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Thursday, August 13, 2020

Woolworths results reveal hidden cost of panic buying

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The past few months have been the longest shopping spree in Australian history, as panicked shoppers stripped their shelves amid fears of scarcity when the coronavirus hit Australia.

Supermarkets have experienced periods of expansion, with customers lining up in front of stores and stacking their carts to the point where purchasing limits were to be enforced.

All of this activity would normally mean a big leap forward for supermarkets, but that is not the case Woolworths revealed in a call to investors this week.

The supermarket giant will post profits of $ 3.2 billion to $ 3.25 billion for the year, which is lower than last year and market expectations.

This number becomes even lower if we consider the “important elements”. These are one-time costs of $ 591 million which will drive profits even further. Woolworths – the large retail conglomerate that owns supermarkets Woolies, Dan Murphy and Big W – fell 0.76% on Tuesday.

So why did this bonus period turn into lower profits for Australia’s largest supermarket?

This is partly because Woolworths has Metro stores in empty CBDs that are losing money quickly. But this is largely the following trifecta of reasons.

COVID COSTS

We did a lot of shopping during the crisis, with food sales in Woolies supermarkets increasing by more than 10%. Trapped in our homes, we bought a lot more, and sometimes paid more for them because when the staples ran out, we bought more sophisticated versions.

“If the product of value (to customers) was not available, it would be traded,” Woolworths CEO Brad Banducci said to investors on Tuesday.

But it also cost supermarkets to stay open.

Banducci said the company believes it should be “very conservative,” including putting in additional cleaning staff, assigning greetings to wipe carts, hiring additional casuals to cover expected additional absences, people to manage the queues and security guards to break the fighting between panicking buyers in the toilet paper aisle, “given the early violence we saw.”

All of these additional costs totaled approximately $ 275 million, said Woolworths, which weighed on earnings.

The costs of COVID-19 to the business will be even higher if you include the bonuses paid to staff. Full-time staff at Woolies receive $ 1,000, $ 750 in Woolworths shares and a $ 250 gift card. Part-time workers receive less and casual workers who joined COVID-19 receive $ 100.

ROBOTS REPLACING STAFF

Another big cost that Woolies is paying this year is related to two new warehouses they are building in Sydney. Instead of having three storage locations in NSW and Victoria, they will build two new warehouses in the same location.

One of these warehouses will be fully automated, and while it cuts costs in the long run, it means 1,350 layoffs in the short term. Woolies has set aside $ 176 million to pay for staff who will lose their jobs.

The new warehouses seem pretty cool. They are able to reduce the amount of space the Woolies need from 175,000 square meters to 75,000 square meters; they will be on a railway line, so they will take 26,000 trucks off the road; and no human hands will have to touch the products between arrival at the port in Australia and arrival at the supermarket.

SALARY ARRIVALS

Woolworths also had to set aside money to reimburse thousands of workers who were not paid what they were owed.

In October of last year, Woolworths revealed that it had underpaid nearly 6,000 employees in the past nine years, after a review triggered by a new company agreement.

The cost of staff reimbursement this year is $ 185 million. Of this amount, $ 105 million is intended for salaried staff who work in Woolies pubs and who receive a hospitality grant. While retail staff have four years past due, they will receive the wages of the previous two years.

These mistakes cause the Woolies to underpaid their staff by $ 390 million.

“It’s not something that we feel particularly well about,” said Banducci.

Woolworths is not alone in not paying its staff properly.

Coles Group, the owner of Coles, announced in February that it would set aside $ 20 million to cover staff underpayment over six years, a decision that led Attorney General Christian Porter to launch a firm warning to businesses.

“Put your house in order,” he told reporters at the time.

It seems to me that if we want to deter this kind of behavior, we should intensify the consequences.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.

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