Woolworths Q3: a quarter of two halves and impressive digital advances

Date : 29 April 2021

Nick Miles

Head of Insight - Asia Pacific

Woolworths has released Q3 results with sales up 0.4% to AU$16,566m. However, the data shows two distinct trading periods during the quarter with sales heavily impacted in the last six weeks as the retailer starts to cycle COVID-19 trading from 2020. So what have we learnt?

Growth ahead of Coles, but not on a two-year basis

Although food and liquor sales declined sharply in the final six weeks of the quarter, overall Australian Food and Endeavour Drinks have held up better when compared to data release by Coles. Australian Food saw sales decline 0.7% in Q3 vs. a 6.1% decline in Coles' supermarkets business. While Endeavour Drinks recorded sales growth in Q3 of 6.3% vs. Coles' Liquor growth of 2.6%. However, on a two-year comparable basis, effectively removing the volatiliy created by the pandemic, Coles' performance appears stronger. Australian Food has grown 5.3% over the two-years vs. Coles supermarket two-year growth of 6.8%. While in liquor, Endeavour Drinks has seen two-year growth of 8.2% vs. Coles' liquor growth of 8.9%.

Shopping patterns starting to return to normal, but will take time

Like Coles, Woolworths also stated that shopping patterns have started to normalise. Although transactions numbers are some way off pre-pandemic levels and basket size remains inflated, this trend is starting to moderate. Aside from the impact of localised lockdowns, there is also less volatility in performance between states, although growth in Victoria has remained below the national average since the end of the extended lockdown in Q2. Weekends are once again the peak trading days and trading across stores appears to be returning to what would be expected. Having said this, traffic in CBD and transit locations has remained subdued and therefore continues to impact stores in these locations. Growth at Big W and in the Hotels business bucked the trend and improved as the quarter progressed, driven by footfall returning to stores and the cycling of hotel closures in 2020.

Australian Food sales down 0.7% to AU$11,092m

Food sales grew 8.2% at the start of Q3 and declined 9.6% in the last six weeks of the period. The decline in sales was driven by store operations, with supermarket sales for the quarter down 4.7% and Metro sales, which continued to be impacted by lack of footfall in CBD and transit locations, down 15.0%. On a LFL basis sales declined 2.1%. These declines were significantly offset by online growth of 90.5%, with sales for the quarter at AU$878m and penetration at 7.9%, up from 4.1% a year ago. Online sales did cycle slightly softer comparatives vs. 2020 due to an initial freeze of the service, however despite this Woolworths still estimates that growth would have been above 70%.

Despite the cycling of tough comparatives in the latter part of the quarter, Woolworths continued to invest in strong promotional campaigns (e.g. glass containers and Discovery Garden), as well as its store network, opening four net new stores (two supermarkets and two Metro stores) and refreshing six shops. It also saw strong growth of 15% from 'adjacency revenue' that includes digital media, fintech, international and wholesale, with the latter two driving the growth.

New Zealand Food sales down 6.9% to NZ$1,792m

Sales in NZ saw a big swing, with growth of 1.4% in the first part of the quarter, contrasting with sales declining 15.1% in the last six weeks. On a LFL basis sales declined 7.5%, while on a two-year basis top line sales were up 2.9%. Online momentum continued with growth of 37.9% to NZ$209m  and penetration now at an impressive 11.6% of sales. Border restrictions have impacted trade related to tourism, however strong market campaigns, investment in price via the 'Value You Can Count On' campaign, strong Easter execution and investment in the network, with one Countdown supermarket and Auckland's second Metro store opening, flagged as highlights.

Endeavour Drinks sales up 6.3% to AU$2,393m

Ahead of its demerger, the Woolworths liquor business remained in good shape, with sales up 14.4% at the start of the quarter, offset by a marginal decline of 1.6% in the last six weeks. This is a strong result, given the spike in sales that the business saw in Q3 2020 and on a LFL basis sales were up 5.5%. Spirit and RTDs continued to grow, beer sales were supported by growth in craft but were overall flat, while wine sales declined. Online sales remained boyant, up 23.9% to AU$193m and penetration at 8.0%. This was driven by improvements to the website and app, as well as increased investment in digital and fulfilment capabilities. Boosting membership and usage of My Dan's and Everyday Rewards continued to be a focus, with good growth. Finally, 6 net new BWS stores were opened in Q3, with 11 stores refreshed, while one net new Dan's was opened,  alongside a new latest store format in South Melbourne.

Digital investment continues to ramp up

Across the group online sales grew 64.2% to AU$1,314m in Q3 with strong plans in place to maintain momentum, create better experiences and increase efficiencies:

  • The retailer has three micro-fulfillment centres up and running via its partnership with Takeoff Technologies, two in NZ and one in Melbourne, with a fourth opening in Queensland in August 2021
  • Woolworths will launch its first mid-sized automated CFC in Auburn, Sydney in partnership with Knapp, who provide Takeoff Technologies with their robotic shuttle systems. The target is to get it operational by 2024, with a capacity of 50,000 orders / week (artists impression below) 
  • Pick up now accounts for 35.7% of orders, with a focus on improving the experience and increasing direct to boot services (currently at 634 locations)
  • The retailer continues to invest in its data and analytics capabilities through increaisng it stake in data-agency quantium, growing scan rates and membership of its loyalty schemes and using this to improve personalisation and website navigation
  • Enhancements to digital communication is also a top priority. With digital media business Cartology growing strongly and launching in New Zealand in Q3, more brands are now using the service to target Woolworths customers via its digital assets
  • Enhancements are also being made to digital catalogues with improved image resolutions, links to videos, recipes and content pages, plus Siri suggestions. New search filters have also been implements to allow range sorting by diet and brand preferences, while geolocation push notifications have been enabled on the Everyday Rewards app, along with eReceipts

Source: Woolworths

What do we expect in Q4?

Woolworths described growth at the start of the new period as 'volatile' and we expect this will be an ongoing trend throughout the rest of Q4 and into the started in FY22. As we move deeper into Q4 both Australian Food and Endeavour Drinks will cycle some tough comparatives and therefore we expect negative growth from both businesses, particularly in May and June. In New Zealand comparative targets are softer and therefore although growth will likely also be negative for a few months, the business should stabilise faster. Overall growth remains postive when looking at a two-year comparative, with Woolworths advances in its digital capabilities both impressive and market leading by some way. The big event at the end of Q4 (June) will be the demerger of Endeavour Drinks, as it becomes a standalone business, with preparations ongoing to hit this deadline.