Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Woolworths Group FY '20 Analyst Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone, and welcome to the Woolworths Group full year results for the 2020 financial year. Stephen Harrison, our Chief Financial Officer, joins me today as a fellow presenter and will cover our financial results a little later this morning. Also joining me today are Claire Peters, Managing Director of Woolworths Supermarkets; Amanda Bardwell, Managing Director of WooliesX; Natalie Davis, Managing Director of Woolworths New Zealand; Dave Walker, Managing Director of BIG W; Endeavour Group Managing Director, Steve Donahue; and our Chief Legal Officer, Bill Reid. In the interest of leaving enough time for your questions, today's briefing will include an update on key issues, followed by the progress on our strategic priorities in F '20. Steve will then present our financials before turning back to me to provide an update on our current trading and outlook for F '21. Before I start, I again want to recognize our entire team for the incredible efforts over the last year as we and our competitors have provided an essential service to our customers and communities. I should add that we couldn't have done this without the support of our supplier partners and the federal and state government, as we have all worked together with a truly collaborative spirit to achieve a common goal of keeping all Australians and New Zealanders fed and in stock in everyday essentials and also, very importantly, safe. Unfortunately, we cannot yet talk about COVID-19 in the past tense, and I wanted to start with an update on our group response to COVID-19 and how we are making being COVIDSafe a part of our everyday business. The recent increasing positive cases as well as the tighter restrictions in Victoria and New Zealand is an unfortunate reminder that we will be living with COVID for the foreseeable future. As one of Australia and New Zealand's largest employers, we're represented in most communities in Australia and New Zealand. As a result, this is very real for us as a business. As of this morning, 37 team members have tested positive for COVID-19 in the August month-to-date, all from Victoria, and 18 of the 37 has since recovered. Since July, 97 team members have tested positive for COVID-19, with 76 now fully recovered. This represents about 0.5% of our workforce, which sits below the percentage of the population that have tested positive for COVID in the wider community. As a group, we want to lead in role modeling COVIDSafe behaviors across our team and communities and make them a normal part of how we operate in them. This involves a supply to COVIDSafe lens to all of our decisions. As part of resetting our operating rhythm, we have established a group, COVIDSafe trial, with this broken into 3 squads: our COVID planning and response squad; our COVIDCare squad really focused on what will become the next priority in COVID, which is looking after the mental and financial well-being of our team; and our COVID digital squad. We have also appointed a Chief Medical Officer. If you look to Slide 5, you will see that we have developed a series of COVIDSafe standards for the group focusing on 5 key areas, including PPE, health, hygiene, cleaning and social distancing. And we are working on the COVID -- for COVIDCare as I speak. Earlier this month, we also launched the Woolworths Group COVIDSafe website to provide a common location for up-to-date information for all of our retail businesses as well as practical tips on social distancing, the use of face coverings and any positive case alerts that eventuate and also our COVID template processes and procedures. And these are all available for other retail businesses to download and use. Turning to Slide 6 of our investor presentation and a summary of the key achievements in the financial year 2020. During the year, our team and our communities were impacted by drought, the devastating bushfires, New Zealand's White Island volcanic disaster, unrest in Hong Kong and then COVID -- the COVID-19 crisis. Our team have continually risen to the challenges that have faced us and lived our group purpose of creating better experiences together for a better tomorrow. We have tried to take a nonnegotiable attitude towards the safety of our team and customers, and this was reflected in the material COVID-19 costs incurred in the second half. However, this was recognized by customers and team alike and reflected in strong customer brand and reputation metrics. We're also pleased to record our highest ever Voice of Supplier results in our recent survey completed in July. We achieved strong sales growth across all of our businesses, excluding Hotels. And while F '20 will be remembered for the impact of COVID-19 in the last 4 months of the trading year, the group had good momentum prior to COVID. F '20 sales from continuing operations were $64 billion, up 8.1% on a normalized basis compared to F '19. Our group Voice of the Customer NPS ended the year at 57, up 2 points on July -- on June 2019. After a strong H1 EBIT normalized growth of 11.4%, EBIT growth in H2 was impacted by COVID-19 in 3 key ways: the closure of hotels for most of the last 4 months of the financial year led to a material decline in its second year EBIT compared to F '19. However, this impact was partly offset by strong sales driven EBIT growth across the rest of our businesses, despite the materially higher cost of sales and team safety measures. We achieved strong group online sales growth of 41.8% and record sales online penetration of 5.5% in F '20, with a much higher exit rates coming out of the year. This was despite the initial capacity constraints we experienced in March and April across our 2 businesses, but the speed with which services -- our services have scaled up and capacity increased during the half is a testament to how quickly our team has responded to a clear need from our customers. We are very proud of the achievements of the BIG W team during the half, with BIG W achieving a material improvement in EBIT compared to the prior year, with EBIT of $39 million compared to a loss of $31 million last year on a like-for-like basis. BIG W had clear momentum before COVID, but Q4 comparable growth of over 30% was a clear highlight. And finally, we made tremendous progress in completing the restructure and then merger of ALH and Endeavour Drinks to form Endeavour Group. While delayed due to current circumstances, we are continuing to pursue a separation of Endeavour Group, which we expect to take place in calendar 2021. I want to talk to Slide 7, which is a reminder of the group's priorities. But on Slide 8 and Slide 9, I will call out some of the highlights of our progress against these priorities. It was particularly pleasing that the group's collective commitment to live our group purpose was reflected in increases in both the group VOC Net Promoter Scores and in our brand metrics in F '20. According to the [ RedTrack Company ], Woolworths brand reputation scores improved by nearly 6 points from Q3 to Q4, which is heavily influenced by our response to COVID. But we're also very proud to be named Australia's second most trusted brand during COVID-19 by Roy Morgan. To recognize the extraordinary efforts and contribution of our team in F '20, we announced our Better Together recognition award in June. As a result, more than 100,000 Woolworths Group team members have been awarded shares in Whoolworths Group, which will allow them to participate in any increase in value that they have helped to create. I have already spoken about the strong digital and online growth across our [ X ] businesses in F '20 and the way in which our businesses have responded to the increased demand. However, we're also able to launch our Everyday Rewards app in -- just at the end of the year. Released in May, it has already been downloaded by over 1 million times, and that makes it easier for our customers to interact with their accounts, activate their personal offers and adds greater convenience to their digital experience with the group. Despite our plans being disrupted, we were still able to make good progress on differentiating our store, our food propositions during the year via the in-store customer experience. We completed 72 renewals, including our latest value format in Mt Druitt, our Smart Store 2.0 in Millers Junction in Melbourne, and our first store using 100% renewable energy, again in Melbourne, at Burwood Brickworks. We also made good progress on our e-stores in Australia and New Zealand, which will include micro performance technology in partnership with Takeoff. And we hope to have this operational in some form in October or November this year, and that's despite the various travel restrictions, which the tech teams have been under. In drinks, we accelerated many initiatives to make the customer experience easier and safer during -- due to COVID. Dan Murphy's introduced contactless, direct-to-boot pickup to over 50% of its fleet. And BWS dramatically increased its on-demand delivery service to over 950 stores. Other initiatives include an extension of Endeavour's marketplace service and local-ranging programs to assist small producers with the route to market, and approximately 400 new suppliers have been added to the marketplace, offering over 4,000 new products online and in-store. We also made progress in improving safety for our team and customers in F '20, and it became even more important following the onset of COVID. Our safety metrics improved significantly against targets set for the year, including a 19% reduction in total recordable injury frequency rate from F '19. We also focused on mental health for our team and provided financial assistance to support team members were required, although as I mentioned at the outset, COVIDCare is an incredibly important priority for us in F '21. Steve will provide a more detailed update on our supply chain a little later. But we have seen MSRDC continue to ramp up in the second half. We also announced New South Wales network transformation in late June, which are important steps to be better for customers and simpler and safer for stores. On Slide 10, it shows Woolworths Group's food and everyday needs ecosystem. In F '20, we made good progress in all 4 growth adjacencies. Last week, we announced our proposed strategic investment in PFD Food Services, which will give us access to a large fragmented market where we currently have no presence. We also made good progress in our other B2B growth adjacencies as we scaled up Woolworths International and Woolworths at Work. We've successfully extended our digital and data platforms with the relaunch of the Everyday Rewards program and rolled out digital screens across Cartology to 957 stores. We also made progress on our partnerships with Endeavour Group and Caltex, and revamped our decade-long partnership with Woolworths Frequent Flyer. Turning to e-commerce. I wanted to highlight on Slide 11 the growth we have seen over the last 5 years, as we have materially increased our investments in digital and e-commerce in response to our customers' increasing demand for convenience and connected ways to shop. Over the last 5 years across the group, we have achieved a compound annual growth rate of 26%. Growth has further accelerated in F '20 to 42%. And of course, it gotten even stronger in the first 8 weeks of F '21, which I'll talk about later. And while we know that some of the outlets will be temporary, we think we are seeing a permanent and structural changes to the way many of our customers shop, with customers becoming increasingly comfortable shopping with us in many different ways. As a result, we will continue to build connected capabilities for the future to meet the evolving needs of our customers. I will now turn to Steve Harrison, who will present our financial results before returning to me to provide an update on our outlook. Over to you, Steve.

