January 2020 WHO (World Health Organisation) declared COVID-19 a public health emergency of international concern. By March 2020 WHO declared COVID-19 a pandemic. Since that time there has been much debate about how COVID-19 would change the behaviours of supermarket shoppers. This quick blog focuses on how COVID effected the performance of Coles and Woolworths supermarkets in the short term.
Australian COVID restrictions
25th January 2020 the first COVID-19 case was detected in Australia. By March 2020 the Australian federal government and state / territory governments were implementing various COVID restrictions to best manage the pandemic in Australia. 21st October 2021 the last major restriction (Melbourne’s sixth lockdown) finished. Since that time Australian shoppers have been adjusting to ‘the new normal’.
During certain periods, e.g. lockdowns, shoppers had restricted outlets they could shop at. These stores were labelled ‘essential’ by the government. Some food outlets, e.g. cafes, pubs and restaurants, were closed or could only offer take-away or home delivery. Also, the government placed restrictions on why people could leave their home, e.g. shop for food and essentials. Supermarkets were essential stores and were allowed to trade with certain restrictions in place.
Changes in Australian supermarket shopper behaviour
Panic buying / lockdowns
From early 2020 Australian shoppers engaged in panic buying. A now famous example was shoppers physically fighting in a Woolworths store over toilet rolls. As explained by ABC News this behaviour continued into 2021 and was in part driven by government legislation, e.g. lockdowns. In 2022, after the last major restriction was lifted, panic buying did continue. In 2022 panic buying was in part driven by staff shortages from farm / factory through to stores limiting availability (ABC News). Then adverse weather conditions, including floods in QLD and Northern NSW limited product availability and led to panic buying.
Supermarket shoppers demand for online shopping increased during COVID. A number of factors driving this change including:
fear of exposure to COVID
government legislation, e.g. lockdowns, isolation
general health advice, e.g. isolation
Did COVID effect Coles and Woolworths in the short term?
Coles and Woolworths being classified as ‘essential stores’ and other venues, e.g. cafes, being temporarily closed during lockdowns etc would suggest Coles and Woolworths could achieve a significant sales increase. The following table highlights low YOY (year on year) sales growth, especially considering the high level of inflation during this period.
Coles supermarkets, Woolworths Australian Food Sales ($M)
Melbourne was the ‘most locked down city in the world’ during COVID (news.com). Generally speaking, Melbourne and Sydney had more COVID restrictions vs other major cities such as Brisbane and Perth. This limited Coles and Woolworths sales growth as Melbourne (Coles) and Sydney (Woolworths) are their ‘home towns’ with major warehouses and head office operations. The COVID restrictions limited staffing levels in DCs and corporate offices. Also, these regions have top selling stores that suffered from staff shortages, again limiting retail sales.
The following share chart highlights the impact the Victoria lockdown had on Coles sales / share.
Coles National Market Share
Source: Coles Annual Report FY 21
Limited stock availability in store was driven by a number of factors. Key points to consider:
Supply, both local and international, was affected by a number of COVID related factors including labour shortages at farm / factory and decreased freight.
Supermarket operations (warehouse, logistics, stores) had labour shortages and struggled to physically deliver sufficient stock weight to meet increase shopper demand, e.g. toilet rolls.
Due to operational issues at manufacturers, logistics and supermarkets both Coles and Woolworths had to implement product limits on various products at different times. As reported by news.com Coles and Woolworths were still implementing product limits in July 2022 (facial tissues). So, whilst COVID did lead to increased demand for certain products at certain times the industry struggled to meet this increased shopper demand. Many will view this as a lost sales opportunity.
The following chart highlights Woolworths were unable to physically ship enough cartons from their warehouses to meet store demand.
Woolworths OBSL (outbound service level)
Source Woolworths Annual Report FY22
According to a report by SMH Westfield Bondi Junction was a ‘ghost town’ after an infectious person visited the centre. Logically shoppers switched to smaller neighbourhood shopping centres to avoid larger crowds during COVID (ABC News). Coles and Woolworths have many stores in major shopping centres so the move to shopping local limited their sales growth. Conversely Metcash supplied stores, e.g. IGA, enjoyed sales growth.
‘IGA operator Metcash says Australians are keeping up the habit of shopping in their local communities even as pandemic restrictions ease’
SMH Australian shoppers keeping it the neighbourhood, says Metcash (Sept 22)
Another factor limiting Coles and Woolworths sales growth was changes in lifestyle. For example, according to the Productivity Commission the % of WFH (work from home) workers increased from 8% to 40% in Australia. This led to a short-term increase demand for office furniture, home renovations etc. Also, government restrictions, e.g. lockdowns, led to an increase in the consumption of alcohol at home. The following table highlights the relative small increased consumption of food during 2020.
