Woolworths Group Limited (WOW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Woolworths Group H1 F '22 Trading Update. [Operator Instructions] I would now like to hand the conference over to Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.

Good morning, everyone, and thank you for joining us on a short notice this morning. Joining me in the room is Stephen Harrison, our Chief Financial officer. As you'll know, this morning, we recently update in our trading performance for the first half of FY '22, and I'll give a short introduction to that and then Stephen will take the million questions, which we expect you'll have. When we released our Q1 results in October, I noted that the first quarter of F '22 was one of the most challenging quarters for our business in recent memory, and this has continued into Q2. Our priority has always been to put the health and safety of our customers and team first, and we have continued to do this in the context of a challenging and volatile operating environment. In Australian Food as lockdown restrictions in New South Wales and Victoria eased over October, shopping behaviors began to normalize, and we saw sales growth moderate. Sales growth has also been impacted by the inclement weather particularly in South Wales, as well as a material decline in tobacco sales. While we are pleased with our sales growth compared to the market and our momentum going into the critical Christmas trading period, the significant costs of operating in a volatile COVID environment has impacted our expect earnings in H1. COVID has had a significant impact on costs, even more so than last year, due to the combination of both direct COVID-related cost, together with the indirect impact from disruption caused by COVID. This includes the significant disruptions we've seen across the end-to-end supply chain and the material inefficiency this causes in our stores, distribution centers and transportation. For H1, we expect direct COVID costs in Australian Food to be approximately $150 million or 0.6% of sales with the cost split between supply chain stores to ensure the safety of customers and team. In addition, the indirect disruptions in the stores and distribution centers from operating in COVID environment has led to elevated operating costs of approximately $60 million to $70 million in the half. This includes the deferral of a number of planned performance improvement initiatives that have been delayed to our teams to focus on servicing customers in the lead-up to Christmas. Supply chain costs were also impacted by higher volumes, fuel price increases and the impact of balance sheet supply across our distribution centers on the Eastern Seaboard. Both direct and indirect COVID costs are expected to reduce significantly in H2, subject to no further widespread COVID disruptions, with direct COVID costs reducing in line with reduced current safety settings. And efficiency levels are expected to improve over Q3 as the business returns to some more sustainable, predictable, and productive operating rhythms. E-commerce sales have continued to grow strongly, increasing by approximately 50% with a 2-year CAGR of over 60%. E-commerce has comprised over 100% of all the supermarket sales in the half to date, with penetration now at 11% of sales. While the profitability of e-commerce continues to improve, e-commerce sales are low in margin, which together with a decline in store-originated sales has also impacted overall profitability in half. We've also invested approximately $40 million in continuing to build e-commerce as well as analytics and digital capabilities with initiatives include improvements to Delivery Unlimited, our subscription proposition, the standup of Q-Retail in partnership with Quantium and the launch of HealthyLife in Everyday Market and investments in digital and data talent more broadly. Turning to BIG W., we've seen improvements in sales momentum in BIG W post-lockdowns, with sales declined by 3.3% compared to a decline of 17.5% in Q1. Growth remained strong at 8.2%, however, the impact of strict trading restrictions in the first quarter that was slightly in strong sales and profit growth from H1 in F '21 has materially impacted BIG W's EBIT for the first half. Finally, New Zealand Food's sales growth has been strong in H1, benefiting from extended lockdowns and higher inflation in the country. In summary, as we head into the key Christmas trading period, we have positive trading momentum and good in-stock position and our team is focused on ensuring that our customers have access to all they need to make this a very special Christmas. We continue to look forward to helping our customers celebrate a much-needed festive season in a safe, inspirational, affordable, and enjoyable way. And we are very focused on refocusing our business to Q3 on rebuilding the operating momentum that the underlying operating momentum and efficiencies that we would normally expect in other business. I will now turn the call over to the operator for questions.

[Operator Instructions] Your first question comes from David Errington from Bank of America.

Brad, my question is a very philosophical one. So, I'll open it up. I won't get into the specific details, but I'd like your response. Brad, do you go hard enough on your costs, on your efficiencies to be able to drive short -- not short-term financial outcomes. We don't want you to drive short-term financial outcomes. We always did that in the past and if it didn't work. But there's a difference between investing too much for the longer term for customers, for suppliers, employees and not enough to be able to generate good performance for shareholders. Now, I think you know where I'm going with this, but I'm wanting to know your underlying philosophy toward why shareholders should accept today, based upon a lot of it, we think or I think you might have been able to go a little bit harder on driving efficiencies, on driving cost out, on being able to get the balance better so it's not such a displeasing financial outcome for the first half. Have you got the balance right between that? Can you drive your execution a bit harder? Now, there's a lot in that, but I don't know whether you've got the balance right at the moment between long-term performance, for customers, employees, and all that, and supporting your shareholders in the near term.