Thanks, Brad, and good morning, everyone. Before I start, let me give some context on the presentation of the numbers and in particular, the impact of AASB 16 and the 53rd week in F '19. The F '20 reported results reflect the adoption of the new lease accounting standard, AASB 16. As we did at half 1, we focused on the reported F '20 numbers, which reflect the adoption of AASB 16, and compared those numbers to F '19 adjusted as if the new standard had been in place. In F '19, we had 50 -- we also had a 53rd week. And throughout the presentation, I'll comment on normalized performance, which has adjusted F '19 to be comparable to F '20, both on a post-AASB 16 basis and a 52-week-versus-52-week basis. We have included pre-AASB 16 numbers for F '20 in the appendix in the slides. However, we'll no longer be reporting pre-AASB 16 numbers going forward, having fully adopted the new lease accounting standard both for internal and external reporting purposes. I'll start today with the F '20 full year group results summary on Slide 15. Starting with statutory results, sales from continuing operations were $63.7 billion, up 6.2% on the prior year. Performance in half 1 and half 2 were very different. In half 1, all businesses delivered solid sales growth, with group sales from continuing operations up 6%. In half 2, we saw a very strong double-digit growth across all our retail businesses following the onset of COVID-19. However, the closure of hotels in late Q3 and for much of Q4 reduced sales growth rates for the group, with normalized half 2 sales from continuing operations increasing by 10.5%. EBIT from continuing operations before significant items increased by 18.3% on a reported basis, with the growth compared to prior year benefiting from the introduction of AASB 16. Reported NPAT decreased by 8.4%, also impacted by the introduction of the new lease accounting standard and the 53rd week in F '19. On the 23rd June, we updated the market on a number of significant items to be booked during the year, including the following: $176 million associated with the New South Wales grocery supply chain transformation; $230 million for costs associated with the Endeavour Group transformation; and $185 million of charges related to interest and other costs for the salaried team member remediation. All of these are on a pretax basis. Including significant items and discontinued operations from Petrol in the prior year, the group's F '20 statutory NPAT attributable to shareholders declined by 56.7%. However, this is not a very good indication of the underlying performance of the business. And at the bottom of Slide 15, we show normalized post-AASB 16 EBIT and NPAT before significant items, which were both broadly flat on the prior year. Turning to EBIT by business on Slide 16. EBIT in Australian Food was up 6.3% for the year to $2.232 billion. H2 EBIT increased by 4.6% with COVID-related sales growth in the last 4 months of the year being somewhat offset by roughly $290 million of costs in half 2 associated with operating in a COVIDSafe way. In addition to our investment in digital and the mix impact from volume growth in e-commerce, [ CODB ] was also impacted by higher team costs associated with the 2019 enterprise agreement, higher store team salaries, higher depreciation and of course, higher variable costs to support the higher sales growth. New Zealand Food EBIT increased by 10.7% in New Zealand dollars. Half 2 EBIT growth was 15.1% driven by very strong sales growth associated with the Alert Level 4 restrictions in New Zealand and higher GP, despite also being impacted by higher operating costs due to COVID-19. BIG W delivered a strong improvement in EBIT for F '20 with a profit of $39 million. Sales momentum was strong prior to COVID-19, but the business had an exceptional Q4, with sales growth over 30%. Endeavour Drinks EBIT increased by 5.7% for F '20 and 4.2% in half 2. After a more subdued start to half 2 in January and February, sales accelerated in late March and remained strong in Q4. EBIT growth in half 2 was impacted by higher COVID-19 operating costs, higher team costs due to the recent EAs and the write-off of legacy IT assets no longer in use. After a strong half 1 EBIT growth of 8.3%, Hotels sales and EBIT were impacted by the government-mandated closures from the 23rd of March. As a result, F '20 EBIT declined by 51% compared to the prior year, with half 2 recording a loss of $52 million compared to a profit of $144 million in the prior year. Central Overheads was broadly in line with the previous guidance at $151 million. You may recall at half 1, we restated half 1 F '19 Central Overheads by $26 million to reflect the in-year cost of salaried store team member remediation costs for the half. There was a further $26 million cost related to this in half 2 of F '19. However, for the full year of F '19, the net impact was only $2 million as we previously booked a $50 million provision in the second half of F '19, which broadly offset the full year salary remediation cost of $52 million. In addition, as communicated in our F '19 annual result, Central Overheads in half 2 of F '19 also included around $90 million of one-off gains, which is why the half 2 F '19 Central Overheads may appear confusing on the first glance. For F '21, we expect Central Overheads to be approximately $160 million due to higher insurance and ongoing salary payment shortfall, remediation and compliance costs. Finally, on this slide, we've shown normalized EBIT from continuing operations, excluding Hotels and Central Overheads before significant items, which increased 8.8% in half 2 and 9.3% for the full year. And it's probably also worth explaining that the total COVID costs we incurred in Q4 of just under $290 million disclosed on Slide 52 includes the net cost of the team recognition award payments, which were not included in the original estimate of costs we provided at the Q3 sales announcement. Turning to Slide 17 and the key balance sheet metrics. Average inventory days from continuing operations improved 2.5 days compared to the prior year to 37 days. Not surprisingly, in the last 4 months of the year, there were some material impacts on inventory from COVID-19 across the group. However, average inventory days has been showing improvement over the entire year. Inventory levels in our food and drinks businesses were initially impacted by the surge in demand, but inventory was gradually rebuilt, with additional grocery and freezer inventory held at the year-end. With more exposure to offshore sourcing and extremely strong sales in BIG W, inventory levels were below typical levels at year-end. We expect, however, inventory to return to normal levels by mid-September. Normalized returns on funds employed from continuing operations declined by 49 basis points to 13.7%, largely due to the impact of the closure of Hotels. All businesses reported higher ROFE with the exception of Hotels and Central Overheads. And the reduction in ROFE compared to the pre-AASB 16 F '19 reported numbers reflects the inclusion of leased assets in funds employed in F '20. Turning to Slide 18. I want to spend a couple of minutes today talking about how the group allocates capital. This slide starts with the key reasons why we think Woolworths Group is an attractive investment proposition. But of course, that's ultimately for investors to decide themselves. These strong business attributes, however, should allow the group to generate strong operating cash flows over time. Thinking about those cash flows, we look to invest enough to sustain our existing assets through sustaining CapEx, and that investment should broadly be in line with depreciation over time. We also prioritize dividends, and we expect to maintain a dividend payout ratio at around 75 -- 70% to 75% of NPAT. This leave us with choices around how we invest any excess cash. In this context, one overarching principle for the group is to ensure we maintain a solid investment-grade credit rating. Currently, our credit ratings are BBB and Baa2 with Standard & Poor's and Moody's, respectively, with a stable outlook, and we remain comfortable with those ratings. Turning to the free cash flow. Any excess free cash flow can then be invested in growth opportunities that reinforce our investment proposition. We could choose to pay down debt, if required, or return excess cash to shareholders through a special dividend or buyback. In recent years, we've done all 3 of these based on what we believe will deliver the best returns to shareholders. Within this framework, the most important element is the cash we generate, so turning to Slide 19. As you can see when you look at the cash flow, AASB 16 has also had a material impact on the presentation of the cash flow. But as you know, the accounting [ refers to ] the cash flows rather adjust the presentation. EBITDA from continuing operations was up 44% before significant items, but was positively impacted by AASB 16. Offsetting this somewhat was the Petrol earnings in the prior year and a significant item expense in the current year compared to a significant item gain in F '19 on the disposal of Petrol. Working capital and noncash movements were positive in F '20 and reflected higher payables and provisions offset by higher inventory at year-end as we increased holdings of key grocery lines. The prior year was impacted by the noncash gain on the sale of Petrol. Interest paid increased materially due to the recognition of lease interest of $701 million, while tax paid declined due to lower installment payments and higher tax refunds compared to the prior year. And I will talk to CapEx on the following slides. The cash outflow associated with dividend declined on the prior year as F '19 included the $0.10 special dividend declared in F '18. Adding all this up, free cash flow for the year was $249 million in F '20. Our cash realization ratio was strong at 124.4%, which benefited from some payable timing issues at the end of F '19 as well as higher payables at the end of this year due to COVID-related inventory purchases. On Slide 20, I want to share with you how we think about our CapEx spend and what we include in sustaining CapEx versus growth CapEx. Sustaining CapEx include areas of spend like maintenance, safety, store renewals, IT and supply chain and productivity initiatives focused on cost efficiency. Growth CapEx refers to spend in areas like new stores, e-commerce and digital and other projects that we expect to drive higher sales and increased margins over time. We've shown CapEx broken down this way on the following slide. Turning to Page 21. Operating CapEx for the year was $1.64 billion, roughly $90 million below the prior year and a little below the $1.7 billion that we'd expected at the half. CapEx was lower due to reduced renewal spend in Australia and New Zealand and lower supply chain spend. Growth CapEx increased due to higher spend on property development and acquisitions of $585 million in the year, which, as you know, can be lumpy. Spend in the year included over $100 million on the acquisition of some strategic sites from Caltex. We expect the CapEx in F '21 to be approximately $1.9 billion, reflecting the lower-than-planned spend in F '20 as well as increased investment in e-commerce and digital as we expand capacity and focusing on meeting customer expectations and -- as well as on supply chain. Turning to Slide 22 and capital management. The Board today has approved a final dividend of $0.48 per share, taking the total dividend to $0.94 for the full year, which is 7.8% below the prior year. Our dividends are based on NPAT, including discontinued operations. And it's important to note that the prior year included Petrol earnings for 9 months of the year. When normalizing for this and the 53rd week, this is equivalent to $0.08 per share. So on a normalized basis, our $0.94 dividend is in line with the prior year. We had previously indicated that the dividend wouldn't be impacted by AASB 16, given this is a noncash change in accounting. This has resulted in our payout ratio increasing to 74% on a post-AASB 16 basis, and we would expect the dividend going forward to be in the 70% to 75% range. Turning to debt and funding. The group's sources of funding and liquidity remained strong, with strong access to bank and capital markets debt. In May, the group was the first Australian corporate to access the domestic bond market post COVID, with a bond issue at very attractive rates that extended the group's weighted average maturity. The proceeds will be used to refinance bonds maturing in the first half of F '21. The final slides from me today, on Slides 24 to 26, are to provide a little more color on our broader supply chain transformation, our New South Wales grocery supply chain changes announced on 23rd June as well as the current progress on MSRDC. There's been a lot of focus on our fully automated shed in Melbourne and our recently announced shed in Sydney due to open in a few years. However, we have been investing to progressively transform and upgrade our supply chain over the last few years, including our Tasmania, Adelaide and Townsville regional distribution centers. We also have a number of new facilities under development, as you can see on the right-hand of Slide 24. Turning to Slide 25 and an update on MSRDC. The facility has been -- has seen a material ramp-up in throughput in the second half of F '20. And subject to COVID-19, we expect the facility to achieve business case volumes and costs during the course of F '21. This slide provides a comparison of the MSRDC to the Hume regional distribution center, which are replaced across a number of key metrics. MSRDC is materially safer and more efficient to operate, has a bigger range in capacity, can build pallets in a way that's efficient for stores and has 100% peak accuracy. And probably most important to those on the call, it's expected to operate at a materially lower cost per carton than the facility it replaces. It is worth noting that due to COVID-19 and the supply chain volatility experienced in Melbourne, we're not yet achieving these costs per carton consistently. As announced on the 23rd June, turning to Page 26, we will be building a fully automated regional distribution center and a semi-automated national distribution center in Moorebank. These facilities will replace 3 existing distribution centers in Sydney and Melbourne. Similar to MSRDC, these 2 facilities will provide a safer environment for our teams, improved availability, ranging and accuracy for our customers and lower cost to operate. And we're confident this will deliver double-digit returns over time. Thank you. That's it from me, and I'll now hand back to Brad.

