Thank you for standing by, and Welcome to the Woolworths Group Market Update Analyst Call. All participants are in a listen-only mode. There will be a short 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 of Woolworths Group. Please go ahead.
Good morning, everyone. Thank you for joining us on this analyst call today to cover the announcement Woolworths Group released to the ASX this morning. Joining me in the room are our Chief Financial Officer, Stephen Harrison, and our Chief Supply Chain Officer, Paul Graham. I will begin with a few brief points from the announcement before handing over for Q&A. Today, we have announced plans to transform our grocery supply chain network in New South Wales with the construction of two new distribution centers at Moorebank Logistics Park in Sydney, with the initial construction to be completed by the end of calendar year 2023. The planned facilities at Moorebank will support our growth, materially improve efficiency, advance our localized ranging efforts, and deliver better and safer experiences for Woolworths stores, teams, and customers.
We expect the initial benefits of this investment to be realized in financial year twenty-five. The Moorebank development will build on the automation technology that we have already deployed at MSRDC in Victoria and will include the construction of an automated regional distribution center and a semi-automated national distribution center. We have learned a lot from our MSRDC development, which is beginning to deliver against this business case, and this gives us the confidence that now is the right time to invest in our critically important New South Wales network. Woolworths Group will invest between AUD 700 million- AUD 780 million in new automation technology and facilities over the next four years and has signed an initial lease term of 20 years with Australian logistics company, Qube Holdings. Subject to New South Wales government's approval, the new facility at...
The new facilities at Moorebank will replace existing ambient operations at Minchinbury and Yennora in Sydney, as well as our Mulgrave facility in Melbourne. Woolworths Group is committed to supporting impacted team members at these DCs, and we will work with each individual on the options available to them within the group closer to the time of the site closures. However, the closures of the sites will regrettably impact some roles. To reflect this, the group will book a significant item of approximately AUD 176 million in FY 2020 for the expected redundancy costs associated with the impacted team members. In addition to this, there will be further significant items in FY 2020 associated with the Endeavour Group transformation and salaried store team member remediation costs, which we also outlined in today's release.
In addition to the AUD 51 million booked in H1, Endeavour Group transformation costs of AUD 179 million will be incurred in H2 for the work completed to date to enable the separation. Despite the deferral of the separation of Endeavour Group, the majority of these costs have been incurred in completing the merger and restructuring stages, with the group now well positioned for future separation. These costs include stamp duty, external consultants and advisors, dedicated internal resources, and IT-related costs. Despite the deferral of the separation, the total cost to complete the separation remains in line with the AUD 275 million estimate we communicated in July of two thousand and nineteen. A further AUD 105 million were booked in H2, related to ongoing salaried team member remediation efforts.
This includes additional historical time and attendance records, accrued interest on back payments yet to be completed, and the extension of the review to other awards applicable across the group. The original focus had been on the General Retail Industry Award, which is our largest award, by a long way. As part of this review, payment shortfalls have been identified for salaried venue team members working in ALH hotels, employed under the Hospitality Industry General Award, or HIGA. This review has identified salaried venue team members were not paid in full compliance with the group's obligations under the HIGA, based on an analysis of F Y 2018 and FY 2019 attendance data. We remain committed to fully rectifying these payment shortfalls as quickly as possible for our team, and I'd like to thank them for their patience throughout this process.
Finally, before turning to our trading update, I wanted to reiterate how proud I am of our team and how they have come together to support our customers, the communities within which we operate, and each other over the course of the last six months. We have truly lived our purpose of being better together. Trading has remained strong in Q4, with Australian Food and Endeavour Drinks sales growth accelerating in May and June, following a more subdued April, which was impacted by unusual trading patterns around both Easter and Anzac Day. New Zealand food sales remained strong throughout the quarter. However, sales growth has more recently reversed to high single digits as domestic restrictions have lifted across the country. BIG W reported very strong growth during the quarter across all major categories.
Inventory levels are now running below where we ideally would like, but the team is responding quickly to address shortages where possible. We are currently in the middle of our annual toy sale, which is performing well. Incremental costs related to COVID-19 are tracking at the higher end of the AUD 220 million-AUD 275 million dollar estimates we provided at Q3. As the trading environment continues to normalize, these higher operating costs are gradually and cautiously being wound back. ALH venues are beginning to reopen, but the conditions of reopening differ by state. As a result, sales remain materially below prior year levels, and the business is expected to continue to be loss-making until more venues operate with a full service offer.
Given the continued uncertainty around when this may be, it appears unlikely that the Endeavour Group separation can take place before the second half of calendar year 2021. However, we remain committed to pursuing the separation of the business at the appropriate time, as we believe it remains value accretive for shareholders. Turning to profit, we expect to report FY 2020 group EBIT post AASB 16 and before significant items of between AUD 3.2 billion to AUD 3.25 billion. Group EBIT, our hotel EBIT is expected to be AUD 160 million to AUD 170 million, with all figures subject to year-end finalization, auditor review, and board approval. Woolworths Group's full-year results are scheduled for the twenty-seventh of August, 2020. I will now turn the call over to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Please note there is a limit of two questions per participant. Your first question comes from Shaun Cousins from JP Morgan. Please go ahead.
Thanks, and good morning, all. Just a question regarding the food EBIT business, particularly in terms of the COVID costs. Can you just talk a little bit about, given we're seeing in store, you don't have as many security guards, you don't have as many checkouts sort of operating. I'm just curious why those COVID costs remain at the higher end, and will those COVID costs continue into July onwards? And overall, will your food EBIT margins expand in the second half, please?
Thank you, Shaun. You asked, we are slowly and cautiously winding back a number of our COVID-related costs, and particularly at a store level. We had some material ones in supply chain, as we took additional warehouse capacity, and those will wind up, will take a bit longer to wind up. But we are cautiously and slowly, and it, it's been done at a store-specific level. So that depending on, particularly in our high traders, we are being much more cautious about what we take out, given the need to be particularly vigilant on, on social distancing. So they will be wound up, but you only have to look at what happened in Victoria over the weekend to realize we just need to have a very cautious setting in this regard. So it, it is being wound up.
