given what happened with changes in promotional programs last year. So that just makes it very challenging to be definitional. But if you just go to core grocery, there is still modest inflation, if you just look at it in total.
So, in general, I don't think we'll be confronting what we did a couple of years ago on the material deflationary drag we had on our business, Michael. How much net-net inflation is delivered into the market, though, is a question, given all these factors that better minds than I can probably opine on. So have I served to suitably confuse you through the answer to my question? But I just gives you a sense of the ups and downs, and there's quite a lot of them moving through our business.
Thank you. The next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Good morning, Brad. Terrific results, so congratulations to the team on that. My question is really around your ability to reduce the rate of operating costs and D&A growth, cost growth through 2021. And I just context it by saying, I mean, it obviously shows in the result today.
... that the additional investment in E-commerce, the additional promotional spend, the capital spend, has driven some really good top line and bottom line outcomes, but we are going to have a lower level of sales growth in 2021. So I'm just interested, if you could pull apart some of the cost drivers a little, and just talk about your ability to slow the rate of cost and capex growth.
Yep.
Through 2021, and what some of the puts and takes there might be we should consider.
No, thanks, Grant. I'll make some introductory comments, and I know, Stephen Harrison, you can look forward to providing more detail to the question. The most important thing we've called out in our results clearly has been our COVID costs, and as per previous results, we had - we're only involved on the investment we've made in keeping our customers and team COVID safe. We do, however, expect to see that unwind, and you've seen that in our cost structure. And if you look at our sales announcement, you can see how the unwind has taken place as with COVID costs as a percentage of sales in Q2, going down to 0.6% from 1% in Q1, and that's continued into the first seven weeks of the new financial year.
You know, some of the costs we incurred, they are quite sticky, so we did a lot of overflow warehouse commitments because of the reduced productivity we had in our own warehouses in Victoria around being COVID safe in there, so those take a bit of a while to unwind, but they are unwinding as it goes, while we're continuing to see the step down, as well as a number of processes that we're automating around people counting or just getting smarter on how we do cleaning and a series of things, so we do expect that trend line to continue, and that is possibly the most important factor in how we manage CODB going forward.
Then, secondly, unlike in previous halves, Grant, we've often talked about the improved efficiency of E-commerce, and means that it hasn't been a net drag to our results. We actually made material investments in the first half, in particular, going into Christmas, in E-commerce capacity. That means you see that baked into our results, and we do expect to be able to better leverage that in the second half. Just to call out, you know, we opened two new manual CFCs in the month of December, and they're very material commitments to us, and they will be the right strategy in the long term. But you see that cost in our first half results, and that really in both Sydney and Melbourne, in Notting Hill, in Melbourne, and in Richmond, Sydney.
We do need to work very hard to get to the efficiencies we want out of those CFCs, and we're very glad we had them. It was really important with what happened on the North Shore in Sydney in the lockdown, but we're still working, running them at, you know, slightly to the right capacity run rates, you know, on those facilities. That's the second bit we need to work on. Then the third bit that we need to work on is we have made good progress with MSRDC in Melbourne and commissioning our new shared MFC and MSRDC. But the efficiency right now, we need to make sure that we deliver them in the store and make the last mile simple for our customers, and that will be a particular focus in 2022.
Understandably, the focus to date has been to get the facilities to work, and we're starting to see really pleasing progress, in particular on our labor cost per carton. But we do need to then make sure we deliver simplicity in store on the, on the back end of that. But Steve, I, I know you have been prepping for this question overnight, so over to you.
It's just a couple of builds. Obviously, a big part of the cost growth in Australian Food is the sales and volume that attaches to it. So, you know, increased team costs, increased, you know, volume throughput through cartons through our supply chain. Interestingly, high transaction costs as customers really move away from cash to really paying by credit card. So there's a bunch of volume costs that will fluctuate based on, on, you know, sales and growth of sales. And obviously, we signaled, you know, given what we're cycling in the second half, there will be challenges in terms of sales growth. So, you know, we're gonna manage those costs, you know, that attach to volume very carefully.
I think on the depreciation question, you know, depreciation has been increasing, you know, consistently over time through, as you rightly point out, our conscious investment, in both, you know, long-dated and short-dated assets. We, you know, we'll continue to have, long-dated investments, as we announced with our New South Wales supply chain, which obviously won't start depreciating until they kick in. But increasingly we're investing more in digital and E-commerce, and we're conscious that those are typically shorter lifecycle assets. And so some of that depreciation increase you see reflects just that mix shifting to some of those shorter-dated investments. I think probably other point to call out, so Brad reinforced the MSRDC and our focus on delivering benefits from our investment.
I think just a general call out that, you know, we're not in the practice of, you know, calling big numbers on productivity or cost savings, but actually in the half, our productivity agenda, you know, went actually relatively well, considering some of the restrictions and conditions with COVID, and actually our productivity more than offset inflation in Australian Food in the first half, so, you know, there I guess are a few builds on Brad's comments, but we're very conscious of needing to manage our costs very carefully and focus on end-to-end efficiency in the second half as we face a more modest sales environment.
Thank you.