Thanks, David. We clearly didn't get the balance right in the first half and hence why we haven't reported this point. That wasn't our plan. We're always into the plan of delivering across the different time horizons inside Woolworths, and that hasn't happened in the first half. We remain committed to ensuring it does happen. We're working hard to make it happen over the full year. As per the announcement, really, a number of things you take for granted, a way, in a retail business was just more challenging in the first half, and that continued on, which is why we called it out now. And that is just not really the direct cause of COVID, which are easier to calculate. You can -- We can debate the settings we've had there, but the indirect cost of the disruption in stock flow, which have been very material. And what we haven't been willing to do, and again, we can debate it, is compromise on making sure we have the right stock position for Christmas and making sure we're all ready to go for this key trading period in the next couple of weeks. And then, what we think will be a key trading period, again, in early January. We know that, that period is the key period of the year and really does set up the year. So, we have taken cautious settings to that. And as you rightly know, in the past, in 2015 and to some extent, in 2016, we didn't do that and it really did impact us, we don't want to repeat the mistakes of the past. But do we have a lot of work to do in the second half? Yes, but do we get the balance right in the first half? No. Are the reasons to us, clear and addressable? Yes, it's all just in the online operating rhythm of the business, which we'll come back and talk to. Is that our plan, as in Q3 just to get back into the right rhythm and be very sensible on how we reposition ourselves for the fourth quarter? Absolutely. There is a silver lining in this is us to be having this focus and conversation right now and our business for Q3 because it does head us up for the right series of priorities in Q3. As much as I find it, I'm comfortable to be talking about it, 2 weeks to Christmas on a day that the sunshine in, and we have some good sales limit.

Your next question comes from Lachlan Costello from Jefferies.

Just some of your underlying at the Australian Food for 1H '22. If I take the midpoint of your guidance, and add back the COVID costs, Thank You bonus, and e-commerce investment that you've called out after adjusting the base 2 for the B2B restatement and COVID costs, underlying Food EBIT in 1H '22 appears to have declined 1% year-on-year despite sales growth of 3%. I was wondering if it was due to e-commerce margin dilution, underlying cost pressures? Or are you absorbing some of the Food inflation?

Let me give you a high-level answer and then I'll get Steve, I'm sorry, I'll add to Steve Harrison to see if he can sort of give you a bit more color. Clearly, what happened in the first half was direct and indirect COVID costs and the volatility that came to our business, which is all about operating rhythm and how we adjust settings in the second half. So, that's one big cost. But to your point, we had less balance in e-commerce growth versus full growth in the first half. We've always -- well, not always, we're very focused on trying to balance e-commerce growth relative to store growth to -- and to continue to improve e-commerce so that it isn't dilutive on overall performance. That didn't happen in the first half, with the negative full sales growth and positive e-commerce growth. And then the issue inside of the e-commerce growth was incredibly volatile. So, we had weeks inside New South Wales, where we had e-commerce penetration of 17%, 18% and that sort of trends back down to 11% to scale up to 18% and scale back down to 11%. So, you have a lot of inefficiencies inherent that we haven't quantified in these numbers but are inherently there. The good news is we know how to get to the scale up in the future, I guess, if you want to look at it that way. So, we've had a lot of that going through. On the overall P&L, then itself, and we can see structural inflation coming through. It's starting to manifest, as we get into Christmas trading. And it's really clear that we'll see it a lot less in the second half. So there's not a lot of inflation in what you see in Australia. You do see some in New Zealand, but it's clearly coming through, it's quite pronounced, as I say, in the second half. But in the P&L itself, the 2 things that impacted us there were the flush that we talked about in Q1, in the way of tobacco and not without the excise increases, the impact has had on us and probably everyone else. And then, the real structural issue that we still have, collectively, on red meat and the fact that we've just seen beef prices, in particular, just beyond relenting in the trend up. So, some of that will unwind for us in the -- well, all of it in some form unwinds for us in the second half. But Steve, would you like look at some specific point on the numbers?