We'll see how we go, and we are really looking at on a week-by-week basis and at a store-specific basis in terms of our big traders versus our lower traders, and then, of course, taking a state overlay. So we'll see how that all goes. As I say, it does change. Last week, I would have been very positive on taking them out this week. Just seeing the COVID spiking in Victoria, I think caution has to be the order of the day.
So it could extend into July quite possibly?
Absolutely.
Yep.
Absolutely.
Yep.
So, Shaun, I mean, I think in July, at minimum, a lot of our cleaning standards will continue. We are simply gonna continue to be very focused on cleaning, in store and during the day in store. So that's going to continue. Security, actually, we managed to wind back quite effectively, and I don't see that coming back. We've seen our team and our customers also regulate around what are acceptable levels of behavior, which wasn't true at the peak of the crisis, in Q3. Then the rest of the costs are the ones we want to be cautious about. In terms of counting team member customers in and out, that will still apply on big traders, and particularly on weekends.
Store greeters will still be there, in particular on weekends, doing the trolley wiping. And then, in terms of a greeter that helps flow things through the checkout, that will still be there, again, probably more on weekends than during the week, and that's when the peak trade is. And those are the ones we'll dynamically adjust as we go.
Given that investment that's going to be at the higher end, I mean, are your food EBIT margins, given you guys have guided to food, to EBIT group, are your EBIT margins in the second half likely to be down, despite what is a tremendous sort of sales release so far into Q4 and into Q3 ?
That's a good question, Shaun. I'll just turn to Steve to give a bit of color.
Yeah, Shaun, at this stage, we're not looking to give EBIT margins or business-specific trading results outside of hotels. So we've still got a couple of weeks of trading or another week of trading and then we complete. So we'll provide that detail to you at the annual results announcement in August.
It would be fair to say, though, Shaun, just for Australian Food, the biggest pressure in that business is actually in our metro stores, in our city metro stores, or what we call the On-the-Go stores. And that is really where the major challenge of pricing with the rest of the supermarket. The supermarket part of the business as you can see from the sales results has pleasing sales momentum, and that is, of course, continuing.
Great, and my second broad question is around the DC. Is the MSRDC actually at business case? Because I thought business case was 2.5 million cartons a week. And maybe if you could talk about what return on capital you expect to get out of the Sydney DC by fiscal 2025, please.
So, there are three key components in the MSRDC, as you know, Shaun. The key to that facility is the automation that we put into actually the single, a single picker and then to both SKU colors for the stores. And there's two other components which are goods to person and bulk palettes. The first of those is the one that is the key to the performance of the site and is tracking in line with our business case, and the other two are trending very positively. Paul, unless there's anything you'd like to add on that before we come back to a return on investment?
Yeah. No, thank you, Brad. Yeah, yeah, Shaun, as Brad says, you know, the most complex piece is the robotic pick, and the load forming logic, which is working extremely well. We're on track with our ramp-up plan. Obviously, we took a little bit of a hit during COVID, where we prioritized purely robotic pick and nothing else. If you take COVID out, then, you know, we're on track with our plan. The site is performing as per expectations, and we continue to ramp it up, and we'll take all those learnings into the new site in Moorebank.
Great. I'll just reinforce that point. We'll come back to the ROI, Shaun, which has been a whole lot of learnings, which is invariably the case in any of these automations that we would apply into both of our facilities in Sydney. And those should really help us with the business case in Sydney. But the key automation is tracking and giving us the cost per carton that we expected, and that's key for us in making the announcement we did today. In terms of the ROI on MSRDC or on Sydney again, Steve, I'll turn to you to give a bit of color.
Yeah, sure, Shaun. I think, probably the important thing to note is on a facility like this, it's largely a fixed cost to run. There's not a lot of incremental variable costs as you add volume, so the more volume you put through the, the better the cost per carton, which is really the key for us in terms of assessing business case benefits. We're not at the excess of two million cartons as yet. We do anticipate being at that level, early in the Q1 of this financial year. And that's really what gives us confidence to make this investment and, you know, confidence that we will be able to deliver the benefits.
In terms of what IRR we're making, we don't call out the returns on capital other than to say it is going to be well in excess of our hurdle rate and our cost of capital. You know, we're comfortable with that investment decision.
Thanks, Steve. Shaun, the other thing which is worth adding is the return has been based on the cost efficiency end-to-end of what we do there, both in the warehousing and then, of course, efficiencies that we can get in the store. It does not include, at this stage, the incremental sales benefit, which we would hope to get, not only at an availability level, but very importantly on the fact that we get a third more pick slots in this facility and a lot more range that we can flow into a critically important New South Wales store network, which has also the most diversity and has the most need for us to flex range, and right now, we have invested materially, as you'd be aware, in our JDA and our space tool, Assortment Optimizer and Planogram Generator.
But those tools are only as good as the range that we can provide, and this will unlock hopefully an incremental material additional benefit in terms of range and sales. But that's not in the core return, which, as Steve has said, is certainly higher than all our required benchmarks.
Great. Thanks, all. Thank you very much.
Thank you. Your next question comes from Michael Simotas from Jefferies. Please go ahead.
Morning, everyone. I was just hoping you could help me understand the underlying trends across the business. So just pulling apart your guidance, given hotels are a fairly material drag, if I adjust the second half of last year, to put it on a 26-week basis, exclude hotels, it looks like your guidance implies earnings anywhere from down a couple of % to up a couple of % in the second half, excluding hotels. That surprises me, given the strength of the sales growth across every business. Can you just talk us through a little bit more about what's going on? It doesn't look like the incremental costs that you've called out from COVID are enough to drive profit down that low.