Thank you. The next question comes from David Errington from Bank of America. Please go ahead.
Morning, Brad. Morning, Steve. Brad, a good journalist needs names, a good analyst needs numbers, and basically what you said there is really good stuff, but can we put some numbers around the costing costs that you've warned in this first half? Now, I know COVID effectively, we can see the COVID costs, and we've got that. But can you call out what sort of negative impact in terms of these investments that you did need to make to meet the short-term spike in E-commerce, yeah, how much of a drag was that on your first half? I think, Steve, you called out in the thing that you were running two DCs with MSRDC. I think you had to run. Was it Oakleigh? You had to run a dual DC, duplicated.
What we're trying to work out is just how much was your first half result held back by costs that should come out going forward? And that's, I think, where the questions are coming from. Now, you've given us a really good rhetoric as to what, but can you give us a bit of substance as to, you know, how much did you have to invest in your E-commerce in that first half? Because I remember Brad was saying you brought five years forward of work in six months. Now, that must have cost a fortune, you know, physical picking. You know. So can you help us out with some numbers? Because as I said, you know, words don't really go much in our models.
All due respect, it's a great explanation, but it, it doesn't really help us much understand how much your first half result was held back by these elevated costs.
Thanks, thanks, David. I don't think I honestly can do justice to the eloquence of your question, but let's give it a shot. Obviously, the COVID cost is the big one, and I... You know, David, I would refer you to a little page of the company presentation that is, you know, Resource Page 16. And I think, you know, this is a really important series of numbers, and we'll talk about some of the other ones, subsequent. What page is it on the-
It's on 14, Brad.
Page fourteen. Sorry. I think this is, you know, this is an important part of it, because when you look at this, you know, David, you're looking at material. I mean, you know, we're talking about in the first half, AUD 7 million of COVID costs. I'll come back to the E-commerce one separately, if I may, and how we wind them off. So a lot of the comments you made on supply chain, which are very legitimate, I actually committing to the DC play facilities, which we felt we needed.
They're just in a very practical sense, given our demands, and it's that number that you see there, of 61 million dollars of supply chain costs, which, as is slowly unwinding, and is virtually, you know, we'll hopefully finish completing unwinding by the end of January. I mean, it's... sorry, we're in the process of finishing now in early February. So that's the big one. I think the cleaning and, you know, and the PPE, you can see the trend lines on how they're coming down. You know, they'll continue to come down as we get more thoughtful and smarter in how we deal with them. The contractors and security really were about, you know, worried about safety for our team and some of the surges in some of the customer behavior.
Actually, our customers are behaving very well. We're all in a rhythm, so we expect to see that coming down. Team discounts, incentives, recognition, payments. We deliberately ran a 10% discount for our team until the end of December. And we felt we could have unwound it earlier, but just given the year to our team, it felt they put in, we wanted to do that. We have now wound that back to our standard 5% plus 10% on own brand in general, plus front of the on business. So that's come back materially. So those costs right now, we're feeling comfortable that we'll continue to manage them down.
As I say, we have a full-time squad that manages the COVID outbreaks, and now that they're more localized, it really becomes a more localized response, and we're just much better at doing it all. So the trend line in those numbers is good, David. It's all caveated though that we will do what it takes to keep our team safe. If I then come back to your second question, and I think so you've got to model those through, and I mean, those are massive numbers. They never cease to amaze us by the size, and we don't resolve from the underlying activities, but that's the size of the numbers, I guess.
If you look at E-commerce, this was an unusual H1 as per the previous question, where normally, you know, the growth rate and the efficiency is. The efficiency more than offsets the growth rate as a part of our composite. This was not true in the H1, and that should be understandable given the incredible growth we've had. But then in particular, our anxiety going into Christmas, that we wanted to have enough capacity there to keep customers COVID safe. And as I say, we deliberately therefore invested more than we perhaps might have, but they were all the right investments. We don't really break it out in great detail, maybe, you know, but it is included there.
I would also like to just call out that we don't quantify either, but it is really important, not only that we had to make our stores COVID-safe in Victoria, which we did with the COVID outbreak, and then the agreements we got to with the Victorian Government on how we manage shops and in and out. We had to particularly do so inside our CFC in E-commerce, and we continued that longer than we did on the rest of our supply chain, and that's because we felt our team in our CFC, you know, we just didn't want to create any risk for them, and at some point, when we meet, we can bore you with the detail of what that means.
But it actually created somewhere in the order of a 20% impact on the efficiency of those sheds. So we had the investment capacity, plus the way we wanted to operate COVID safe, which of course changes as we go forward. So those are the, you know... We'd love to give you more numbers on it, but I mean, you can see the big numbers, but those are the, you know, that's where we are on the E-commerce side. We think it puts us in a very good position in the second half. We need to deliver against that, as you know, because we do expect to see the tailoring on sales.