Quarterly individual goods consumption, 2020
Source: ABS Insights into household consumption
The following table highlights the growth of e-commerce (home delivery) as a % of total retailer sales.
Coles supermarkets, Woolworths Australian Food Sales % e-comm
As explained by insidefmcg demand for online orders dramatically increased late February / early March 2020 (+45%) as the pandemic started. At the same time some shoppers were panic buying product in store. This led to a situation where Coles and Woolworths temporarily suspended their home delivery services and click and collect. Simply put they was insufficient stock levels in store and store labour to physically pick, pack and deliver all the orders. Woolworths CEO Brad Banducci described the situation as ‘we continue to be supply-constrained, not demand constrained’. (IT News Nov 20). This situation obviously limited e-comm sales in FY20.
During FY21, 22 Coles and Woolworths were able to grow their online sales. With improved product availability and staffing levels both supermarkets doubled their online sales. In addition to e-comm sales there was a dramatic change to ‘digital’ shopping. This included increased use of store services such as click and collect, direct to boot and digital tools such as apps. For example, the number of shoppers using the Woolworths app increased by 320%.
‘The use of the Woolworths App is up 320 percent, driven by viewing our digital catalogue, planning a physical shop and online shopping itself’
Woolworths CEO Brad Banducci
IT news, Woolworths reports 320 percent rise in app use as shoppers digitally prep, Apr 2020
Retail Sales Summation
COVID did offer Coles and Woolworths a very rare opportunity to dramatically increase sales. Due to temporary government legislation there was less competition in food, e.g. cafes temporarily closed. Due to a number of COVID related factors the industry was physically unable to fully meet the increased demand from shoppers in the short term. Also, changes in shopper behaviours / lifestyles limited Coles and Woolworths sales growth.
The following chart highlights the impact COVID had on sales in cafes, restaurants and takeaway food services. Please note the growth in 2022 as shoppers adjust to the ‘new normal’.
Cafes, restaurants and takeaway food services
Many will argue the biggest limiting factor for retail sales growth was supply constraints for online orders. With some shoppers in isolation and/or lockdown obviously demand for home delivery dramatically increased. Before the pandemic Coles and Woolworths had a better online service vs the competition. Generally speaking, specialist retailers, such as the local baker, butcher etc did not offer click and collect and/or home delivery. Also, major competitors, such as Aldi and Costco, had no / a very limited online grocery offer. Now many competitors are improving their online offer. For example, Metcash plans to have 800 IGA stores on the online platform by FY25 (IT news).
‘it’s true to say that we started late (on digital) but (adoption) was spurred on by Covid.’
Metcash Group CEO Doug Jones
IT news, Metcash takes digital deeper as online sales spurt, Jun 22
Much has already been written about the increasing CODB (cost of doing business) / inflation due to COVID related issues. Interestingly the following table highlights Coles and Woolworths CODB has been increasing lately (FY22) as we enter ‘the new normal’.
Coles supermarkets, Woolworths Australian Food CODB %
The recent spike in CODB is not COVID related. For example, Woolworths annual report FY22 highlights COVID related COBD remained constant (0.5%) vs FY21. The increasing CODB is due to standard business costs increasing. For example, July 22 Woolworths increased store labour wages by 5.2% in line with the Fair Work Commission decision to raise the minimum wage by 5.2% (Yahoo). So, in the short term COVID has increased the general COBD, e.g. labour and freight costs. COVID specific costs, such as providing hand sanitiser for staff and shoppers etc, only had a minimal impact.
The following table highlights Coles and Woolworths still enjoy a strong % EBIT (earnings before interest and tax). During the pandemic there was speculation that % EBIT could dramatically decrease, due to increasing CODB, this has not occurred. One factor maintaining % EBIT is increasing gross margin. For example, Woolworths increased their gross margin from 29.2 in FY20 to 30.4 FY22.
Coles supermarkets, Woolworths Australian Food % EBIT
Disruption is the new normal. The ‘COVID era’ has disrupted global supply chains, limited product availability and created labour shortages in supermarkets (warehouse, logistics, stores). However, the short-term impact on Coles and Woolworths has been negligible. Even with product shortages and staffing issues they have been able to grow retail sales. The recent increasing CODB is due to increasing general business costs, not new COVID related costs. They have been able to maintain % EBIT, partly due to higher gross margins.
The long-term impact of COVID will now be debated. IMHO (in my humble opinion) the major challenge for Coles and Woolworths will be increased competition for online orders. COVID has highlighted Australian shoppers increasing demand for online orders. Many specialist retailers (local baker, butcher etc) will develop an online ordering platform (maybe just for click and collect). Major competitors will also develop their online capabilities. For example, Aldi does operate different online order business models overseas that Aldi Australia could replicate …
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