Yeah, Shaun. I'm sorry, Michael, let me answer that one. I think in the first instance, as you look at last year's numbers, it is important to just go back and look at the commentary we did call out in the second half of last year, about AUD 83 million of one-off benefits going through our centralized costs. So, a benefit from the Caltex arrangement of AUD 50 million and the benefit associated with the property sale, I think it's over AUD 30 million. So, you do need to take those out in terms of looking at the underlying trading performance and earnings. I think, you know, excluding hotels, we've obviously got the hotels impact, which you've backed out in your analysis.
As we did call out, the COVID-related costs are very much at the higher end. One of the other things that we haven't specifically referenced that I wanted to just cover is our team recognition bonus. So, we have included the costs associated with the team recognition bonus in that earnings guidance. We are planning to fund the majority of that by capping short-term incentives for those eligible to participate in our STIP program across the group, but that doesn't cover all of the costs, so there are some additional costs associated with that that's reflected in that guidance.
Okay. So just to be clear on that, are those team recognition costs over and above the COVID-19 costs of 275? And can you give us some idea of what the quantum of that is?
Yes, they are over and above. We haven't called out specifically at this stage what that cost is.
Even though they're not immaterial, though, Michael, as for a full-time wage team member at Woolworths, so non-STIP eligible team member, it is AUD 1000, AUD 750 of shares, and an AUD 250 gift card, and then that's scaled back for the part-time team members. With the casuals who joined us pre-COVID getting AUD 100. So it's not an immaterial cost. I think you can back solve what the cost is. It was something we signaled we were gonna do in Q3, but it wasn't in the estimate of Q3 because we hadn't done it yet.
We would have preferred to have done it in Q3 at the end of the fiscal, but we thought the real power in it for us from Woolworths was to do a shared one to our team members. In order to do that, we moved it forward. Coles had also done a version, so that's another reason we moved it forward earlier in the year, which is why you start reflecting it in these numbers. As Steve points out, we still need to see where we land the year from a STIP scorecard perspective anyway, for our STIP-eligible team. But what we've done in agreement with our team and support of our team is cap that, so we can do a material component of the funding for this payment. But it's the capping is not sufficient to fully fund this.
So it sounds like a lot of the... Well, basically all of the costs are going to end up in FY 2020, and none of us knows where sales are gonna go. But if sales growth remains elevated, should we expect some fairly material operating leverage into next year, or will there be more costs coming through to offset that?
Oh, as always, we don't really give, you know, a profit guidance. It would be fair to say we have tried to take a pretty tough line on making sure that the costs that incurred this year are in this year. And that includes, of course, the recognition payment I just talked about, and includes us trying to provide as much rigor and discipline as we can to the salaried team member remediation. In terms of the cost that flows next year, it will depend on what happens with these more localized COVID updates, outbreaks. But we certainly are very focused on winding back those incremental costs safely and cautiously to ensure that we hopefully can deliver against what our aspirations are.
Hi, thank you.
Thank you. Your next question comes from David Errington from Bank of America. Please go ahead.
Morning, Brad. Morning, Steve. Brad, I probably need to apologize again up front for this question, and so please, I don't mean to be rude if it comes across as being rude. But Steve, you said in answer to Shaun's question, that you're comfortable with the extra returns that you're likely to get from this new supply chain initiative. It would be fair to say that over the last 10 years, I've been very uncomfortable with the return metrics that you have been generating, Woolworths have been generating, on your capital expenditure requirements. I think given that you're gonna be spending another AUD 1 billion, because you've got to put AUD 1 billion, because you've put up front AUD 176 million of one-off costs to close down the old two DCs.
So if we come at the upper end at 780 plus 170, and it's gonna be more than that, it's gonna be close. You might as well say a billion dollars. I think, can you be a little bit more specific, please, in what returns you're gonna be generating? Because it's not gonna. You're saying the quote, I think, is that this is gonna be over and above the existing capital expenditure framework, because it says that it is not expected to materially increase, which is gonna get an increase in CapEx. It's not gonna. We're not gonna see a reduction in CapEx now for the next four years. And yet, over the last four years, five years, we haven't seen any return or any increase in EBIT from your CapEx, and now you're gonna spend another AUD 1 billion.
So can you be a little bit more specific, please, in what returns you're actually gonna generate, so we can actually hold you to account? Because I think it's fair to say, Brad, Woolworths management really hasn't been held to account for the CapEx that it's been spending in the last five to 10 years. And I think on another AUD 1 billion you're putting up front, we need to know what return this is gonna be. And it's not really a good enough answer to say you're comfortable with the return metrics, when it would be fair to say that we've been a bit uncomfortable with it. So can you give us a little bit more, please, in what returns are gonna be given? Is it 15%? Is it 20%? How's it gonna be? Is the MSRDC actually generating return?
Because you've been doing that for 10 years now, and it's still not really there. I think you need to pay us a little bit more in terms of giving us a bit of numbers that we can hold you account to, please.
Thanks, David. You're right, we have been investing in our business over the last certainly the four and a half years that I've been the CEO. We have actually, last year in our CapEx, you see in the last year, made some material investments in supply chain outside of the commissioning of MSRDC. We've entirely upgraded our Adelaide Regional Distribution Center, Townsville Regional Distribution Center, and we commissioned our new Melbourne Fresh Distribution Center in September, October of this year. So there's been internal investments. This was always the big one that set out there. It's the biggest individual investment decision I have been involved in, likely to be involved in at Woolworths.
It's one we've deferred for literally close to two years because of our anxiety of making sure that we took all the learnings out of MSRDC, and we could flow them in here, given the quantum that's required to be spent, and I and Steve will talk to the number. I think there are some material additional benefits on this from what you see in MSRDC, and let me just talk to them. Firstly, as you know, in this case, we are consolidating three distribution centers into two, so it's not just a direct swap of one for one. Secondly, and critically important for me, it's at the intermodal points in Moorebank. It's on the rail line from Port Botany.