Then on the question you've rightly challenged us on many, many times, which is our investments in supply chain, David, and we are very cognizant of our commitment to deliver on that. Actually, we had a good first half as well. We've called out our various facilities. We talked to you before about trying to get to the right volume through MSRDC and do it consistently, and then get our cost per carton down there. Actually, very good progress that Steve can talk to on that. Our reference that I made in the previous call was to the need for us to now deliver the efficiencies in store, which really is an FY 2022 conversation, but we are over the two million cartons a week.
you know, and that is starting to deliver the right cost per carton, and we are still hoping that we'll get the efficiencies. Melbourne is precious for me too early in terms of consolidating. We'll finish that. Unless there's anything you want to add to that, Stephen? I don't know what other numbers we can provide or comfort we can provide there.
No, I think that's good color. I mean, just a few observations. You know, we called out AUD 168 million of COVID costs in the Australian food section of our announcement. You know, that's, you know, if our costs grew 10.5% in Aussie food, that's just under 3.5 of it. You know, volume is over half of the remaining, and I think the other big ones we called out, which are, you know, relatively similar in magnitude, are, you know, depreciation, which, you know, Grant asked about earlier. Some of the investments in digital and IT, you know, relatively similar sort of magnitude, so they're probably the other ones I'd call out.
Yeah. So, as I'm sorry we can't give you the exact numbers you're looking for, but hopefully it gives you a sense of the color of the potential that lies ahead for us, and that we're working hard to deliver, and actually I was saying in the first seven weeks have got off to a good start in doing so.
Thank you. The next question comes from Shaun Cousins from JP Morgan. Please go ahead.
Thanks. Good morning, all. Just a question on market share in Australian Food. If we look at and recognize ABS data can be a little tricky, but in the December quarter, I think the growth was 8.8%. You've grown at 8.3%, and Coles at 7.3%. Can you kind of confirm there that you think while you're definitely gaining share at the expense of Coles, it seems that the remainder independents are gaining share? And do you stand by the comment, I think you might have made in August, that you see local as a tailwind is still somewhat temporary and some of those customers won't stick? Or is there the prospect now that some consumer habits have changed and some of this local tailwind that supported sales could continue on?
Just talk a little bit about market share composition.
Oh, sure. Thank you. And we did look at share, you know, through slightly different metrics and not via the ABS ones. So just caveat, we look at it slightly differently. But you know, the hallmark for the business in December and January was just great progress and good growth across all states that we operate in. And that was... That really struck us was this consistency of execution. And from the numbers we look at, it would appear as if we made good progress on growing share across all states. Now, where the share came from varies on a state-by-state basis with a new Costco facility in Perth and you know, so it doesn't necessarily come at the expense of Coles, which becomes much more situational specific.
So it was really pleasing momentum across the group. And so I think that's important. Within that, what we're still seeing, Sean, is that the freestanding or neighborhood stores are still growing disproportionately. But as with the market reverting back to a more normalized growth rate, we're starting to see a rebalance. The rebalance itself, though, is happening very in a very volatile manner because a lot of the lockdowns we've had sort of start some of the balances back. So you sort of see, you know, you get another lockdown in Victoria, and again, everything goes back to the neighborhoods, and so it comes back. So it's volatile, but neighborhood stores are still growing faster than malls are.
But actually, we've seen the, you know, the reversion to mean in general, except outside of the city malls that we talked about. And so, and then depending on what happens in the lockdowns. So we're seeing the reversion to mean, and that correlates with my comments around where we've started to get some of our share growth on. Similar with Natalie. I don't know, Natalie, if there's anything you would like to add to it. I mean, it's very noisy, I guess, it's the-
I think the momentum has been very pleasing throughout the half and into January, and that's spread, as you say, across, you know, all states and also across fresh and packaged. And it's, you know, to me, a reflection of the great work our team has done in stores, really looking after our customers, but also our whole team really working end to end on a very strong trade plan and working with WooliesX on continuing to satisfy that demand for very convenient services, whether that's delivery or our to the boot services, which have grown very strongly over the half.
You know, so we're always talking very dramatic effects in this market. You know as well as we do, habits are really, really important elements of what we do, so things tend to happen slowly. So the reversion back to a normalized shopping pattern is happening slowly. The one thing that we're not seeing reverse as of yet, though, is we've called out is E-commerce, and that's not surprising given that it's been a longer term trend. But otherwise, it's just a slow normalization that's taking place. For those who are interested, all of the, the, you know, the toilet paper and all the essentials categories are still continuing to trade above normalized sales. That is probably to do with people still staying at home, but it's just, again, habits.
Even those are taking a while to normalize, where you would have assumed pantry stocks and whatever else means that they may have normalized by now, but, but they're not. They're still trading slightly up, on what their normal long-term run rate would be.
Thank you. The next question comes from Andrew McLennan, from Goldman Sachs. Please go ahead.
Good morning, everyone. I thought I might ask a question on the hotels. The revenue line didn't look to be too much of a surprise, but EBIT certainly was very, very strong performance there. Can you talk about a couple of things, I guess? Maybe talk around sort of gaming capacity and how that changed over the period. You've obviously spoken to some premiumization in the mix of sales on premise, but can you also talk about cost control? It's been a much better recovery in profitability versus the prior half than we expected. Thanks so much.