Yes. Thanks, Brad, and I think you've covered the component of the question as it relates to the e-com mix component, which obviously comes through a lower average margin just because of the nature of that channel. I think -- and look, think I followed the math, but I think the other consideration, we've not tried to do a full reconciliation of all the different drivers in an announcement, because we're just trying to update obviously on earnings. But I think the other factor that is just worth considering is the underlying cost inflation in our business. So for example, over half the cost for supermarket is in the cost of the team, we have an increase in wages for the team at 2.5% in line with the Fair Work ruling. As we try to articulate, we just haven't been able to get the productivity and efficiency that we would typically look to do. So, in a standard year, we would aim and aspire to offset inflation through productivity initiatives. And I think just the inability to do that, this year, given the settings and given the impact of the disruption of COVID and really how tired our team our have been operating in this COVID environment for 18 months or potentially longer now. And therefore, their ability to cope with change is just under pressure at the moment. So, it's a combination of those factors that lead us to the earnings outlook we're in.

Your next question comes from Ben Gilbert from Jarden.

Just from my perspective, I'm just trying to understand what's changed in the last 6 weeks, because you obviously gave a reasonable amount of color around cost at the end of October, and we would have known what was happening around extra costs around PCP, online volatility, et cetera, given -- and tobacco, given things have opened up. But it's -- like, it's a pretty material mix first consensus. What's changed? And I suppose, when I look through, at all, to some of the prior question, I'm wondering if there's maybe some gross margin benefit or something in the PCP that we weren't quite aware of, and this normalization around that as well. It's just a pretty material change from when you last gave some pretty definitive numbers around costs and obviously, the comp update.

I mean, I think, Ben, thank you. The thing that will change, but I guess, changed in -- I think it will be more dramatic than we would look at is, the continued issues around disruption in October and then, in particular, in November. And so, when we looked at those, we really felt -- and always, we want to be very transparent and call it the way we need to call it. So, it was really somewhat October and November just as you saw the sustained disruption and the cost of those disruptions sitting inside the supply chain. The continued need to be COVIDSafe and the slow wind back of what we be COVIDSafe. And then, some moderation of sales from mid-November as we sort of saw a New South Wales and Victoria opened up that made us decide that we needed to call it, and therefore, we will forecast and so it's all those factors coming together. And we've got to be on the conservative side in the way we think about. This thing can come back to you in that manner than anything else. We also thought that this year, and the consumer sentiment suggested that there would be an earlier Christmas. And it's not -- it hasn't proven to be true. We're still in a good position, as we've alluded to, in e-mail. Whether it's market share or, actually, sales momentum if you look at days to Christmas and sell through a seasonal one, but there hasn't been sort of an early bump. So, it's clearly going to be another -- as it is every year, we think this might be an exception to the Woolworths based on all the research we've done at late Christmas. And so, that also factored into our thinking and there's reasons to be positive around the next 2 weeks of Christmas and then the 2 weeks after that, as we get into early January trading. But we also wanted to not bet on that in coming and talking to you this morning, we'd rather know what that is when we come back to the half year and having a more informed discussion on the full year. So, sort of a range of factors that came together and as I say, we're driven be concerned the side settings and on the other side.

Was there a bigger hit to gross margin than you might have expected, whether it's sort of waste shrink or maybe you have that price increases come through as quickly and you might have tried to absorb all?

No. I mean -- and Steve can talk to it as well. We're actually in a very good position with our sell-through, so stock loss is in a good position. Inflation is starting to come through but come through gradually. It's meat that has just been unrelenting on beef and beef prices going through the $10 per kilo in the Australian Eastern standard. I mentioned, whatever the right metric is. So, beef, actually is, in the first quarter, was looking better than we had thought, but it's really tightened up again. So, mainly beef, but a little bit of lamb. So that just has put huge pressure in there for everyone. We all need chicken this Christmas, so if you want to shop always Steve can ask you to buy ham and chicken. So that was the real one that had been the real one that sat there, actually, the gross margin since we feel pretty good and we're feeling pretty good on seasonal sell-through on early season lockdowns, as we've tried to be very deliberate on not doing, because we do believe having stock in Christmas week will make the difference of success or failure for at least in the sales and in the consumer segment. Are we missing anything on that, Steve?

No, I think it's okay.

Your next question comes from Bryan Raymond from JPMorgan.

Just on the $40 million of digital investment, how should we be thinking about this? Is this something that is pretty much at your run rate levels of investment? Or is this a big incremental spend that's somewhat one-off in nature? Or should it be considered in the base and then going back to a more moderate rate of dollar cost growth per annum? Just be great to put that in context around your broader digital investment strategy.