It creates a lot of efficiency, leveraging rail both into the intermodal site and then into the national rail network. It's ideally located into Sydney. It has taken us four and a half years of searching to find the best possible site we can. I think this is not only the best site in Sydney, but the best site in Australia if it's executed against plan. We have also then taken the learnings we've had out of the MSRDC into the site, not only how we would like the automation to work, but more importantly, and Paul can talk to it, the flow through the site from end to end.
We have now, but also comfort that our suppliers can deliver quality with the quality of quantity we wanted, which was the big issue going back in the day with the original plans around Project Mercury in the original setting. So there are a lot of benefits we have to it. Then obviously, most importantly, it is the core of our business. It is 40% of our business. It's where the growth is for us and where we need to do a better job of servicing our stores. So that's the logic of it and how it'll play out over the next couple of years. There will be, of course, additional investments in our supply chain going forward, but this is the big one.
I'll let Steve talk to where we see the return falling and the way we're assessing the return and also the way we're assessing MSRDC.
Thanks, Brad. So David, to your question, you know, we do see a high confidence level in delivering a number of the savings Brad talked about. So there will be clearly wage savings on moving from manual or semi-automated visits to the automation. We see transport benefits associated with being in the location we're in. We see in-store labor benefits in terms of just efficiency of the unloading of the pallet and the putting the product onto the shelf or the replenishment process, just because of being able to leverage the technology to get the pallet configuration matching the aisle to which the products need to go. The combination of all of those things give us confidence we will deliver, you know, a strong IRR. It is double digit. I'm not going to go into the details, but well above our hurdle rate and our cost of capital.
But IRRs don't really tell us much, do they, Steve? I mean, you can make an IRR say anything you like. If you can get fifteen, twenty years, and it looks great, an IRR. A return on capital at a point in time is the most appropriate for an investor. Now, in four or five years' time, because it's not going to be operational to twenty-five, what sort of earnings uplift is this likely to give from a return on capital? You would have put a billion dollars down. Can we expect 200 million dollars or so of cost savings? That's the bottom line. Because an IRR just tells us nothing, really. So what's the return on capital going to look like in, say, five years' time? Because then we can factor that into our earnings to then understand. But I just think that you've been very evasive in basically saying, "Oh, we're going to spend another AUD 1 billion, oh, and trust us, it's going to give a good uplift in earnings," but we don't really know.
Look, David, you know, I don't want to get into the details of the-
But you're asking for AUD 1 billion. It's AUD 1 billion, Steve, that you're asking us to commit to. We understand the concepts, but you need to understand that we need to know what the numbers are going to look like, and it needs to be a little bit more just on concept. What's the return on-
Look, David, I'll leave it to you to back-solve. You know, as we think, we've been very clear, it's about 10%, and I think you can back-solve from there for what its impact is on the earnings stream of our business. In the interim years, what we've got to do is come back and prove to you the benefits we get out of our MSRDC next year, and then, really importantly, the year after, in FY 2021 and FY 2022. That gives us some dry powder together with the other investments we've made, and so we can start getting benefits out of our supply chain in the interim while we invest in the next step.
My final question is, I suppose this is just following on, the 70% payout ratio is going to be maintained while you're doing this, I suppose. There's no chance of getting that. So you're just going to be accumulating more and more franking credits. Is that a fair assumption, or is there a way that you might be able to increase the dividend payout, utilizing those franking credits at the same time as going on this growth venture?
David, at this stage, you know, the board hasn't reviewed or changed our dividend payout policy, but that is definitely tied to that. At this stage, we don't see any change, certainly for the current financial year.
Thanks, Brad. Thank you.
No, I want to benefit David, and I, and I think it's fair, you know, with Endeavour is delayed, that's something we were really thinking about factoring into that conversation. It's something we've had to defer for reasons which are just all what they are until the back end of 2021. But it is on the top of our minds.
Okay. Thanks, Brad.
Thanks, David.
Thank you. Your next question comes from Andrew McLennan from Goldman Sachs. Please go ahead.
Good morning, everyone. Just to follow on, obviously, the environment from a supply chain perspective is gonna be quite dynamic. You've got Coles effectively doing a very similar thing in both New South Wales and Queensland. I'm just wondering if you could talk about how firstly the fact Coles is upgrading their supply chain has influenced your decision making here. Secondly, how you know whether you're gonna use the same technology partners as you have in the MSRDC? I assume that's the case, but I just wanted to confirm. And then thirdly, whether or not the significant expectations, I guess, that we all have for online penetration, how that's factoring into how you're evolving your supply chain strategy here.
Thanks, Andrew. I'll take a first crack, and then I'm going to turn over to Paul, in particular, on the technology side. The Coles decision hasn't influenced us at all, to be honest. The original work on what was Mercury Two, to replicate Mercury One, started in two thousand and fourteen, two thousand and fifteen. The big issue we've had is making sure that we're comfortable with MSRDC before we do another one, given the size of the investment required there, never mind the one we've already bought. And then, critically importantly, finding the right site for the future.
This is not a trivial exercise, and it certainly has taken a lot of patience and a lot of time to work through to find, and say what I think, I think what we think is possibly the best logistics site in Australia. That really has been what's laid us confidence in the tech, and then the site. Paul will talk to the two technologies, the difference between the RDC and the NDC, between Vanderlande and Dematic. I'll let Paul talk to that. He'll also talk to how what we're doing in these sheds should complement what we're doing in online. As you know, in online, 82% right now of our online business is serviced by stores, so it's fulfilled in store.
But in parallel, we are looking to commission our four Takeoff units by the end of 2020. Actually, everything's ready to go, subject to the team being able to travel down there to commission it, which we're hoping is done. We were well on track to actually commission the first one by July, but anyway, we hope to get there by the end of the year, but Paul can talk to how these would feed into that, as well as the technologies and why we feel the same technology partner in the RDC is with us today, but what will change in the process going forward, so over to you, Paul.