... No, thanks, and I'll make some comments, then I'll get to Steve Donohue to dive into the detail. Firstly, I just want to reinforce your comments on cost control and what the team have done a really good job of simplifying the operations of the business. And so there's real simplification, which is a topic we talk about a lot as a group, has really been exemplified by what the hotel team have done on simplification. Secondly, I think a very important feature of our business is we do have a lot of natural hedges in our business in terms of off- on-premise to off-premise or from city stores to neighborhood stores.
But another thing that really strikes you in our venues is they are very neighborhood driven venues, and so in a time of lockdown, actually, our general location of our venues plays to where those venues are located. And they also tend to be larger venues, and therefore, when you come to the social distancing aspect, it's easier to execute within them as long as you simplify your offer. So it is a more robust, inherently more robust structural business than may first meet the eye. But I'll turn to Steve to talk more specifically to some of the comments around what percentage of gaming machines are operating. Any other comments you want to make?
Yeah, thanks, Brad. I mean, it's hard to talk to the specifics of gaming machines because they're all state-based, and the changes or the restrictions imposed by various state governments meant that you had a lot of ins and outs, if you like. But we're at a relatively normalized position now, with a sort of one in two square meter rule playing out across most markets, with the sort of couple of notable exceptions, including Victoria. The gaming numbers have been overall, I'd say, pretty resilient. But they are somewhat linked to the other elements of the hotel.
So just coming back to the cost control question. The reality has been for us that we haven't been able to put entertainment into our venues, and we are one of the largest entertainment providers when it comes to live music and stand-up comedy and the like. And obviously, a lot of those events haven't been able to be conducted. And equally, in the area of food service, a lot of hotels had discretion previously to sort of set their own specials and those sorts of things, which, you know, were great from a customer standpoint, but actually added a lot of cost on the way through. And customers are increasingly demanding just, you know, the basics of a hotel menu, and that's meaning that we're not investing in some of those feature specials and that sort of thing.
So there's been, you know, a focus from the team on cost, but there's also been this natural removal of costs related to COVID.
And I just want to call out, though, the real volatility and uncertainty. It's credit for a lot of team members working in the business, in particular in Victoria, where they're working, they're not working, they are working, and it couldn't have been tougher for the team, quite frankly.
Thank you. The next question comes from Aryan Norozi from UBS. Please go ahead.
Just on New Zealand, if you look at two-year average sales growth for the quarter to date, the first seven weeks, it's running at 2%-3%. I mean, is this how we should be thinking about Australia moving forward, given Australia's running at 4%-5% at the moment, but are there any differences that suggest that New Zealand would have slowed down more materially than Australia, please?
Yeah, I mean, I think it's a great question, and one that we've been looking at, of course. There are what seems obvious, some narratives, but actually, there are material differences. The major material difference, actually, in New Zealand, and we can come back to long-term immigration. We're just looking at short-term net number of people in the country. Actually, Australia turns out to have more people in the country when in December and January than normal, just because of the overseas tourism patterns. Whereas New Zealand actually gets a real bump in December with the number of overseas tourists who come. So actually, they have less people in New Zealand right now than they normally do, and it's quite a material difference.
So you're seeing both the products of a market that essentially hasn't been in a COVID lockdown as a nation, except for what happened back in March, and there's been a little bit of carry there, but in truth, there hasn't been. So they never got into a reality of home consumption to the same extent, and so the food service sector and the store sector are quite different. But outside of that, you're just seeing differences by sheer numbers of people in the country at any point in time, consuming food or buying food from supermarkets, and it's a very different tourism pattern, in New Zealand, you know, in particular the South Island of New Zealand.
So when we look through our New Zealand business, and you just look at our tourism index funds, which actually tend to be at airports in New Zealand, if you're interested in Auckland Airport or Christchurch Airport, Queenstown Airport, you'll just see huge declines in sales. So it's just a very different profile. I wouldn't extrapolate from that into Australia in the next twelve to eighteen months.
Thank you. The next question comes from Ben Gilbert from Jarden. Please go ahead.
Morning, Brad and team. Just a quick one from me, just around the Endeavour demerger, and that we're now back on the table. I'm just interested in how you're thinking about potential capital structure there. So I think from memory, I had a net debt to EBITDA sort of view on the unit. Looks like you have the group ex-Woolies effectively debt-free. The dividend was probably a little bit softer today. Just how are you thinking about scope for capital management, particularly things around off-market buybacks, post the proposed demerger?
Thanks, Ben. I'll turn to Steve to answer the specifics. We didn't think it was a bad dividend today, actually, but just real. But we do understand your question and take it seriously, what happens at the point of the demerger. The only point I just wanted to make, if I may, we haven't ever stopped working on preparing for this moment. We just had more of a focus in the last year, which I think stands us in good stead, of creating Endeavour Group. And part of the reason we did this was to take out the complexity between Endeavour Drinks and ALH, and just the overlap, because, you know, our liquor sites, retail sites were owned often by an ALH license and operated in a different way.
So we've been working very hard on that middle step of getting the business in the right shape to take the final step, and it stands us in a much better place. We still have work to do today than we were a year ago, in general, on the operations of the business, but that equally does include on the overall capital structure of the business. But I'll turn to you, Steve, just to give some comments and thoughts on how we're thinking about it.