Thanks, Steve. Turning to the current trading and outlook on Slide 57. Current trading has remained strong across the group in the first 8 weeks of F '21, with the exception of Hotels, with group sales of 12.4%. Hotels sales growth, while still down materially, has improved on Q4. COVID costs have also remained elevated but at a lower run rate than the March to June period, with cost for the first 8 weeks of F '21 of $107 million, which represents approximately 1.1% of sales. Australian Food sales increased by 11.9% in the first 8 weeks, with the stricter restrictions in Victoria resulting in a consistently strong growth rates in that state. New Zealand Food sales have slowed relative to the second half of F '20, increasing by 8.3% in the first 8 weeks. Sales in week 7 increased sharply as restrictions were introduced and have since reverted to single -- to mid-single digits. BIG W sales growth has continued to be strong, increasing by 21.1% in F '21 to date. Since the 5th of August, 22 stores in Metro Melbourne have been closed to in-store customers. However, online services and pickup have continued during the time. In Endeavour Drinks, sales growth has also remained strong at 23.7% as Endeavour continues to benefit from greater in-home consumption. On Slide 28, it illustrates the weekly sales growth for the first 8 weeks as well as the 2-year average growth by business, which shows that sales growth remained strong, despite cycling some higher sales activity in F '20, such as Lion King Ooshies in Australian Food. Finally, turning to Slide 59. We have given you more detail on the COVID costs as we continue to prioritize operating in COVIDSafe. While it is almost impossible to predict, we are currently assuming that some level of elevated sales and costs will continue for the remainder of the first half of F '21 at least. In summary, there are many uncertainties in the year ahead, but we will continue to be guided by our purpose, and we are committed to making COVIDSafe part of our everyday operations. We have had a strong start to F '21 and remain positive on the many opportunities to create better experiences together for our customers, team and communities in the year ahead. I would now like to hand back to the operator to open the line for questions.

[Operator Instructions] The first question today comes from Michael Simotas from Jefferies.

The first question from me, and it's great disclosure that you've given on the COVID costs and the sales you've seen so far in FY '21. But I was just hoping to explore that a little bit further. So based on that COVID cost run rate that you've provided, it looks like you probably need an extra, maybe 4% incremental sales growth to offset your underlying costs plus the COVID costs, which would suggest that, all else equal, your margins for the food business should be up quite meaningfully relative to the first quarter of last year. Am I thinking about that in the right way? Or are there some other moving parts that may offset that?

Thanks, Michael. Look, obviously, we're not giving guidance for the year ahead. And there are many moving pieces in our results. You've talked about a couple, of course, elevated sales, but in that, in parallel, elevated COVID costs. But we're still working through all the other aspects on our P&L. In F '20, the things that we don't really call out enough are still continuing to work very strongly on making sure [ winter ] promotions -- that we continue to refine our promotional program to deliver value for customers, but also to make sure we have more winner promotions than we used to, and that continues to progress. We're still working very hard on stockloss. We actually finished the year with a much better stockloss position in Australian Food. I'm going to get a question later on, and so it's just over 2.7%. We're continuing to progress that into F '21. A very important lever for us. Then on the cost of doing business side, we did actually make progress on our Simpler for Stores efficiency program in F '20. But in truth, it was slowed down, understandably by COVID and now need to pivot to being COVIDCare. So we're continuing to work on that, although we need to be very sensible and pragmatic on that just given the environment we're in, with progress there being offset by COVIDCare kind of investments we continue to make across the business. And then very importantly, of course, within all of that is our continued investments in online. And we have double capacity. But you can see the growth rate that we were experiencing online. We'll come back, I'm sure, and I'll get questions to talk about the profitability of online. It is profitable, but it is still margin dilutive. So there's a whole series of factors that are guiding to our overall result there. You've talked to a couple. We're not going to give a forecast, but there are as many positives as there are negatives, quite canny.

The next question comes from Shaun Cousins from JPMorgan.