Yes. I mean, Bryan, I mean, this is more in the discretionary side than anything else. And so, it comes back to point of balance. We felt we looked at what we could do, we could drive outcome this year as well as continue to invest in the future. So, we didn't get that balance quite right. So, we do have options to go fast and slow in these things. We do think they are all important things, but we can dial it up and dial it down and that's the kind of thing we're working through. Stopping and starting is never a sense of our achievement, we can do that. We do believe subscriptions are key and us and all of our competitors are working through whatever their subscription strategies are. We wanted to just get a bit more solidity into our e-commerce business through our Everyday Unlimited subscription, so we can -- so that -- we've really done that, so that's probably not in the same can. We're really very positive of what we do with advised analytics across the group, but we have an ability to tailor and focus there. So, we'll work our way through it. 2 businesses, we've told we needed inside the group, our marketplace division, which is up and running, and we can actually do buy and how fast and aggressively we ramp, but I think is the question, we'll probably going to start in Q3. And HealthyLife, which was sort of a health advice and on to what we're doing, we can make the same call. On digital data, in general, I think everyone in the market is -- to be transparent, the actual cost of retaining your team is just disproportionate. And if you lose team, now, actually, the retraining cost and the opportunity cost of losing your team is material. So I don't think you can slow that down and we, as I say, turnover inside our business is sort of 15%, 18% and this would be true for everyone. And I think we just got to continue to invest in that team and so. But there's a mix there. We can go far from slow, Bryan, but we'll be quite thoughtful in particular, on Q3 of how we work our way through this. And primarily, because we want all of our teams to focus on just delivering all the improvements we've got sitting there. But look at e-commerce, we rewrite and just sort of picking algorithms that are really positive. Actually, we use Q-Retail to do that based on steps, moves and how you cube out totes. We haven't really rolled it out across the business yet. We kind of slow down some of the new things and do those kinds of activities or make sure our routing software is working as well as one for our trucks and then everyone's using it. So, it will be kind of best, that's how we'll use Q3, more focused on embedding and ramping up, delivering against all the initiatives we have been, starting new ones.

Your next question comes from Shaun Cousins from UBS.

I'm just curious around how you're planning to reduce your in-store costs, as online growth means stores generate less sales than previous, and going forward, stores will settle at a lower-level share of sales. I mean, I guess, some of the cost-saving initiatives that you've wanted to embark upon and haven't been able to be conducted due to the extent to which the team are justifiably exhausted. Is that kind of something that you haven't been able to sort of access to? And more generally, how do you manage the structural operating deleverage in your stores because online will settle at a higher level of sales, please?