Yes, firstly, just on the dividend, probably just worth refreshing for everybody our approach to dividend. We typically have a smaller first half dividend than a larger second half dividend. So there's typically a split, and our increase really reflects our growth in impact. And so, you know, I think that'd be how I'd encourage you to look at it. As we think about the capital structure for both Woolworths and Endeavour, really, we're thinking about it as, you know, the shareholders of Woolworths today will be the shareholders of Endeavour tomorrow, you know, assuming demerger is the path we take. And so we're very conscious of the need for an appropriate capital structure for both businesses to give them both stability and the capacity to grow.
We're working through the details of what that capital structure will be for both businesses, which we would anticipate communicating as part of the demerger documentation, which will probably be sometime in mid Q4. Is there an opportunity for capital management? Certainly something we're looking at very closely. We're conscious of, you know, franking credit balance. We'd like to do capital management if the opportunity arises, but it'd be premature to call any specifics on that at this stage until we've worked through those final capital structures for both businesses.
Thanks, Steve.
Thank you. The next question comes from Richard Barwick from CLSA. Please go ahead.
Thank you. I'm gonna sort of pick up on the actual number of your online shoppers in supermarkets, because I've seen some market data which shows that online supermarket shoppers tend to be less promiscuous than in-store shoppers, so just to clarify the one point five million customer number that you've disclosed, how is that defined exactly? Is that the number of households who are shopping online with you through supermarkets, and also, just how many of those are repeat or established shoppers as opposed to perhaps, you know, COVID temporary shoppers?
Thanks, Richard. I'll make some comments, and I'll turn to Amanda Bardwell to talk. Firstly, some of the numbers that have been quoted, you saw in some other presentations of how sticky customers are when they cross shop across channels. We agree with the point, but we don't agree with the multiple that's in those numbers. We would have a much more modest expectation of our overall share of a customer if they shop more than one channel from us. We're focused on getting, you know, obviously the right share of each customer, and we do get a greater share of a customer's basket when they shop more than one channel.
But our multiple's much more like one point three than it is two point one, if you are looking at share multiples of cross channels and what share you get out of a customer. So we do agree, and it is true. Of course, you know more about a customer, they get more comfortable with you, and the more ways you can engage with them, you know, the better off you're gonna be, and I think that that's a truism. And then specifically, though, on numbers of E-commerce customers, I'll let Amanda talk to the actual number, but it does get very tricky because in the first half, we had our core customers using our services, and that continues to grow very strongly.
But then we had a number of customers who used us just given that they were vulnerable customers or retired customers in the one-off, so it was a pretty noisy half on the totals. But I... Amanda, I don't know if you'd like to elaborate on any of the specifics on that.
Yeah, so maybe, maybe we'll start with the, you know, we missed about the one and a half million, and what we're talking about there is total number of individual customers who shopped our E-commerce services during that half, which, you know, is reaching quite a material number for us. I think the important point that Brad's made is all of those customers also shop in our stores, and so we're very much looking at the overall share of wallet of that total customer group. Underneath all of that, and again, I think, Brad, you, you make a good point. What we were really pleased to see in the first half was we're able to bring all of those loyal customers back in the first half of the calendar year we weren't able to properly service because we prioritized all of the vulnerable group.
And so what we were really, really pleased to see was those loyal E-commerce customers coming back and getting into a very consistent pattern and way of shopping with us. And then we equally were able to continue to serve those customers who'd tested the service during those COVID peaks. And then we had the other sort of overlay, which was as there was individual outbreaks of COVID in local communities, obviously there was this quite unnatural spike that would happen as the demand for those services rose. So there's a whole lot of individual things happening underneath those numbers, but I think, you know, I'd summarize it by saying we're increasingly seeing strong, really healthy growth in our E-commerce customer base. And we're very, very, very happy with the mix of those customers.
I mean, our focus is to, of course, continue to enhance the experience, as we've talked about, and that's a real effort for us in the second half. Thanks, Richard. Thanks, Amanda.
Thank you. The next question comes from Scott Ryall, from Rimor Equity Research. Please go ahead.
Hi, thank you very much, and thank you for limiting it to one question per person. Could I ask about your infrastructure or supply chain infrastructure that you've opened for the E-commerce business piece, so the two new CFCs and the eStore. How would you judge the success of those stores going forward? You know, what are the sort of metrics that you look at relative to your in-store fulfillment? And if you've got any initial comments, I know they've only been open for months, if you've got any initial comments on your experience with them, I'd be really interested in that as well. Thank you.
Thanks, Scott. Again, let me take a crack at this, and I'll pass over to Amanda to elaborate. The first point I'd make is now and into the future, in-store performance is gonna be the key mechanic in which we actually fulfill E-commerce stores, and WooliesX in Amanda's business and Natalie's business are working very closely on how we do that. It's gonna be 80% plus of E-commerce orders will be fulfilled in-store. There are many benefits in doing that, and it's wonderful to see what we're doing in Australia and how we're also leveraging some of the learnings in New Zealand, who's more advanced on that issue. That's critical to us.
