How Woolworths aims to offset higher wages

The nation’s largest grocery chain, Woolworths, says it will focus on boosting productivity, such as moving staff from cash registers to the increasingly popular Direct to Boot service and investing in technology, to help counter the pending significant rise in staff wages.

The $41.7 billion retailer has more than 180,000 staff and is one of the biggest employers in Australia.

Newly-elected Labor Prime Minister Anthony Albanese has backed a pay rise of around 5 per cent, to keep pace with the higher cost of living such as petrol and higher interest rates.

While Woolworths and rival Coles Group might be hoping for a much smaller increase to the minimum wage, the prime minister was clear he backs the wages jump in line with the headline inflation rate of 5.1 per cent.

Woolworths boss Brad Banducci indicated support for a wage increase aligned with underlying inflation currently at 3.7 per cent, and is awaiting the outcome of the Fair Work Commission’s annual wage review. Coles declined to comment about what it is doing to combat higher wages.

“Like all good retailers, we will continue to focus on productivity across our business including looking at process improvement opportunities and investment in technology to sustainably reduce the effort required by our teams,” a Woolworths spokesman told The Australian Financial Review.

He said streamlining processes included: better scanner technology for home delivery; ensuring more staff are on Direct to Boot services to meet the higher demand; and streamlining changes in rosters with an internal staff app that allows people to swap shifts with ease. Woolworths has 629 stores with Direct to Boot services.

Woolworths is also set to open its first automated customer fulfilment centre in Auburn in 2024. The facility will be built in partnership with Knapp, whose automation technology will help Woolworths’ personal shoppers pick and dispatch up to 50,000 home deliveries a week in Western Sydney.

The spokesman added reducing stock loss and better inventory management is another way for the retailer to maintain a lid on costs.

In the March quarter, Woolworths indicated that COVID-19 costs had begun to ease as it returns to a more stable operating rhythm.

A fund manager who did not want to be named commented it would be difficult for both grocery chains to keep the same level of profitability unless a reduction in labour is achieved.

He suggested one store has to find an additional 170 hours of productivity to keep the same EBIT/Sales.

“It will be incredibly hard to keep the same EBIT/Sales and fractionalise the cost base. The gross margin has to be the saving grace. Also keep in mind, most online pick/sort hours are down in penalty hours, where loading is 1.5x the base rate. And nearly 50 per cent of the comp sales growth is now online, so that is incredibly hard to flex,” he said.

Barrenjoey head of consumer research Tom Kierath said the way both retailers will claw back these costs is by increasing prices further and more investment in automation.

“That wage increase is just going to flow through to the cost line,” he said.

“You are seeing food prices increase because commodity prices are increasing, so suppliers are putting up prices, but on top of that, Woolies will increase their prices to compensate for the higher labor costs.

“It may not be all en masse on the first of July, but I would say that through the next six months, they’re going to have to take more price rises.”

He added since the two supermarkets essentially operate in a duopoly, it’s relatively straightforward to take on price rises compared in a more competitive market.

Woolworths said managing industry-wide inflationary pressure will continue to be the focus as “we work hard to continue providing our customers with great value in partnership with our suppliers”.

Australian Food and Grocery Council CEO Tanya Barden told a CEDA forum last week that businesses must rapidly improve productivity to absorb cost increases and avoid passing on price hikes to consumers.

Speaking on a panel about the outlook for global supply chains, Ms Barden predicted that inflation figures would reach double-digits by the middle of the year, presenting a growing challenge to industry profitability.

She said supplier businesses are at a “tipping point where they need to pass some of these costs through in order to remain viable”.

About 40 per cent of Woolworths’ Australian supermarket suppliers have asked for an increase to prices. That represents 50 per cent of its sales, which jumped 5.4 per cent to $11.43 billion in the third quarter.

Most product price increases were implemented in January and February, but Natalie Davis, MD of supermarkets, flagged some of the largest FMCG suppliers have indicated that within 12 months, they will come back for a second cost increase.


Extracted from AFR

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