Maybe just a little bit on the labor costs. Can you just talk a little bit about how you're thinking about labor cost inflation for fiscal '21, conscious of the -- I think there was an agreement you recently reached with the SDA around backpay and penalties. And maybe if you could just sort of quantify what that labor cost is. And maybe, Steve, your comments on MSRDC, should we not expect business case at MSRDC until we get more normal sales growth? Or is it really that you couldn't get that when you had panic buying, so we should envisage MSRDC savings coming through in fiscal '21, please.

Sure. I'll make some comments on labor costs, and I'll turn to Steve to provide a bit more detail and then get into the detail on MSRDC. In F '20, when you look at the year rolled up, we did experience a material lift in our wage costs. It was over 5% for the year, once you annualize the enterprise agreement that we had implemented the year before, once we went about adjusting department manager salaries to make sure that we were fully compliant with the award and then just general salary inflation. So it was quite a material year for us in F '20. In F '21, we are hoping to see that moderate. Now the issue you raised was the Fair Work Commission had come out with the base rate for F '21 for the general retail industry award and said the 1.75% will become effective next February. We were seeking clarification whether -- what were our obligations, is -- was it February or was it June -- sorry, July of this year. But it's still quite a moderate rate to what we have seen historically. And so what you saw we did overnight was really just decide that we wanted to provide certainty to our team in this time of COVID and not get caught up in trying to get clarification, but just execute against the base increase from 1 July. That number is actually in our budgets, and we don't think it's an untoward number in the context of the business. That doesn't mean we don't need to continue to work hard on our CODB, Shaun, as you would imagine, and the Simpler for Stores program continues to work hard. It is behind what we would like to have achieved in F '20, but there's a lot of momentum and a lot of work on all aspects of it in '21. Steve, I don't know if there were specific points you want to talk to CODB or you wanted to move on to MSRDC?

I think you've covered the labor inflation question. Just, Shaun, picking up your comments on MSRDC. Look, we're pleased with the ramp-up and the performance of the facility. But I think it is important to note that the ramp-up has been impacted and slowed down due to COVID-19. And just to clarify this, we exited the Hume regional distribution center and moved all that volume into MSRDC in the third quarter of the past financial year. But the plan had always been to move the remaining volumes of ambient servicing Victoria out of our Melbourne Liquor DC, which is sort of a shared facility between grocery and liquor, and also our Mangrove national distribution center. And so it's been that transition of volume to ramp up the scale of MSRDC that, that's just been slowed down by the disruption that's occurred in Victoria really since March. So that said, we continue to grow volume in the facility. We did roughly $1.8 million -- sorry, 1.8 million cases on average per week over the first 8 weeks. We hit 2 million cases 2 weeks ago. So we are gradually ramping up. And so in terms of our expectations of hitting our business case, we firmly expect to hit once we get all the volume into the facility, the business case, cost per carton. Because I think the advantage of a facility like this is there's very limited additional variable costs that you add as you add more volume into it. But we won't hit those rates until later in the year. So in terms of the P&L perspective, you should anticipate some benefits this year, or we certainly anticipate benefits this year, but full run rate benefits won't be realized until F '22. It's probably also worth noting that, just given some of the restrictions in Victoria around operating in a COVIDSafe way, there are some minor impact to productivity in the facilities and some costs associated with running those facilities at the moment.

The next question comes from Grant Saligari from Crédit Suisse.

Brad, I'm just trying to work out and make sure it's clear in mind why the profit leverage in the second half was so different between Australian Food and New Zealand Food? Because -- I mean you've obviously called out the COVID costs, but I would have thought things like cleaning and the like, team member bonuses would have basically hit both businesses. But New Zealand Food had something like a 15% increase in EBIT in the second half and obviously, the 4.6% for Australia Food. So maybe just talk to that. And it obviously goes to sort of the guidance you've given on costs going into the first quarter of '21 as well.

Thanks, Grant. That's a really unusual question, but I think it's a great question, actually. There were -- the biggest issue we had, in a funny way, New Zealand going into -- very rapidly into a stage 4 lockdown, got into a very structured demand pattern. And while it was elevated, it was very structured and we managed to -- and actually, the trading hours have come down, we just managed to manage through the supply chain. In Australia, actually by not getting to the structure process, we had a lot more volatility, in particular, through our supply chain. And so we had to -- and we did invest materially in extra warehousing capacity in Australia, which was one of the biggest cost elements we had. And we didn't regret it, but that was a big investment for us. The second one, particularly in Australia, again, by not getting to the structured process early in the crisis, we're very worried on the security side and just for our team's sake, and the rules weren't clear. I mean when you go into a level 4 lockdown, the rules are clear, the [ place ] is clear, everyone's clear. We invested materially in security. This was in a lot of conversations with the federal government. I don't resolve from it at all, but we basically committed we were going to have security in every store inside of -- in Australia. So we were very forthright on doing that. Thirdly, and particularly in Australia, again, we didn't know whether COVID was going to go in Australia. In New Zealand, there were very few cases, very limited absenteeism. We made the decision again to be safe and to recruit up to 20,000 new roles based on an assumption that we would get this very high absenteeism of up to 20%, which was the experience we've seen in community-transitioned COVID scenarios, which we didn't have in New Zealand, but we thought we might have in Australia. We did over -- we did play that too safe. We turned out to only get to about 6% absenteeism. So I know it sounds paradoxical, but actually moving very rapidly into a very structured level 4 lockdown at an operating cost level is actually materially lower. I know it sounds somewhat strange. Steve, did you want to elaborate?

I think probably just 2 other builds, Grant. Firstly, the margin growth -- GP margin growth was slightly higher in New Zealand in the second half. And as Brad talked about earlier, we have that 2x level of inflation in Australian Food on our wages, but we didn't have that same impact in New Zealand.

I mean as I say, once you get into a very normal rhythm, being able to plan our business is easy. When you're in this volatility, it's incredibly, incredibly hard. Sorry, Grant, your second question was to do with the outlook after the first 8 weeks. Was it to do with sales or cost? Do you mind just coming back to that?

Yes. It was more to do with the cost outlook. And I think what you're saying, and maybe correct me if I'm wrong, is that most of those additional costs are probably accruing in the Australian Food business, not -- that's my take from your previous comments.

I'm not certain I understand your point. But what is clear for us, as we get into a more structured, more organized approach COVID costs, and I think as a percentage of sales, that's quite a handy way to look at it. You can do your own analysis, benchmarks. You'll find that they are between 1% and 2%, depending which retailer you look at depend on what they include in it. But I'm sure you'll work through them yourself. So we're finally kind of looking at percentage of sales as just a handy thing to do. What was certainly done as a percentage of sales for us in -- as we go into the new year, and again, that is because we're better planned, we're better organized and the rules of engagement are clear. Things like security, we still do have security, but we're not trying to have security in every store, in every hour. We're just trying to make sure where the risks are that we make adjustments. Things like PPE at the peak of the crisis, just putting yourself in a position to have masks in stores, you're paying $0.84, $0.85 a mask versus the $0.12-odd down. The cost of hand sanitizer, again, is sort of, in the sense of $1, for what it was during the peak and things like that. So you've seen us to be better planned. We've seen the cost of actually operating COVIDSafe coming down. And we've got a lot of other interesting initiatives underway to continue to adjust the term. An interesting thing is just, for us, in making sure if we count how many people are in the store, we will automate that process. We do a manual process right now. There's work being done to use automation to be able to do that. So we feel that there's -- that the number you see, we can continue to chip away at it without making our business any less safe. So that is an important part of our plan in the year ahead.

The next question comes from David Errington from Bank of America.

I don't want to sound negative, Brad, because I think the results are really very pleasing. But I'm targeting your MSRDC and your CapEx that Steve outlined. When I look at Slide 25, look, I've got to say, I'm not -- I'm pretty underwhelmed by the benefits that you're getting on a cost per carton basis. Because when you do the numbers, having your workforce, you're only getting around about, what, a $0.30 reduction in the cost per carton. And when you look at that on 2.5 million case per carton per week, you're only saving about $40 million from -- unless there's more benefits here in your stores. When you look at what you've done here, it's taken you 8 years to do it. You're probably spending $500 million to build it. And you're only going to save $40 million in costs. What am I missing here in saying that these things are good investments and that you're going to commit another $1 billion for your next one? What am I missing here? Because on that slide, on the math, it does look to be an underwhelming investment.