Then on the incremental 20%, that's where we are trying to learn and use either manual or automated CFC to get that on. So there's and in both of those, the key for us is the end-to-end cost and experience we provide to the customer. So you're always trying to optimize your in-store pick cost or your CFC pick cost and your delivery cost. And both of them need to be added together when you look at that end-to-end cost, of course. And then you also need to look at the experience you want to provide your customer, and there you are trading off, often, range and availability for speed.
Because the closer you are to the customer, the faster you're gonna be, but you do lose something on range and at times availability if you're doing in-store pick versus CFC, or second automated CFC pick. So it's quite an interesting Rubik's Cube, I guess, and I find it intellectually very interesting on how you manage those factors. What we believe is that speed is very important, and a customer will accept a more curated range for that speed. But what a customer will not have with a curated range is an out-of-stock experience. So how we actually range curate and provide alternatives or make sure we're in stock becomes key.
What we also can see and know is you can get very caught up on the in-pick, the cost of the pick, but actually, there's a higher cost of delivery than there is the cost of the pick, and so you can get very caught up on perfection on the pick cost, but then actually lose it all on the last mile cost, and so you have to be very thoughtful. In particular, given 35% of our business is actually picked up at a store anyway, never mind delivered to the customer. So it's a very interesting trade-off and something we are learning about more every day and trying to educate our board about more every day. On some of the underlying metrics, though, Amanda, I don't know if you wanted to add?
Yeah. Look, no, look, I'd only just say, you know, we really line up the CFCs, the manuals. We look at the efficiency coming out of our stores and also now the automated facilities. And we look at them both in terms of, to your point, the customer experience and the relative experience of our customers who are being served by those different sites. And then we're looking at the different efficiency end-to-end, and I think that is a really important point you make, Brad, around it's not just the pick, but it's the last mile. And so we're looking at that lined up in each one of those different facilities and understanding, you know, how we can maximize the efficiency in each.
Naturally, in our stores, which are carrying, frankly, the bulk of all of our home delivery and to-boot services, you know, we're able to utilize a lot of that existing infrastructure that we have there. Versus a CFC, we've got a lot of fixed costs that go down in the early stages, and then we're ramping up the capacity over time. So it is that, it is getting that balance right, and we're very conscious of where are we placing a manual CFC or indeed an automated CFC versus where does that sit within our overall network?
And then just on the question of, you know, the eStore, we're really in the test and learn phase there, and that's really about testing the volume that we can reach in terms of that automation, particularly with the Takeoff units, and the early results are quite pleasing. And then also how much throughput we can actually get through the automated facility as well. So, you know, we're testing and learning on the eStores, which we think that there's something really interesting there for us in the future, particularly as we think about our broader store network. CFCs will play a really important role, but the most important aspect of our network is that store network.
The trade-offs, five metrics I'm conscious of David's point earlier that we look at is items that the pick rate per hour that you pick in a store or CFC, the labor cost per hour which takes in the overhead, the out-of-stocks position, and then the delivery on time which we all roll up into a perfect order metric. We track that weekly or both by month, and we all work together on changing it. It's all those metrics that come together that then do that. Then on the cost side, it's the store pick or the CFC pick rate. The delivery cost net of any revenue we recover on that delivery cost.
And then we look at that for route-based trucks, and we look at that, which then becomes down into number of drops per hour, or we look at that through our on-demand service, which is a sort of point-to-point service. Hope that makes sense.
Thank you. The next question comes from Johannes Faul from Morningstar. Please go ahead.
Hi, Brad. I have a question on stock loss improvements in selling food and the potential for more gains there. I guess the question is, you know, where does stock loss currently stand? Do you have a goal? Do you have a certain level in mind? And how far could strong growth in online and the building of these fulfillment centers, whether it be CFCs or in store, help in achieving that goal and driving more gains in stock loss please?
Yeah, thanks, Shahan. I'll make some comments, and I'll ask Natalie Davis. It'll be super obvious to elaborate. We had a very good half, and we called that out on stock loss. And of course, some of it is related to the elevated level of sales we had. So we, you know, we do know that, but a lot of it is actually related to the improved way we're running our end-to-end processes on loss. And what you're trying to do on loss, a bit like the issue we talked about on E-commerce, is make sure it's good loss, because you don't want to end up with out of stocks, and then, you know, you feel like the stock loss has gone down, but you've alienated your customer.
Clearly, online does help on a stock loss number because your stock loss is diminished. You know, online, it's only through out of code challenges you have on quality of product. It's not through some of the other forms of stock adjustments that you need to make. So that does help. Elevated sales help, but we've actually structurally improved the whole way we run it, and it's one of the highlights of ours is how much more forensic and thoughtful we are in the end-to-end process. But, Matt, over to you for any detail.
Yeah, I think it's been a very pleasing half on stock loss. There's obviously been a benefit, as Brad said, from sales fractionization, but we continue to work end-to-end across the business to really help our teams improve stock loss and also share learnings with our New Zealand business across the Tasman. You know, the two initiatives that I think are probably having the biggest impact at the moment are the work we've done creating a waste and markdown tool for our fresh team to use in store and also streamlining the processes around that tool. So now we're doing markdowns less frequently and making sure that we're using technology to work out what the depth of the markdown needs to be. So that's really helped our fresh areas.