Thanks, Brad. Yeah, as Brad mentioned, we are going to continue working with Vanderlande on the RDC in Sydney. We have an LOI in place for that. We have gone through the journey with them and MSRDC, which has been a learning journey in a number of ways. But we will take five years of that experience into the new site in Sydney. We have built a strong capability, both in our internal teams as well as the Vanderlande team, in the Australian marketplace, and that's going to hold us in good stead. The Dematic solution in the NDC, a different solution, given the different nature of the product that we move there. It is much more slow-moving, it is bulkier, and therefore, that fits a semi-automatic solution as opposed to an automatic solution.
But they will be connected, so we will be able to merge, for example, a delivery to store with both the NDC and RDC label. Today, it gets two deliveries from two separate locations. The location and the use of rail will take twenty-six thousand truck movements off the road a year that we currently have from the Port of Botany into our NDC and RDC. But the key benefit in the solution is an integrated site, the use of rail. And I think, as Brad alluded to, you know, whilst there are significant supply chain benefits, the benefits in store are also significant. These pallets are robotically picked. They produce 100% order accuracy every single time.
They are very, very safe in terms of the way they are built, and as Steve mentioned, they are built not only to the store planogram uniquely, but indeed to the aisle and the bay of that store, which means that we can change the store planogram with the flick of a switch, and with the flick of a switch, MSRDC, for example, is then building to that new store planogram, and new order accuracy means that we have 100% on-shelf availability, and then the expanded range, so we're very comfortable with the solution providers that we have. Say we've built significant experience with their team and our own team. All of that will go into Janus. It is a simpler design.
To give you context of the size, we've got currently 175,000 sq m in the three sheds. We'll be reducing that footprint by 100,000 m to 75,000 with the two new sheds. That shows the efficiency that the automation provides from a footprint perspective, and obviously in relation to the cost of building and operation, that plays out in the returns. Just in terms of online, the expanded range capability, again, 100% order accuracy, the way that we're able to build and deliver the pallets to our stores enables them to pick online more efficiently or if it goes into our eS tores or indeed our online hubs, again, they get all the efficiency that robotic picking, the technology delivers. So it makes them more efficient, which then flows through to the cost of operating our online network.
Gotcha. And just in relation to the site, so you've got the two DTs connected. What proportion of your sort of national volumes will be going through that one site? And also, I think there's somewhat of a delay to Moorebank. I don't know enough about it, but are you confident you'll be able to open up on time?
We remain confident. You know, we're obviously engaging with Qube, who is the master leaser on that site. As you know, it's a Commonwealth State initiative. The planning approval has already been granted for the site. We have to go through a application process to get our individual footprint approved, but the actual site has already got planning approval both at a federal, state, and local council level. So we remain confident in the timelines to deliver the site. In relation to the percentage, you know, the NDC will produce 100% of our national distribution. Currently, we have two sites, one in Melbourne, one in Sydney. And the New South Wales site will take about 34% of our overall volume, which is proportionately represented by obviously our sales and network in New South Wales. It also is important to note that obviously we have a larger number of stores than our main competitor, and therefore have a broader distribution network to cater to.
Okay. Thank you very much.
Thank you. Your next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Good morning, Brad. The sales growth in BIG W, not only was it particularly strong in Q4, but you commented that it was very, very strong across... So very strong cost for all product categories. Can you elaborate on that sales growth and why it's being achieved across all categories? And perhaps any comments on the run rate through June, whether that's changed at all?
Thanks, Grant. Look, you know, it's been a very consistent line of improvement really in Big W until actually sort of towards the end of Q3, when we just saw this real pop. And so, you know, that's what we saw early in. You know, when COVID started, obviously everyone was doing a lot of home leisure, but actually the real highlight for us has been apparel, and particular winter apparel. And where our issue is right now is essentially we are very, very light in winter apparel, or as our merchant team like to call it, clean. So, you know, it's been strong, but that's really been the highlight category, and we were backed in with that. We've come back to talk about the fact we couldn't get that category to grow.
So the big mover has been apparel, although all the categories have been strong. When you look at it at a customer behavioral sense, existing customers are buying more from us, but we've also been fortunate to attract a number of new or old customers back to the business, and they seem to be sticking with us, which is terrific. And our Everyday Rewards program has played a very material role in doing that for us as we continue to enhance it. And we actually right now we've commissioned our own personalization engine for Everyday Rewards in the context of Big W. So very strong, and very strong also, as with every other general merch business in online.
Nothing else, actually.
Just to call out just the sheer consistency of it, that's been the delight. The issues we've had in June actually are us running low right now of key winter lines, and particularly in apparel-
Mm.
Which is just very hard to go and replenish or to go and, you know, commit to future volumes. And you also get a bit gun-shy on doing it, if I'm being absolutely honest. But toy sale started last week and is our best toy sale ever. So, it's still early days, but it's certainly on track for the best numbers we've had in the toy sale as far back as our records go. So, very pleasing. The real issue, though, is making sure we maintain that momentum in Q1. And of course, you know, that's where our real anxiety and focus is right now.
Okay, that, that's helpful. Secondly, just on, on the shape of the, Australian food, sales growth, can you comment at all on, the run, the rate of growth in online that's in that number? And, I guess the other phenomenon has been more local shopping versus people going into big centers. Is there anything you can tell us about the, sort of the composition of that, Australian food sales growth?
Yeah, I mean, it's both excellent questions and both works in progress. Online has continued to be very strong since we turned it back on. You know, we had pivoted it during the crisis to really be focused on supporting vulnerable customers, Priority Assist, and then actually turned it off to most of our regular customers. We've turned it back on for them, and in essence, we found ourselves in some ways, simplistically, with two databases: people who got starting to use our service and people who traditionally had wanted the service. And both are continuing to use it, although our vulnerable customers are slowly starting to ease back on it. But it's continued to be incredibly strong through May and June. But the real highlight has not been e-commerce, it's been digital growth.
