Finance Finance News Woolworths’ COVID hangover sparks investor sell off

Woolworths’ COVID hangover sparks investor sell off

Woolworths is wearing the costs of Australia's COVID rules. Photo: TND
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After earlier defying the effects of Australia’s COVID lockdowns, Woolworths shares were savagely sold off on Tuesday after the retailer warned its bottom line was under pressure.

And with uncertainty surrounding the effects of an influx of Omicron variant cases around the world, 2022 could be “just as challenging for the grocery sector” retail experts warn.

Woolworths enjoyed a massive surge in sales when shoppers panic-bought at the start of the pandemic, but Australia’s largest supermarket is now facing a cost blowout due to staff testing, plastic shields and extra employees brought on to ensure its 1000-plus stores remain COVID-safe.

The supermarket on Tuesday revealed that direct COVID costs would reduce its first-half profits by $150 million, while additional indirect disruption to its stores and distribution centres would cost between $60 and $70 million.

The news prompted a large investor sell off, with Woolworths shares falling as much as 9.8 per cent on Tuesday morning before recovering slightly in the afternoon, finishing the trading day 7.7 per cent lower at $37.45.

Toughest challenge ‘in recent memory’

Woolworths Group chief executive Brad Banducci said the Delta wave was “one of the most challenging” periods the retailer has endured.

“The first half of FY22 [financial year 22] has been one of the most challenging halves we have experienced in recent memory due to the far-reaching impacts of the COVID Delta strain and its impact on our end-to-end stock flow and operating rhythm,” he said on Tuesday.

“We have continued to put the health, safety and wellbeing of our customers and team first in the context of this challenging and volatile operating environment.”

Woolworths now expects first-half earnings between $1.19 billion and $1.22 billion – down about $100 million on the same period last year.

Annual growth figures are also lacklustre – up just 2 per cent on last year – as the first half of the 2021 financial year saw unusually strong sales.

This made it harder to deliver strong annual growth this financial year.

But Mr Banducci is confident the effects of the COVID lockdowns are now in the past, and he expects a much stronger second half.

He also confirmed Woolworths will look to wear the higher costs instead of passing them on to consumers in the form of higher grocery prices.

COVID catching up with supermarkets

Louise Grimmer, senior lecturer in retail marketing at the University of Tasmania, said the financial effects of the pandemic are finally hitting supermarkets.

“Retailers have had to bear the cost of COVID-related restrictions, regulations and health orders and have been front of the line in terms of their interface with Australian consumers,” Dr Grimmer said.

“Whilst the supermarket industry performed strongly as we first entered the pandemic last year, we can now see that results won’t be as positive when all the COVID costs start to come into play this year.

“Next year will likely be just as challenging for the grocery sector as we face uncertainty regarding Omicron.”

COVID cost hangover

Brian Walker, chief executive at consultancy Retail Doctor Group, said Australian supermarkets are dealing with a cost hangover from COVID-19 after experiencing a short-term spike in sales because of panic-buying.

Mr Walker said although sales growth has dropped off, supermarkets must continue to invest heavily in testing, plastic shields and extra staff to comply with COVID restrictions – not to mention absorbing the cost of thousands of workers forced into isolation.

“Panic-buying created a short-term sales spike, but that puts ongoing pressure on the cost structures within their businesses,” Mr Walker said.

“As they start to cycle the panic-buying, there are a lot of lagging costs.”

Mr Walker said Woolworths’ rival Coles will face the same cost pressures, meaning it is unlikely to perform much better.

Its shares fell 3 per cent on Tuesday after Woolworths’ trading update.

But despite the cost pressures, Mr Walker said Woolworths and Coles are keeping their eyes on the medium to longer term.

“This isn’t a sprint – it’s a marathon in the supermarket business,” he said.

“It’s a longer game and the market will come to see that.”

Dr Grimmer said supermarkets have played a positive role during the pandemic.

“The ability for us to be able to access food and household products during the pandemic either in store, using click and collect or via home delivery has been vital in helping Australians get through COVID.”

Woolworths shares are still up more than 10 per cent since January 1.