So I think, David, 2 things. The cost per carton here are fully loaded, including the depreciation. So if you're assessing the cash benefit versus the cash outlays, you need to add back the depreciation. And then the other component, there's 2 other efficiencies...

But what -- how much is that then, Steve? What's the cash return then, please?

David, you can do the math on the depreciation of the $400 million of cash...

So it's 400 -- so across your $400 million, how long do you depreciate it over?

Different parts of it have different depreciation rates. So the build is different from the automation. But it will be -- it will vary from 10 to 20 years, depending on the different type of equipment in it. So you look to the other...

So you're probably looking at the $30 million of depreciation you'd have a number say..

Yes. It's in the $20 million to $30 million range. But let me talk about the...

So you're talking about $65 million of cash benefit, cash return?

Well, that's just looking, David, if you let me finish, at the cost benefit just within the distribution center. There's also labor benefits and efficiency in the store from the way the pallet is delivered to the store, which makes the picking process much more efficient. We don't need to do the splitting activity, which used to occur at the back of the store. And secondly, we actually get transport benefits because you get improved cube efficiency of the pallet in an automated pallet, build versus a manual. So yes, overall, and I know it's a topic we've debated many times, we are confident that we're going to get the returns over them from the investment in MSRDC. Has it taken a long time to get to the point we have? That's a fair criticism, but I think in the last 12 months, we've made decisions based on protecting its volume in Victoria leading into Christmas. And then in the last 6 months or 8 months, in particular, the disruption associated with COVID and bushfires actually at the beginning of half 2.

And David, just 2 other points to raise on it. One is, of course, we're talking about the cost this year. One of the issues we have in our standard warehouse is the continued inflation, which we have, which you do materially offset in the context of automation and as the depreciation comes off. So the benefits get better by your -- in an accounting sense, as you well understand. The second one, and I think a very important one, is the ability to just get the extended range. Because essentially, you're not working to a big phase, all of your pallet positions are -- can be picked from. And so that's not a value we ascribed to. We've really done it on a cost play, but you do actually get an ability to hopefully flex up the range. And one of the biggest costs in our business, and one that we continually need to work on, is balancing our RDC, our regional distribution center range to the NDC. And so we get a really interesting range optimization play going forward. I'm not embarrassed by how long it's taken us, David. I think we've been cautious as we should have, and you've challenged us on this many times. We needed to get one. Whilst it is incredibly hard to get these things right, we feel we are 80% of the way there. That's why we announced Moorebank, but they look pretty easy on paper to do, but they're much harder to do in practice. So I think I've taken a prudent, long, slowing the process down was the right call.

I think it makes more sense when Steve just explained, $400 million of cash out, $40 million running, $25 million of depreciation plus other benefits in-store, which probably about $10 million, $15 million or so, then it starts looking pretty good. But on the second question on the CapEx, Steve, Slide 21. I'm trying to -- I mean I'm really -- I'm pleased with the extra disclosure, et cetera. But what are you actually trying to tell us with sustaining CapEx, those numbers there, and growth CapEx? You're really pushing to split 2 out. Are you basically telling us that we should expect no improvement, incremental EBIT from the sustaining CapEx, that, that in effect is a cost? Because I would have thought supply chain, renewals, IT productivity, we should still expect an EBIT uplift from that investment. Is that right or not? And why the property? Property's a big number, $585 million. I mean when you look at what you did last year, too, you guys must have a lot of property on your books at the moment. Can you just give a bit of more color on that, please?

Yes. So I just wanted to give a bit more flavor about how we're thinking about CapEx. And some of the elements of sustaining capital are maintenance in nature. But we've moved away from calling it staying business to actually sustaining because part of growing your business and sustaining it is expecting some benefits from it. So as we look at a replacement, and we talked about this a few weeks ago when we talked about the New South Wales supply chain, you don't just replace like-for-like. And so we're trying to be disciplined to say what's a like-for-like replacement and then what's the additional benefit you get from enhancing an asset. And so that's how we think about sustaining the business. Because we definitely want to get productivity benefits from renewal, we want to get sales uplift from renewal. And certainly, we're enhancing as well as just maintaining assets when we do replacements and upgrades in things like supply chain and IT. The second part of your question, sorry, remind me...

Property.

Property. Yes, so one of the things we've been thinking a lot about property is how we unlock opportunities through our balance sheet, through securing sites, developing and then cycling them. But equally, we're also looking at what are strategic sites that we should continue to own. And I think in some ways, the lease accounting standard helps us to think about this. Because ultimately, there'll be certain sites that we want to continue to own and certain sites where it makes sense to lease. And one of the things we have been doing progressively is trying to reduce our WALE or our length of lease, which creates capacity in our credit metrics. And so we're just trying to do some -- think about how do we, over time, balance the mix of lease debt versus borrowing debt. And so what you're seeing is some of that transition. But this is lumpy, right? And I think there have been a few opportunities that have arisen in the last 12 months that we've unashamedly taken advantage of the opportunity to acquire. Now what we need to do is develop them and then get that cycling for those nonstrategic assets.

And what we've tried to do in it with the good all -- I think it is good actually, is do a network plan -- a holistic network plan across the country for what areas are we underpenetrated in and do -- what combination of supermarkets or small stores or e-commerce do we want to put together in that area and use that to then do quite a disciplined ranking. When you get to the sites where we're underpenetrated, if they're not out and when the suburban creep invariably coming to very tough places for us structurally to enter. And that's where Fabcot, a business you would know well, comes into its own, and we're trying to get it much more strategic and disciplined and focused on unlocking value for us there, which does require an element of development and often with joint venture partners, and match it together, residential as well as commercial. So we are getting much more disciplined. I thought the highlight to me was the fact that we cycled out a number of properties as well. So I would urge you to look at the net number of property in, property out.

I think we've got some great examples of where we've done a terrific job at this. Double Bay is a highlight. As you'd be aware, and I'm sure you're aware, of the Hilton development. We're in -- currently in the process of working through the approvals for in Melbourne.

The next question comes from Andrew McLennan from Goldman Sachs.

Just wondering if you could just talk to -- from a sales perspective, particularly on Slide 58 in food. If you could just point out whether or not the Ooshies promotional program was cycled at exactly the same time. And if not, which weeks may have been impacted? Because that sales number is really quite strong. So well done there.

Yes. I think it's a great question. I'll take the highlight -- high level, then I'll ask Claire to elaborate. But the Lion King was really in this period last year. So it is like-for-like comparison. I'm sorry, I think it started the second week of July. Claire will come back and correct me...

Correct, yes.

So you are looking at like-for-like, Ooshies or Lion King last year, plays really -- just a value campaign. It's always very important to do getting to the -- get your Woolies worth. We are -- what it doesn't include very importantly, though, is the launch of the next version of Ooshies, which is Disney+, which launched yesterday, which is week 9 for our fiscal year. So it includes one but not the other. Claire, I don't know if you've got -- you know the dates better than me.

Yes. Just to give the very specifics. So Lion King last year started on the 17th of July, so there's a couple of weeks where we are lapping that. And as Brad rightly said, we started our Disney+ Ooshies campaign yesterday. And to date, we are very pleased with day 1 sales.

Okay. So just following on from sales. I mean, obviously, very strong performances, particularly with respect to online. But just -- certainly, the industry feedback has been suggesting you guys have performed very, very well with respect to online. Without sort of discriminating on the source of -- or the channel of those sales, how did you feel about the performance of the physical stores during the fourth quarter from a sort of physical sales growth perspective?

Yes. Look, I think we -- good, to be honest. I mean I think we've got 2 things going on. Firstly, in the middle of the COVID crisis, which was -- it really hit us in March and into April. The fact that our team recovered in-store and customer scores got to where they were was fantastic, actually. And then, of course, as you know, when you look through our results, you see the strong sales growth we had during the same time anyway. So I think it was a real testament to our team that they have managed to not only hold on to the sales, but just that whole recovery and the material out of stocks, availability issues we had. And if you look at Slide 58, one of the highlights to me in that slide, each business tells a different tale but it's the consistency of performance inside Australian Food. When you look at the like-for-like, that actually -- if you go back into June, you see that consistency. So I feel like we've been trading relatively consistently. Clearly, the last couple of weeks Victoria has been elevated, but it has been quite a consistent tale, which to me has been the highlight. And our store team not only got safety right, got in-stock availability right, got the customer experience right, but you've got to remember that our e-commerce business is really pick in-store, with [ 80% ] of it being in store. So they really also went and did some in-store picking and got that right for us as well. So it felt very good. On e-commerce, well, I think it's just an achievement by the team, and incredibly hardworking during this period. On e-commerce, in general, we've called out the overall growth rate. We said it in the media call, so I don't mind repeating it. We had a very strong start, as everyone would be aware, to trading, with the group online sales for the first 8 weeks being up 84.6%. Actually, the food sales were up about 97.9% -- sorry, I may not be -- indeed I don't get to the 100-mark. It's a really good start. And again, it's the store team that's been doing that. So they've been managing the store sales as well as really managing that position. So it's been a very -- one of the highlights to me, actually.