So e-commerce has been growing in you know the forties, and digital has been growing in the eighties or nineties. So that's what you see. It's still very low levels, but very strong growth, and that growth has been through not only Australian Food but true across particularly Dan Murphy's but also to some extent BWS, BIG W. And New Zealand, which was very strong during the crisis because we didn't need to turn it off as we did in Australia. So that's continued on. In terms of people shopping locally, that is slowly easing, and it's still certainly true, but it's not quite as true as it was eight weeks ago. And really, since early May, we've slowly started to see that rebalance.
To what extent fully ever rebalances, I can't tell you, but you only have to go to Bondi Junction on the weekend, and you know, you'll see that, you know, the traffic and the flows have started to come back. So, you know, that is certainly seems to be rebalancing for us. The real issue we've got at the moment, and I called it out to Shaun's question, is our On-the-Go Metro stores in the city, which are just. You know, while people might be going back to shopping locally, to some extent shopping in, you know, a regional center. At this stage, it's still very, very challenging in the city or the city fringes.
All right. That's very helpful. Thank you.
Thank you. Your next question comes from Bryan Raymond, from Citi. Please go ahead.
Good morning, Brad. My first question is just to follow on food around the profile of sales growth into June. I think you've addressed elements of this question, but just trying to get a feel for May versus June, and particularly about consumption at home piece, whether we're seeing people start to eat out at restaurants, cafes, et cetera, a bit more, and if you're seeing any slowdown into June, or if you've seen a pretty consistent trend across that Q4 to date so far?
It's one of these scenarios, Bryan, when we came and announced Q3 sales and sort of said mid to high single digits. So it's like going to the doctor and you you start panicking because I hate giving forecasts. But since that date, we've just seen very consistent trading across our supermarkets business. So Metro has been a very challenged player to cities, but in Woolworths Supermarkets, it's been very consistent and pleasingly consistent. There's been some movements, you know, in categories as we go back to school and therefore breakfast at home somewhat winds back. But that's been more than compensated for by by entertaining categories which really didn't exist for us in April coming back.
You know, we didn't really feel like we had any strong ANZAC, or we didn't have an ANZAC long weekend, but we've never had ANZAC Day. So we've seen that being counterbalanced by growth or return to growth in our more entertaining style categories. So very consistent would be my answer.
Okay. And then just on the CapEx and the DCs, am I right in thinking about this DC CapEx as somewhat maintenance CapEx? I know, I know that it's a big project and it wouldn't be typically considered that way, but if you don't continually refresh your fleet of DCs, they would deteriorate, and you become less competitive. So I'm just trying to think about whether an ROI is actually the way we should all be thinking about it, given you guys sort of need to do this progressively over the long term, and you're likely to reinvest a fair bit of that ROI back into a customer offer. Can you help us understand just sort of thematically, how you guys think about it? Because I, I'm looking at it and saying, "Well, this is a long, long-term project.
Maybe you generate a double-digit ROI. There's an element of reinvestment. And then just the second part of that question, just, in case I get cut off, is, you know, where is the CapEx rolling off in order to fund that 750 over two and a half years, within your current CapEx envelope?
Thanks, Bryan. If you're a lawyer in the Woolworths board meeting where SIB or stay-in-business capital decisions have been growing capital starts, so you'd find it interesting, but there's always a robust conversation. The ROI we've closed, it is a fully blended one, so it's got both elements in it. Just to give you a sense, by the way, Minchinbury was originally opened in 1998, Yennora in 1981, and Mulgrave, it actually was built in 1974, but the current form was commissioned in 1999. So, all more than 20 years old, and all with capacity constraints of some description. So, there's no doubt they needed to be replaced in the next couple of years.
And so we are constraining not only our growth in New South Wales, but range. So that is clearly true. However, that's not the basis on which we've talked about the ROI, not the way we've approached it, which is an enormous opportunity to improve our end-to-end operations around it. I'll turn to Steve, really, to sort of further elaborate on your next question.
Yeah, I mean, well, I'll build on that. You know, one of the things we're trying to move away from we talk about, SIB capital and talk about sustaining capital. So actually, what's the capital that you need to invest to sustain your business long term? And you rightly point out, that a number of these facilities are old and need to be replaced, as Brad sort of elaborated on. That said, and, you know, Paul won't mind me saying, we still require to get a return on that investment, like for like, but actually we are investing in automation. It's not just a like-for-like replacement.
We are upgrading, in some ways, the technology, and therefore the expectations associated with that, and that's why we're looking to drive not just an SIB outcome, but an improvement in the cost of running our supply chain. In terms of where we're working through the roll-off of capital to fund this, it's part of our ongoing planning cycles. We review that on a year-by-year basis. We do know we've made these commitments, and so and there may be years where actually we have sort of a spike in CapEx, just particularly around the peak construction years. That said, we will balance that and make trade-off decisions as we go through it. And we're working through our three-year planning process right now. A little bit delayed given COVID.
It would be refurbishments, wouldn't it? That would be the primary source of, given you've already sailed through that program, and they're quite a bit chunky, your CapEx budget normally. Would that be the logical place that research you'd roll off as supply chain ramps up? Is that thinking?
Yeah, we sort of had tried to have a, you know, a pretty sustainable version of capital over the years. And it would be fair to say if we chose to, we could materially slow down our renewal program. At this stage, they're still delivering, you know, good returns for us, so we continue to evaluate it on a case-by-case basis. But that is an option we have. The real issue for us is actually, we have a number of major IT investments, and there will be, of course, invariably further IT investments required. But actually, how we think about those is a critically important part of this overall balance as well. I would just call out.
Okay. The final one, if I can just sneak it in, is just the net headcount reduction that you'd expect across, you know, the decommissioning of three DCs, the likes of manual and bringing in two automated, the way we can sort of get a feel for the staffing costs improvement out of that?
