Woolworths boss details grocery challenges

Brad Banducci2Woolworths chief Brad Banducci has said that groceries continue to be a challenge for the supermarket giant, as deflationary pressures and a lack of product innovation give way to consumer trends towards fresh food.

Taking a 1.9 per cent increase in comparable food sales to the ASX on Wednesday, Banducci told investors that continued price investment, funded in part by improvements in stock loss, was working.

He said that growth in its fresh food categories was particularly pleasing, noting that quarter three has seen produce turn around to slight inflation.

“We’ve seen really pleasing volume growth [in fruit],” he said. “We we’re slightly deflationary in the first half on produce, but we’ve seen that change slightly to inflation in the second half.”

Perishables and chilled products are also growing well, as consumers gravitate towards new-age yogurts and other low-sugar products. But the outlook for broader grocery categories wasn’t so optimistic.

“Grocery for us has been a challenge for the last two years,” Banducci said. “It continues to be deflationary and in many ways it’s suffered from the fact that fresh has grown and there hasn’t been the same level of innovation.”

“We’re working hard on it, we’re starting to see some volume growth, so we’re not negative about it, but it is a more challenging part of the business.”

Red meat is also a problem area, as high input costs continue to put significant pressure on margins Banducci estimates there’s been a combined beef lamb impact of $40 million for the half.

“The traditional red meat business is incredibly challenged in Australia; the input costs are material.

“As red meat has become so expensive we’re seeing a real pop in white and pink protein, so you can say your seafood department is up but it’s really a transfer of protein from red to pink,” he explained.

The difficulties are expected to continue for the next 12-18 months, but Woolworths expects to continue to improve on stock loss rates, which Banducci said should help to cushion any impact.

Stock loss improvement from above four percent to the low three percent range was singled out repeatedly by the company, with Banducci saying the savings funded price investments and an improvement in gross margins.

The factors underpinning the improvement were numerous, but a shift in supplier relationships that’s helped take a whole day being taken out of supply chain time was highlighted as an ongoing focus – particularly as warmer weather makes quality control more difficult.

“We’ve gone from being reactive […] to being much more collaborative and much more forward looking with suppliers,” he said.

“We’re now much more structured and much more planned on how we work with suppliers on range and price resets.”

Woolworths has been working with Pollen Consulting Group since late last year. CEO Paul Eastwood said since late last year on improving their supplier collaboration on their expanding private label ranges.

Eastwood said that the supermarket has made real progress in generating savings in the area.

“What you should be doing is assessing the total margin possible in the value chain all the way from the very beginning,” he said.

“That’s how you then understand where the opportunities are to improve, which addresses the cost and improves margins for everybody.”

Following a trial period late last year Eastwood has been kept on to provide ongoing ideas and mediation services between private label suppliers and the supermarket.

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