Brad, I'm glad you mentioned that point because I know the increase in capacity was the decision you made for, I think, in particular, delivery for the fourth quarter. How is the business tracking versus capacity at such a high growth rate? And sorry, could you also just make a quick comment on how Takeoff Technologies, you, obviously haven't embedded it yet. But just what you're seeing offshore in terms of its ability to drive efficiencies in this area?

So I'll make a few comments on online, and I'll just ask Amanda Bardwell who's -- to talk about it. Obviously, just keeping up with this growth rate has been just an amazing achievement by the team between Woolworths Supermarkets and WooliesX. We've doubled our online capacity in Q4, which was incredibly important, just to make sure that we could service vulnerable customers with a safe alternative. So the fact that capacity doubled was just an outstanding achievement. So it's a much bigger online database we have now than we did before. We're going to have to work hard just to keep driving capacity, in particular, for Christmas, and we're very focused on creating this safe, affordable, inspiring Christmas. And we get peak trade in stores in Christmas, and we know a number of customers will still select to rather get a home delivery. So a lot of work ahead on, which I'll let Amanda talk to. And our home delivery pickup rate, which have been running sort of 65-35 has obviously got more home delivery in the short term. Very importantly, though, across our business, and I'd just like to call out the growth in same-day and on-demand or -- often on-demand is replaced through cloud, which has continued to grow very, very strongly, and that's become a really important part of our business, particularly Dan Murphy's, but more broadly. And the reason I call that out is one of the reasons we went to a Takeoff was our belief that we needed to have a very strong same-day proposition to meet the needs of customers. And everything we've seen suggests that, that was a good decision. In terms of our go-live for our Takeoff facilities, actually, I can't get to [ moment ] this year, but it's working. I've seen the videos. We're not shipping yet. We are 4 months behind -- 3 months behind shipping, but that's just to do with getting the engineers in the country and just a lot of visa restraints. But we're very hopeful, the units are in, and we're hoping to actually start shipping October, November out of Melbourne, Carrum Downs. We had hoped to actually start first in Auckland, but getting engineers into New Zealand has been even harder. So I think we will hopefully activate Moorhouse at the end of January, early February next year. But Amanda, just would you mind providing some comments just on online capacity? I know that's still a really challenging area for us to keep up with customer demand.

It is. Thanks, Brad. Look, I'll just summarize, I think, what you've just run through, which is, I'd say, a huge amount of capacity coming out of our stores. And I think really those early first wave of COVID taught us a lot around how we can actually work together with Claire and the supermarkets team to drive more volume of orders through our store network. And so we've been really, really pleased, I think, to discover the additional capacity we're able to deliver there. So that's really important. I think the CFCs have really stepped up for us, particularly in Melbourne and Sydney, and we've more than doubled the volume out of those facilities. And then the way that we're managing the last mile has also been a big unlock in terms of capacity. And so home delivery has certainly been the key driver of sales results. However, interestingly, I'd say in the last 3 months, it's been very much closely followed by drive. And so back to people looking for COVIDSafe way to shop, and again back to our store network, the way that drive is actually performing for us, particularly with that contactless to boost service, has been really exciting to see. So yes, we're confident that there's still a lot of capacity in our existing network. We're just working on making it more efficient. Thanks, Brad.

Thanks, Amanda. So very high growth. But keeping up with it is a real focus for us, a priority, as I say, for Christmas, a real collaboration across our business to get that done.

The next question comes from Bryan Raymond from Citi.

Look, I'm also happy with the disclosure you guys gave around the COVID cost. That's really useful. Just interested in -- given Victoria has likely ramped back up in terms of some of those costs, how that profile looks between Victoria and the rest of the country? And whether we could see any further reduction, should Victoria continue on their current path of moderating cases?

Yes. Thanks, Bryan. Looking forward to a very precise question on our trading coming up as your second question. But on the first question, as I said, on New Zealand, paradoxically in a lockdown, you get into a much more predictable trading pattern, and therefore, the cost impact is not quite what you would think it might be. So we do have some additional costs that we're putting in, PPE and making sure we do the right social distancing. But it's not quite the lift that you might expect in a level 4 lockdown. So as I say, it's -- once you get there, it is quite predictable. And outside of just getting the team safety right, you've got a much more predictable trading pattern with pretty contained hours. So it's not quite what you might expect.

Okay. Interesting. Just on renewals. The CapEx was down about 20% year-on-year. It looks like the number of renewals is fairly stable. Just interested in if you guys are changing your strategy a bit there in terms of the investment per renewal. Or if there's just some COVID-related timing stuff going on that sort of explain some of that?

Yes. Think about it, no, it's just a timing issue. If you actually went back to F '19, you'll see it was a bit higher. So if you look over a multiyear period, you'll see it's actually quite consistent. So a little bit more than we did in the last quarter of '19, which -- and then -- so that made us look a bit lower year-on-year. And then there have been a few delays. Actually, the more delay was found on the renewal program in Melbourne, just given the nature of what's happening with building -- in the building lockdown. That has slowed things down there. So no. What we're trying to do is, and one of the key things in this sustaining capital, is just to get very strong predictability and plan and execute well. And so it's a pretty smooth program overall. And I would just say the renewal still continue to perform very well for us. We just -- I mean I've called out Mt Druitt as a value store. We've also just found our first low turnover value store in Melbourne that opened about 3 weeks ago at Hoppers Crossing...

South Dandenong.

Yes. So that's -- sorry, South Dandenong, not Hoppers Crossing. So we're continuing to try and be much more focused on it, and that's what we do depending on where the store is.

Okay. And then just last one for me around inflation. Your competitors called out a slowdown in inflation in the month of June and then sort of just continued into early FY '21. Interested if you're seeing same things and then also just a comment around whether you're committed to catalogs as well and -- given they sort of moved online on that front? And how you think about the promotional programs? So you're aggressive in that in a holistic way. They're all pretty much related, that would be...

Of course, the -- sorry, can you just repeat your question on inflation? I mean it has been slowly trending from negative to positive if you take out tobacco, and you slowly seen that come through. And of course, we saw it come through in Q4. What was your question on that? Was it whether that was driven by a reduction in promotional? Was it a more structural issue?

Yes. Sorry, I'll repeat it because perhaps I wasn't clear. So Coles called out that in late fourth quarter '20 and early 1Q '21, they've seen the rate of inflation moderate quite a lot, stepped down. I'm just interested if that's something you've experienced. They've called out promotions returning back towards normalized levels and so on. But they've also taken out -- more recently looked at taking out the printed catalog. So I'm just interested in how you're seeing the promotional environment more likely -- yes.

No. We've seen a very smooth, more consistent line. We were back into a relatively full promotional program in June, actually, from mid-May, I would say. Stop me if I'm wrong. So we were back into a full promotional program for mid-May. So been a much more consistent trend line. So no, I wouldn't call anything out on that. And that just flowed through into the -- into July for us. Specifically then on the whole topic of catalogs, I wouldn't confuse, and I'm not telling you are, by the way, but I wouldn't confuse a number of promotions and then the mechanic in which they delivered. Most businesses in Australia and New Zealand have been getting out of physical catalogs and getting into more digital catalogs, but not with a reduction in the number of promotions in those vehicles. Our New Zealand business doesn't -- has phased out its physical catalog. Dan Murphy's has done it as well. So it's not about reducing the number, it's just a different way of delivering it. And we certainly have plans to continue to be a much more digitally-driven special business. We are thinking through when and how we do that. But I wouldn't -- it's not a way of reducing the number of specials. It's just the way of improving the effectiveness of them and making them much more personalized.