The other work that's continued is around closing up a little bit the entrances to our stores and putting in what we're calling welcome gates. They're now in over more than 700 of our stores, and they've also helped control stock loss. You know, we continue to work on, you know, what are the initiatives we can put in place to make sure that we're maintaining our stock loss performance into next year, but obviously balancing that against availability of product and freshness of product for our customers.
Thanks, Natalie.
Thank you. The next question comes from Phil Kimber, from Evans and Partners. Please go ahead.
Hi, guys. Just a question, with all the new supply chain changes, you've talked a lot about the costs, but, is there a meaningful sales impact from those initiatives as well in terms of in-store, in-stock positions? If you could maybe give a bit of color around that. Thanks.
Phil, I mean, thank you for the question. You know, there are many challenges in volume cycling this second half, as you know, with the elevated sales of last time. But there are some positives that I think are very important to call out. You know, one I called out in the media call was the fact that we never really had Easter last year in Australia, and that hopefully we'll have a safe COVID, but a much bigger Easter. It's the second biggest celebration we have in Australia.
The other one is we did suffer some material out-of-stock challenges just as we cycled the Covid crisis before, and then we had a lot of issues understandably inside Victoria of how some of the constraints and the shutdown actually of our Mulgrave warehouse, as well as our West Footscray CFC, and so there were some understandable out of stocks that eventuated from that actually plus later in the process, our meat plant in Truganina, so generally, we're pretty good at managing out of stocks in our business, but this did create an elevated level of out of stocks last year that we should be able to cycle and materially improve this year, given the infrastructure we now increasingly have in the business, so that hopefully will give us some form of upside.
A lot of what you've seen, though, with the warehouses we've put in is to give us growth for the future. A lot of our warehouses were already at capacity and back in Melbourne. Some of the costs we've had historically been to have all these overflow facilities, and that created a lot of inefficiency. And so what we've now done through the investments we have, is put the right capacity into the future. I'd like to call out Townsville in particular, which, when we had the Townsville floods, we really regretted not having the capacity in there for all the team and customers in FNQ, and that's now changed. Adelaide, with the material expansions we've made there, which are very important there to help us, with that part of our facility.
Our new Melbourne Fresh DC, which I think becomes key. And so, that already put us in a really good place for the future. You know, we... In Victoria, we're literally out of capacity from for the last normal five weeks of the calendar year, and so that all these issues are now will be systematically addressed by what we have. We'll also be able to materially rebalance for those who like the technical detail between the lines picked in a national DC versus the lines picked in an RDC. And with our standard RDCs, which is, as I'm talking to Adelaide and Townsville and so on, you know, we'll have extra pick slots there, so we'll be able to really reoptimize range, which will help us with our interstate-... Right.
Quite a lot of good opportunities there for us, Paul. I was joking with some of our team, you want ERP upgrade in your lifetime, you want to. Also, only do one supply chain upgrade in your lifetime, because they do give you gray hairs, but we're materially advanced, and it's pleasing to see all the progress we've made. Hopefully, we'll start getting the benefits, which we'll then try and balance against the incremental investments we're still making in Jandakot or Moorebank in Sydney.
Thank you. The next question is a follow-up from Grant Saligari from Credit Suisse. Please go ahead.
Brad, just quickly, just on back on the COVID costs. I've been trying to noodle through why your costs are so much higher than the Coles costs. And I guess not for you to comment on another company, but it just struck me with the previous question that you're out of capacity with your DCs as you in some states, as you said. Is some of this COVID costs that we're seeing for duplicate DCs really to handle the extra volume? I'm just trying to understand this disparity in costs that since the reporting.
Yeah, I think, I mean, I always like the word noodle just by way of reference, but I find noodle through most of our numbers as well. Look, because we were pretty tight at capacity limits, in seriousness, Grant, we didn't have much flex for error, and so we took a very safety-first approach to the bulk warehouses. It's not directly related to volume, but we didn't have much room for error. If things went wrong, we just had no flex in our system, and therefore we just felt we needed to be very prudent. That's what you're seeing. When you're at capacity, you just can't afford the slippage, and we already were there, and then you start saying, given these volatilities in the automated sales, how do we deal with it?
That's what you... They are related, but we've technically tried to report it the right way. As we get more flex into our system now, if we had another COVID crisis, which I would hope we wouldn't in later years, there would be more flex in our system to adjust to it than we have now. You know, in general, I mean, one of the things we talked about before, even with Amazon and the automation, it's not very good in a COVID crisis because you need bulk capacity to move pallets and all that, and we started to activate that. So there are different but related issues. The other one, which is very important to point out, and I think we have in previous calls, we certainly did for the Victorian government.
Historically, our DC network, even for our NDCs, has been very Victoria-weighted. So, Mulgrave, our NDC has been based in Victoria, and it's been supplying the whole country. And so when we have issues there, and we have to invest there, that did cause a lot of additional cost for us. And perhaps if a different shape of network, you wouldn't have Truganina, which services us through the whole of Australia, and usually it is based, you know, in Melbourne and so on. So we were a bit, little bit more weighted, which changes a lot in the world we're talking about and how we're investing in. And actually, our NDC is moving finally now to Moorebank, but, we're increasing capacity in our RDC, so it becomes a less key factor in our reliance, so we're rebalancing things up.