Yeah, look, let me just say, we're committed to not only supporting the transition of the team into other alternatives, but at Woolworths, but actually leaning into the whole issue of the future of work and how we train team with the right skills for the future, and we've got time to do it. But essentially, there are about 1,350 roles that would be made redundant in this process, and we've got a net 650 roles that would go into to the new warehouses. And given the fact that they are quite far from the existing ones, we've taken a, we think, a very prudent approach to the size of the redundancy provision. And it's based on our learnings between Hume and Southland and also in Melbourne. So those are the raw numbers.
Thank you. Your next question comes from Ross Curran from Macquarie. Please go ahead.
Hi, guys. Good morning. I was just wondering, and this might be a bit hard to separate out, but, to what extent do you think government stimulus packages have helped to underwrite demand in some of your more discretionary items? And how do you see demand for that playing out, after, you know, the packages start to get wound back a bit?
Thanks, Ross. In all honesty, we're not very leveraged as a group to discretionary items. I suppose you could say at Big W, a lot of our consumer electronics, there would have been some benefit there, but it's not a big part of our business. I think you could also argue, probably, there's some discretion in Dan Murphy's, but it really is to the affluent segment, sort of trading up into more premium products. I'm uncertain the government support has benefited us materially. What has benefited us clearly has been you know, the various forms of restrictions, and therefore, people are staying at home.
They're, you know, they're just eating more at home, they're looking after their homes a little bit more, and so, you know, we've seen some benefit there. In the heart of the crisis, we also saw some ASP lift, where customers would come in and if a value product was not available, they would trade up. So there was an ASP benefit in the height of the crisis. That ASP benefit is, it's fallen away, but the rest of the benefit of people just staying a bit more at home, entertaining sensibly, hopefully, and safely at home, and so on. So that's really where we've got our benefit.
I guess to follow up that point, if you look at your average customer basket this year versus last year, is the mix of items in it roughly the same? Are you seeing customers change their shopping habits and buying more individual items as opposed to semi-processed items, or how have things moved around?
They reduced the number of trips they were making, so 2.2 has become 1.6, if I remember correctly. So it's coming back now, but people went less often. They chose one store and did all the shopping at the store. That didn't help us in the height of the crisis, where they would've chosen a local neighborhood store, and often that wasn't a Woolies, and they went and did all their shopping in that store. So that's what we've seen. You know, you choose one store and try and just do it once a week. That's slowly changing, but that's really the big issue we saw. In terms of the basket composition, I think it's...
I mean, there's a little. As we go into the next phase, we think our customers want a little bit more fresh, a little bit more health. Everyone's starting to talk a little bit about fresh and health as we sort of go through, you know, getting this entertaining phase out of our system. So we see that as quite an important longer-term trend. We had thought that our delis would be negatively affected by the crisis, that people wanted more packaged product versus product that was picked for them. But actually, to my surprise, that really wasn't as pronounced as I thought it might be, and I thought people might revert to a lot of packaged produce as well.
But it was there for a while, but then it fell away, so I wouldn't call that out. The one category that has been a real challenge for us all year has been tobacco, although even in the last couple of months, that has gone from being a major negative drag on us to slight sales growth, not volume growth. So that's probably the one thing that's changed a little bit, but the rest of it is relatively consistent, I would have to say. You know, but it jumps around during the period, right? I'm just talking in a very macro level over, you know, the three months.
Thank you.
Thank you. Your next question comes from Richard Barwick, from CLSA. Please go ahead.
Good morning, all. Thanks, Brad. Can I just go back? You've talked a bit about the Metro stores in the city as obviously creating a bit of a problem for you in a sales sense, and you've said, I think a couple of times, that they've been the biggest issue. I'm just trying to marry up the shape of your sales and then the sort of flow through for earnings. Because I would've thought if you'd seen some real strength in online, you'd be getting a little bit of margin dilution flowing through from there. So if we're giving a bit of a pecking order of impact, are you saying that the weakness in these Metro stores has been more material on the bottom line than has the margin dilution from online?
Oh, that's a tough one. I'm gonna turn to my colleague, Mr. Harrison, to help me on this one. It's just been such a dynamic period, so as not to be disingenuous on it. Our On-the-Go stores, which are sort of, you know, whether it's a Pitt Street Mall or whether it's a Southern Cross or whatever, the turnover has gone down so much that they are unprofitable. When you look like for like, actually, they were very strong drivers for us last year. It's the fact that you've gone from profit to no profit to unprofitable, that's the big issue. You have that inflection point. So that's why I just called it out.
Our neighborhood Metro stores, which sort of more compete with, you know, the IGAs, I suppose, so Harris Farm Markets would have been very strong at the counter balance, but those stores have been a real, real drag on us. In terms of online, there's margin dilution, but it's not- doesn't go to not being an unprofitable site. It goes just to a lower margin site. That was particularly challenging for us in Q3, where we went very heavy on home delivery. Now that with Q4, we started to get some balance back in between home delivery and pickup. And so that's not quite as big a challenge, but it does sit there in the mix. I don't know if you'd like to-
Oh, look, I think my comment would be by far and away, the biggest impact on flow through is the COVID costs.
Yeah.
You know, you know, by, you know, 10x, right, in terms of type of impact I would estimate. Metro stores are certainly a drag. You know, we, you know, in those On-the-Go stores, we are losing money with the sales levels where they are. We do expect that to come back as customers come back into the city. I don't know the exact numbers off the top of my head, but they'd be similar type of magnitude, would be my estimate to the margin impact from the growth of e-commerce.
Mm-hmm. Okay.
We'll clarify that. Don't hold me to that as a sort of off-the-cuff response.
No, that's-
More of the full year.
Yeah, we kind of, we like to call it this question on the media call, you know, should you have put all the costs you put into your business? And, you know, as I think we talked about it at the end of Q3 sales announcement, given everything we knew and given everything we knew from overseas, it didn't feel like it was the right time to not be very, very, very conservative in terms of what we did, in terms of assuming the absenteeism in store and therefore adding additional casuals in terms of the overflow warehousing capacity that was put in. In terms of having security at every store, given the early violence we saw, elevating the cleaning standards, having a host to manage the checkouts, having a greeter to welcome to stores.