The next question comes from Ross Curran from Macquarie.

Just quick question about BIG W and Endeavour. Just on BIG W, the sales and profitability is running well ahead of competitors there. And I just noticed from your slide that's come through weeks 3 and 4-ish. Can you just talk through what categories are driving this? And how you expect that to play through for the remainder of the year? And then similarly, on Endeavour, gross margin was up despite increased promotional activity of your competitors. Are you not seeing your customers trade down? It doesn't seem to coming through with the margins there?

Yes. Thank you. Two great questions. I'll ask Dave to talk to the sales issue. As you might expect, with people staying at home, there's been a real surge in leisure and entertainment at the home. But actually, the highlight to me has been what's happened on our apparel side of the business. So it's been more than just stay at home-driven demand surge. So Dave, I don't know if you want to elaborate on what you're seeing on a more micro basis.

Yes. I mean, certainly, Brad, I've found the stay at home -- our whole business is focused on really supporting families and communities. And -- so right across the board, we're seeing strength in any categories that either support kids being at the home, either from education or being in entertainment or parents working from home or just more home cooking. So small appliances are really taking off, anything in sporting and leisure, toys, games and puzzles. And pleasingly, we're now getting back into stock in kidswear, womenswear and menswear, and we're seeing growth there. But frankly, it's -- we're seeing a consistency right across the store and the offer that is really supporting the sales. So there's a few areas you'd call out specifically, but it's not one area that's really driving the growth. It is the full collection of -- an offer for families.

Thanks, Dave. And then on liquor, actually, on the media call, I made the point, and I'll get Steve to elaborate in detail there, actually, we are seeing a bit more trading up. It's not a volume issue. It is really a bit of -- more of a trading up. But Steve, you're on -- more [ on liquor ].

Like we've seen with the all COVID changes, accelerated the long-term trend of lower volumes at higher values, and that's definitely played out in both retail and hotels actually. So in spirits, we've seen continued growth in gin, for example, and craft beer sales are materially outstripping commercial beer. And interestingly, as we've opened hotels again, that's quite a -- on-premise as well, with -- in fact, faster -- it's growing a lot faster than standard pause as well as craft beer is materially outstripping commercial growth. So yes.

The next question comes from Aryan Norozi from UBS.

Two for me, please. Just on the gross margin, it was up 56 basis points in the second half for food. Can you just give us a rough breakdown of the drivers? I know you mentioned shrink was one of them. And how we should think about that in terms of annualizing that stockloss benefits into fiscal '21, please?

It was a bit hard to -- I'll make a few comments, turn to Steve and then Claire, if they wanted to elaborate. We had a bit of a challenging year, always cycling things, as you may remember, in F '19, on stockloss. It was a really pleasing year of us consistently improving our overall loss over the course of the year, and we finished it with an average of just over 2.7% for the year. But it was actually -- as is often the case, it was really the journey over the year that was really pleasing. And there are a lot of other things going on in our GP rate that become really important as well. I think I'd just like to call out that there were some mixed benefits there in the percentage sense nothing else, with tobacco really has been a flat sales year for us after the CPI increase, which can make mix look better than it is in a percentage sense, given it's a low GP category. Same was true with infant formula. And then I'd just like to also call out on the negative side there, that red meat continues to be an incredibly challenging business from a GP perspective. And every year, we kind of hope it will change, but we're really battling to offset the lifestyle cost increases we've seen. So there are quite a few movements there. Stockloss is a real benefit, improving our limited to loss promotional program. We're really continuing to work on having a much better promotional mix. I would see those as the 2 real benefits, but there are changes in category mix based on what I said is also there was on. Steve?

I think just to build on that. The really big driver of those stockloss, so last year, we deteriorated stockloss performance in the second half. I think one of the real highlights for me for the year actually is the consistency of the improvement of stockloss. So we ran the 2.7% levels pretty consistently, both half 1 and half 2. And so you just get a bigger delta on the improvement in the second half of F '20 because of the deterioration of last year.

Claire, anything you'd...

I would just add a bit of flavor to that, kind of momentum, which the plan would be to continue into this year. I think as we discussed last year, particularly the work we did around -- the changes to make in our front-of-stores more secure, whether that was in welcome gates or the waits on our assisted checkout, did give us that benefit we were wanting to see in long run, particularly. But I'd also add the benefits we saw in fresh food on the back of some of the changes we made in one of our transformation programs in Fresh Made Easy, where we took out over 400 overspaced spaces in [ deli ]. And clearly supporting -- having the right range into the right store and also continuing the progress in some of the work -- technological work we've done in waste and markdowns, making it simpler for stores to get a much better clearance rates through -- at again, right time, right place, relevant to the store.

Perfect. And then second one for me, just moving outside of sort of shorter-term trading. I mean as you -- I mean key consideration, I mean, as you start the cycle, being strong numbers from a top line perspective. I mean what are you doing internally in terms of capitalizing on trends that will happen post COVID and once things sort of normalize? Is there anything around meal kits or anything around the business strategy that you sort of want to accelerate to sort of grow share as you start cycling these comps?

Well, I think it's a big question. Clearly, digital and online are a key part of what we need to do, and so we're working very hard on that. We are continuing to refine, of course, the stockloss number. But in terms of category-specific strategies, Claire, did you want to elaborate on that?

I think just some of the key ones, as you rightly pointed out, everyone has turned into remarkable bakers, whether that's kids or adults. So we're seeing that, obviously, be a very huge trend from March, and that continued through. And with events like Christmas and others coming up, that would be a particular one. As you rightly point out, more meal occasions being had in the home, whether that's breakfast, lunch or dinner, would be obviously an area which we will continue to review. And probably the last one I'd call out is everything we're trying to do for the year ahead is very much have that COVIDSafe overlay. So when we look at some of the key events coming up, ensuring that customers can still have a surprise and delight, whether that's in Halloween at home or what Christmas will mean has meant we've changed some of our plans. But in order that -- actually we still maintain a great event for the customers, but actually understanding that's going to be -- more likely to be done at the home.

The next question comes from Richard Barwick from CLSA.

I just want to talk a bit the last question around Slide 30. That's pretty telling with regards to the change in behavior, less trips, but obviously, significantly bigger baskets. What can you tell us as to what that means for shopping behavior and the way that's rolling forward now into FY '21? So if you could put Victoria to one side, what are you seeing in terms of the locations or the types of stores that people are shopping at? Because I know you've put...

Thank you. I think, Richard, it does depend on what stage of lockdown you're at. I mean in aggregate, what you found was people shopped less often but bought more when they shopped, and that's pretty logical. And you tended to choose one core store you shop from, and then you got your whole basket at that store. And that was a trend in Australia, New Zealand and in all the international countries. And the size of that basket was exacerbated by the move to online, where instead of you having 10 or 11 items in the basket, you run in the 50s. So that's the mega trend. Then in terms of specifics, and it's incredibly noisy with borders shutting and everything else going on. But in general, we saw the customers shop more locally. And I think it was borne out by competitor results. And based on what we look at as well, when we look at our neighborhood stores, the old marketplace, so to speak, that many of you will remember, that Woolworths used to develop, people are shopping there instead of going into the regional or subregional walls. So we've sort of seen the move to local. It doesn't -- and that's sort of, in many ways, kind of advantage independents over the chains, but that seems to be quite noticeable. Then within that, when you look at when people shop, we used to talk a lot about this move to the weekend, and weekends and Sundays becoming the big day. Actually, we're starting to see that flatten out a lot more. We're getting more growth in the middle of the week. But essentially, it's just a flattening of the shopping experience. It's not really volume movements, just the week's been flattened out as people have changed that. Now the question becomes how long that will continue going forward. We truly believe that the e-commerce part is sustainable. To what extent? We'll see this move back into the more and more scenario as people feel safer. It's not one I personally have a view, and I suspect it will happen. It's just a question of when and how. So we think that, that side will rebalance, and we also think people will probably slowly, cautiously, over time, probably also collects their basket between retailers. But those are the key trends we see as of now.

Well, just -- I mean you make -- you said it yourself that the move to local can advantage the independents. But I guess what I'm trying to get my head around is typically -- or oftentimes, the independents can be smaller stores where people might not be doing their main shops. So as you say, you -- people are shopping less often, but bigger baskets. And there's a bit of a contradiction in that if they're going to shop local if that local means smaller?