So there's a little bit of that there. And then you, you know, this is. You take it for what it is, and we talk a lot about this at the board. We feel our role in the food sector as the, you know, the largest player, is to absolutely do the right thing. We just cannot, we could not afford to not meet the needs of customers. Quite frankly, we felt like the expectations of the nation were on us, and we decided we just could not take a chance, and that was particularly true going into Christmas. So you've seen a very, very conservative safety-first approach, and I don't think we're resolved from that.
Thank you. The next question is a follow-up from Ben Gilbert from Jarden. Please go ahead.
Good morning, Brad. Just one more quick one from me. Just so I understand, just the gross margin comments. Could you give us any color on just the deltas there in terms of shrink versus some of the increased investment around online, and the Woolworths Rewards? And specific on the insights around promotions, because I think you guys led the market in promotions back to close to 100% post-COVID, or not post-COVID, but post the initial sort of big step up. How are you thinking about that? And whether you think you're starting to be smarter and getting better returns on your promotions from an internal perspective?
Well, Ben, it's a really, really tough one. We, we did go and support promotional programs earlier than the competitors. So when you see any gross margin, you know, it's reflecting really year on year, and give or take, so they're a relatively stable overall program, a relatively stable or very good price index. So, you know, we cut down a few promotions. We had a bit more participation. So you, you've seen a very stable, stable program. The gross margin mix, that then comes from the categories we sort of moved around as it does. Frozen, because as we talk about supply chain, was our highest growth category inside Woolworths, which has extra supply chain costs which actually come into CODB, but actually, reflect a higher GP inside business.
Frozen was actually our highest category product, interestingly enough, followed by international food and health food, which again, tends to be slightly higher. So there were some kind of mix issues that go through there, but it's not like you're seeing a material promotional benefit flowing through our business. You would be seeing inside that GP some of our higher E-commerce costs, no doubt, because the net freight cost for E-commerce is in GP, and that's just the way it's been structured. So you'll see a little bit of that coming through. The major highlight was stock loss improvement, and the question therefore becomes: how much of that was systematic versus non, just so sales were up there.
A lot of it we get comfort to at this point was relatively systematic in what we saw. You know, we've tightened up our stores without compromising our customer experience, which I'm relieved and pleased about. We talked previously about turning our scales on and fine-tuning the scales inside our self-checkout areas, and actually, we're getting much better at doing that. We're doing much more bespoke markdown management, as Natalie talked about. So it feels more structural. There is some benefit there that we shouldn't kill ourselves on, but it feels a lot more structural in process. So a lot of moving pieces. Steve, I don't know if there's anything you wanted to add to that, but I think we feel relatively sensible on what we've done there.
One-to-ones and, you know, rewards-based programs, look again, there's a year-on-year. So, you know, we had Lion King, and then you had Ooshies, so there's a lot of those, you know, and we had. So I wouldn't think that it's been a material driver. We do think it's a very important long-term opportunity, though, for us to get more one-to-ones, and that's what we're signaling through the booster, you know, that we talked about or through just how we, you know, more accurately take in-store offers and new purchasers one-to-one offers. Steve, I don't know if there's anyone you wanted to add?
No, I don't think so. I think you've covered it.
Thank you. The next question is a follow-up from Shaun Cousins from JP Morgan. Please go ahead.
Thanks, guys. Maybe following Ben and also Johannes's question, what is your stock loss in food now? I think at the end of fiscal 2020, it was 2.7%. Can you quantify what that is, please? And maybe, again, to Johannes's question, where do you think it can get to, please?
Steve, do we actually tell everyone the number?
It's not one that we're specific on. We're more directional. So, yeah, I think we're. Yeah, we've gotten below 2.5 in the half, but I think some of that is a function of the sales growth that Natalie talked about. So there's some fractionalization benefits as well as some systemic benefits. I think it's just one we'll watch closely in the second half, as sales moderate.
Certainly, hold us to account on the number that we exit the year on. But we are tracking, and we've been tracking ahead of last year, all year, and through them. So good process, some extra sales. So I'd just like to walk through our seasonal sell-through, which is excellent this year, which was materially helped out. Often you get a big jump in December, but a great seasonal sell-through, which really helped our December number. And the improved stock loss. Actually, I would call out Big W, actually, which really made some good progress on that as well, as we continue to take some of the things we've learned in the supermarkets and entire Big W and obviously the amount of sales there.
Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Banducci.
Thank you, everyone, for all of your questions, and challenge. You know, it always feels strange to me because our heads are already thinking about Q4, and we're talking about H1, but hopefully, you get a sense that we've got off to a decent start in the second half. Our focus is Easter, and we're hoping Australia has a great family Easter this year, and that's where the focus needs to be, and we do see that as an opportunity, albeit in a moderating market, and that's what we're working towards, so come into our stores, see what's there, participate in Discovery Garden Tours; it's an amazing program, and get excited about Easter. Thank you very much.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.