I'd say, you know, all of those costs are not, except for the warehouse, where we've got certain tenure associated with it, even though it's short-term, none of those are actually that complex to unwind. We thought it was unwind, and we're trying to get to nice momentum for July. You know, as I say, last weekend makes us just a little bit nervous.
And just two sort of questions to round off that. Thank you. When you're talking about these Metro stores, how many stores in total are you talking? And then for online, I think you're tracking at about more or less 4% of sales. What would you be expecting that number to shape up to be for the Q4 ?
Yeah, I mean, I don't have the specific numbers, probably around 20 or 25 Metro stores, part of the others. I don't have the number at hand. But that's the material impact of the turnaround. That's the issue, right? It's from profits as well. In online, it's certainly tracking higher than, you know, well, the exit rate will be in the H2 FY 2024. It might even be in the future, I couldn't tell you like that.
Because you have doubled your number of delivery slots, haven't you? So I thought it might even seem stronger, the growth, than that.
Yeah, so the exit rates, which we only look at it at a monthly, but yeah, it's kind of good.
Yeah, I think in Australian Food, we'll probably hit six as an exit rate.
Okay. All right, and just the last one is the staff remediation costs. I mean, that number seems to be growing every update you give. And I think we were talking 315 back at the half year, up to 390 now. Yeah, when, how soon until we have an endpoint here?
Yeah, yeah, we, yeah.
Yeah, it just seems like 'cause I remember when you first identified it, the sense you gave then was you gave an all-encompassing number that you thought you'd capture everything, but that hasn't proven to play out at all, not even close.
No, and I think this is gonna be an issue for every major corporate in Australia. I actually think you don't know until you've actually added and you've analyzed every shift done for every team member, whether they work for you or don't work for you, and you've applied it and tested it against the award. And so you have to do that. What we have done in the Q4 of the numbers you see now, they're based on four and a half years of individual time and attendance records for individuals across all of our retail businesses, and two years of equivalent analysis for the HIGA. Steve and myself were talking earlier, it's probably between two-thirds and 70% of all data has been analyzed in the group, and then we've grossed up for the other thirty.
All the numbers you saw before, we sort of started at 20%. When we first called it out at the end of October, it was based on two years of analysis inside Woolworths Supermarkets, not including the rest of our banner group. So it is the fourth March, and so that's what you're seeing today. And I said, it's based on between two-thirds and 70% of all records have been analyzed in some detail inside the group, and then we've grossed up for the assumption on the other 30. So, accuracy should be materially higher, but I honestly believe for anyone in our position, until you've analyzed all the records, you do not know the answer because it becomes down to the individual. There's no set off in this process, is the problem.
You can set off on the timeframes, but you don't get to set off between individuals. It's a better off test for each individual applied to what they worked, not what they said they would work, or what people thought they might work, but what they would work and what day they worked it, whether they split the shifts when they worked it, and how it then interfaces with awards that are inherently incredibly complex in their interpretations. So I wish I had a better answer. It's not something we feel particularly good about, haven't felt good about it for you know a year. But I can assure you only of one thing, which is the veracity in which it's been done, and the fact that it's we're calling it the way it is.
Thank you. Your next question comes from Scott Ryall, from Rimor Equity Research. Please go ahead.
Hi there. Thank you. Hopefully, mine will be a very quick answer. I just want to talk about your national distribution center, which receives the consolidation of your two sites. Could you just give us a sense of what is received from local suppliers versus what is imported there? And how will you look to shift goods around the country, given that this will be your primary site for those styles of goods? Is the rail extremely important for outgoing, not just for your incoming from ports?
Thanks, so it's a great tricky question, which I'm gonna get Paul Graham to talk to, except for one issue I wanted to call out, which is one of our range issues at a store, is that we don't have any pick slots, and therefore, we do a lot of direct store deliveries for today, and it's just a very inefficient process for both the supplier and for the store, because you can't always predict when delivery is going to come in, and therefore how you manage your back dock, and also how you manage your flow through of information back to the supplier, and I think, Paul, correct me, I think we still have, like, the average store in New South Wales, somewhere around 180 DSD deliveries a week, which is enormously inefficient.
And these are most of these deliveries will be able to be taken away and flow through easier, which will be good for supplier and for store. But Paul, in terms of mix between national and international and port, but I'll turn to your expertise.
Yep. No, thank you. And Scott, you know, it does depend obviously on the season, but we have about a 35% international inbound in terms of the actual shipping numbers, but by volume, it is greater. Obviously, a lot of our own branded FoodCo products are sourced either locally or overseas. A lot of our general merchandise that's stored in the NDC is international import whether that be homeware or other items. So it does vary by SKU, but it will be the one NDC. We will be using rail where it's appropriate. Obviously, being on a railhead, we'll be able to take the containers directly from the port.
Qube, as we know, runs the port-side logistics as well, so we'll be able to actually prioritize unloading from the vessel straight into our NDC, with no hands touching that product until it actually gets into the store, which is a main feature. We will use rail as the predominant mode, because it's obviously the most efficient, but we'll also use road where it makes sense, so it'll be a combination. Obviously, there is infrastructure upgrades being undertaken currently, nationally, to ensure that we have efficient, more efficient rail links into Brisbane and into Melbourne, and we'll take advantage of those as they continue to be invested in, but rail is an important part, I think, of our landscape.
And as Brad said, when we looked at the location and the features that we wanted, you know, Moorebank not only provides a good location for semi-metro delivery, but also gives us that unique ability to remove twenty-six thousand vehicles off the road from the port, and then use rail as a much more regular option than we currently do in our current NDC setup.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Banducci for closing remarks.
Thanks, as always, for all of your questions and appropriate challenge. We look forward to talking to you on the twenty-seventh of August, when we will present full year results. And obviously, all the numbers you've seen here are caveated with the need for us to go through various reviews. So thank you, everyone. Have a good day, and look forward to speaking to you soon.