No, I agree. I agree. It's a tricky one. I wish I could give you a definitive view on it, but it's just very noisy right now. Actually, we structurally have a relatively strong neighborhood -- store network in a relative sense, and that is to say through the marketplace developments of law inside Woolworths. And so we were really quite dependent on these stand-alone or very small, local neighborhood malls which many will remember. And so it's quite noticeable the strength that those have in these moments. But -- I mean it depends so much by geography, to be honest, Richard, right now. Just hard to get more granular than that.

Okay. That's fair enough. And just on the loyalty card, seeing a nice growth in scan rates. Can I just clarify, is that scan rate -- does that actually relate to the number of transactions that are scanned with the card? Or is that actually the proportion of sales going through?

It is scanning rates, and so when you start looking at the tag rates or the volume-adjusted basis, it's higher. I'm particularly keen on scan rates because I don't like to kid ourselves. We could put in other numbers and look higher. But it's how many people actually use it, and I think that's quite -- I know it sounds strange, but it's an engagement metric to me. But the tag rates is higher than that.

The next question comes from Scott Ryall from Rimor Equity Research.

I guess, firstly, congratulations. You guys have done an amazing job keeping supermarkets stocked for all of us to keep eating on the last 6 months, so well done. The -- my first question, and thanks also for the additional detail on the supply chain transformation. I thought that was pretty useful. Can I firstly ask about MSRDC, and I know you've done this a little bit today. You've talked about variability and predictability being key drivers of the performances of facilities like MSRDC. I wonder, can you just comment on how it performed during lockdown? And you've got 2 lockdowns, I guess, to comment on. And whether or not -- I know your volumes are ramping up. But I would have thought that predictability in a facility like this is less important than it is for a more manual facility. So maybe just help me understand how it's performing, admittedly in ramp up, not in full operation, but relative to some of your other DCs, please.

Scott, that's a pretty tough question. We did a lot of benchmark in the crisis with a whole series of international retailers, and we still meet with them and share case studies. In a completely unpredictable demand surge, automation is not your friend because you really are pushing for pallets that you didn't predict you were going to have to push out to stores. So a bulk warehouse where you can just move the full pallet through is the key. And so we found -- whether it was Kroger or whether it was Sobeys, we all experienced the same issues that you are not as worried about brands, you're worried about commodities and you're worried about getting a full pallet flow through to the store. And therefore, having the right automation to pick cartons just intuitively doesn't play to your advantage. So -- but as we get out of a demand surge and to a more predictable demand pattern, that all changes, warehouse is only as good as the forecast it gets, I guess. And as we now get into a good forecast, and Claire can talk to, we start getting much better pick, pack and dispatch through the warehouse. Important point I never mentioned earlier was just in a COVIDSafe world as well, these warehouses are much more COVIDSafe. The big issue in warehousing is how you -- is contact and contact times. And of course, we can much better manage it in the context of this. Claire, do you want to add on the relative differences in the warehouses, depending where we are in the...

Yes. I think on your last point is critical, Brad, because clearly, with some of the restrictions in Victoria of having less people in the DC, obviously, an automated site has less of those challenges. So the ability to have that site operating 24/7 to keep that increased demand in Victoria is definitely given us a positive benefit versus some of the other sites in the other states, which aren't automated. But the key call out, I would say, for now are in that more predicted pattern is deliveries on time, a shed that can operate 24/7 in a COVIDSafe way with less people in it is everything we would want to minimize any risk.

Okay. So can I then move on to New South Wales. And obviously, you've been able to use learnings from Victoria for the design of your New South Wales facility. How much of the benefit -- I think the benefits are pretty clear from Slide 25, so thanks for that. But you've got the added benefit, I guess, in Moorebank of having merged locations and your little diagram on Page 26 showing the elimination of transport legs. I assume that's pretty meaningful. So how much extra? You don't -- this is not a quantification, but I assume then there is meaningful additional benefits for you of the co-location and the closure of 3 sites and moving to 1 relative to what you found in Melbourne. Is that a fair comment to make?

Yes. Look, a couple of points I'd make on that, Scott. And Steve, feel free to elaborate. This site is in a really terrific location for us because it really is an inland port. You get the automated rail link directly from Botany Bay and so you -- and then you -- straight from there into national rail system or actually on -- right on the key arterial roads where we need a warehouse. So irrespective whether 2 or 1, the actual location and the infrastructure links for Moorebank or a material stand up from MSRDC, which was in South Dandenong, and for those who went there, you remember it's just in a panic. On -- actually one side of Melbourne, where a lot of the growth right now is actually taking place on the other side of Melbourne. So location-wise, this is superior. And I think the fact that we've run these rail links is incredibly important for the NDC portion of it, in particular, given you're trying to service the whole country. So some real structural advantages in where it is. And then, of course, having the 2 together clearly is yet another benefit between them. But in terms of the infrastructure, potential of the site there, I don't think there's anything like it in Australia.

Yes. My only 2 builds would be, there are always puts and takes in any business case, and we wouldn't have made the investment decision where we're not confident. There are a couple of different dynamics going on with New South Wales. Firstly, land costs are a bit higher in New South Wales, and you've got a difference in currency as well. So that said, we think the benefits are there to justify the investment.

The next question comes from Michael Simotas from Jefferies.

Sorry, I got cut off before, but I did get the answer. Just a second question from me on the Hotels business. So clearly, the Stage 4 restrictions have a heavy impact. But could you just comment on how well that business is operating under sort of more normal, if we can call it that, social distancing requirements? And also whether we should expect any significant stock write-offs relating to the Stage 4 restrictions in Melbourne.

The second is easy to answer, Michael. No. And I'll come to the first, the team has done an outstanding job of twice now shutting down our venues. And it's just -- I couldn't -- you couldn't call them out enough for the way they've done it. And the first, I'll make some comments and I'll get to Steve to talk to them. As I said, in supers, actually, we have quite a strong neighborhood portion of our fleet, and that is so inside our ALH venues, which tend to be relatively -- suburban tends to be relatively big venues, where the ability to implement social distancing is much easier than it probably is in -- Steve looking to me as a kind of venue I'd like to drink. Yes, Steve, small underground one, much harder to implement social distancing. But we found also the structural asset that actually is better in the COVIDSafe world we're into. And process simplification and the venue, plus the ability in these bigger venues to execute COVIDSafe distancing, we think is a really important strategic advantage of the venue. But Steve, I mean, you're living through it.

Yes. Well, you're right about the first point. There's no stock issues for us with the reclosures. I think what we're seeing from customers in hotels is recognition of the safety of the hotel, to your point, Brad. And it's local, obviously, but it's also very familiar, and customers are seeking those more simple and familiar experiences, and that's what hotels have been able to provide and it's reflected in their results.

Can you give us any indication of what sort of patronage it's running at relative to normal levels?

I'll give you a taste of, say, Western Australia, for example. It's growing in the double digits. So -- yes. And that's a nongaming market. But bars and food are performing well. But down on last year, I think that it all depends on the level of restriction in every individual state.

That's right. We have contextualize everything in -- with Victoria, yes. So it's a tricky one, given the differences in the states that we've seen. So it's kind of hard, I think, to -- it is -- it's varied state-by-state basis.

But I think, Michael, as we put in the investor presentation on 57. For the first 8 weeks, our Hotels is still down. Now a lot of that's driven by Victoria.

But we can operate COVIDSafe with 80% of our previous capacity, at least, in place. So between 70 and 80% it depends on what part of the venue, but it is an ability to do that. So Steve, you'd be working through that. It depends on what the regulation is, 1.5 meter, 2 meters venue cap. But as you work through it, and it's all state-specific. There is an ability to be relatively sensible in the gaming room, as we call it, on about a 57% machine availability.

Varies by state, again.

Varies by state, but it's not quite as bad as it might sound. It's probably actually...

Whether you're able to -- you will be out to stay and have a drink -- you're able to sit down, have a drink, all those things play a part in the numbers on a state-by-state, venue-by-venue basis.

At this time, we're showing no further questions. I'll hand the conference back to Mr. Banducci.

Thank you, everyone, as always, for your interest and supporting our business, and hopefully as customers as well. Obviously, we are all living through these types of -- trying to make sure we're all COVID-safe. And so I hope you're all safe as well. I look forward to coming back in not too long and talking about our Q1 results. Thank you for your ongoing interest and support.

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.