Yes. Thanks, Shaun. And we'll talk about it in the half. We think we have a good glide path over 3 years. What we found was the sort of real friction in this one quarter where online, really, not only was it big, but it really went zigzag, up, and down depending on where we were in a COVID environment. And then there was the operating deleverage in stores and then the disruptions. So, it's sort of -- I'll answer just in the short term now, and at the half year, if you're okay, we'll talk about it more in the long term, but it all came together in a very compressed way in the short term. And we couldn't -- the initiatives we're currently on that store we couldn't -- we just couldn't get them all fully rolled out just for the reasons you talked about. So, how we reimagine our stores for the long term and how we make it work for the long term is the key and how we use automation and machine learning to do that is the key. But if I come back to the last quarter, if there was a positive in the last quarter, we worked very hard on investing in our direct-to-boot service. We're actually held pick up percentage much higher than the fourth would. And that just basically shows to us the importance of continuing to build out our ability to put the groceries directly in the customer's boot. So that helped and that wasn't a big issue in the half. It wasn't a huge move to home deliver, versus direct-to-boot. But it was of the share elevated cost in online as we scaled up the team and yet, it was all these turnover issues and the inexperience issues, and therefore, you're picking numbers, you don't deliver what you you'd like to the new picking algorithms, inability to scale it across the business, and we're very excited in the ability to do, to keep out the . So that was really e-commerce. And then, on the in-stores, we're really excited about what our food pellet does for the whole way we do stock play in the store. We'll continue to roll them out, but it just has been an inability to bank enough savings there. Our automation, through and temperature manager which we talked about the that you have to slow that down. We're very excited about works and does not erode promotional effectiveness or customer trust, but how we scale that up, again, delays, and there would be 5 other things that would have been delayed inside the store. And then, Shaun, you know this off well, but just to give you some of the stats that we would experience. Outbound service levels to stores rent. So this is -- we said it this forward, we expect it to around 80%. So delays, in terms of our truck has been late, about 30% of the time in peak trade in October, November, and particularly in Victoria, but some extent, in New South Wales, a truck was late, and it could have been the next morning, so you'd get a crew ready to work below that night and the truck came the next morning. This is true in late November, in particular, in Victoria. Store service levels, which is -- do we have enough product, at the end, of the day, that's still around about 90%. So, just the level of disruption that we just saw in the base business was just rather extraordinary. And then, behind its Woolworths need to rebalance what product is coming out and what share as we had, whatever pressure sitting there, sort of putting more of our products into the new one DC in Melbourne. We split it between and also, and then actually took some volume out of our Melbourne Fresh DC particularly the chilled poultry and also left that aside, I think you're very cold in that fact. So, it was always a combination that meant trying to really realize the benefits of a and there's all these other pressures just don't work. So, that was our issue in the short term. But long term, we do believe you can get there. We do believe there's efficiency player that gets you there. We've become -- have become more comfortable despite everything we've talked about on the ability to use your stores as our primary performance tool. And we think that, that can work. And we do think that in doing that, you can materially minimize the deleverage. Flexible work inside the store between one of your traditional roles has been plus e-commerce is working well. We've seen Canberra Airport, which is our key case study work particularly well where it's half e-commerce half, in-store, shop, and we make efficiencies work. So -- But that will be the conversation, I think, at the heart, right now, it's just getting the basic right. And as you can imagine, on top of that then will be the volatility now, which has just blown through the business.

Your next question comes from Adrian Lemme from Citi.

Just a follow-up question on the $60 million to $70 million disruption costs. Is it right to think that this is very much incremental in last year? I know, we've got a much higher level of that COVID community cases. There's been the impacts on that. Just interested to know if it was just basically too hard to work out last year sort of...

No. Much of what we cited in the quarter and hope you have conveyed it somewhat in the investment quarter-to-quarter is Delta would be much harder because of all the isolations required, and therefore, are taking an experienced team member in and out of business and shutting shares. And then the fact that we had, not only a challenge in Victoria, but New South Wales, so you then change the whole way your DCs work to support them, which caused secondary issues are actually up in Queensland, then we have a flood in FNQ which doesn't help the situation and so on. So, Delta is much more hard in terms of impact inside the business. As I said, for all of these reasons that the fear that we had last year, and it was then just the rational exuberant which we had based on a fear of COVID. This was actually operating with the COVID strain in the core part of our business side. [indiscernible] day and we haven't tried to overcomplicate the numbers because the proof is in the put and what we deliver. But I think the impact on the cost impact is even higher than that. I would also then say, as we said a few people that the labor shortages and therefore, recruiting and turnover have become quite pronounced for us and for everyone else. So you're training people that an even and side, which has all been legitimate, but quite pronounced. And then, last year, really, Melbourne settled down come in November, and we had a good run to Christmas in the side, the North Shore City, which by the way was a week ago that the North Shore of Sydney kept the retail of those beaches to themselves. So, I don't know quite different actually when you just look at where the pressure is for and then even the last couple of days in New South Wales and what's happening there. So quite a different situation. And by the way, it's not going to be an easy ride in the next couple of weeks into Christmas or into the early new year period. The only thing I'm certain about, is we have done everything possible to be in the best possible position because I do really believe the retailer or retailers that have stock flow right in the next 4 to 6 weeks. So I think we can -- we'll have a white-knuckle ride not in consumer demand, but in having the stock for them to buy. But we won't -- we have done everything possible we can from our side to ensure that that's the case for the Woolworths.

Your next question comes from Craig Woolford from MST Marquee.

Just wanted to get a better understanding of the one-off nature of these costs versus ongoing impact. If I rattle through each of them, it looked like once, you're open as a business rather than being impacted by lockdowns, that COVID costs were running at about 0.2% of sales. Is that where that's trending at the moment? And then, the way you described the $60 million to $70 million bucket of costs, some of them, high volumes, fuel prices, balancing supply chain, that looks like it could continue into the second half as well. And then lastly, I think that e-commerce, the $40 million cost there. I assume, the way you're describing it, it looks like it's in the base and would continue next year. Hopefully, there's some revenue to pay for that extra cost. Is that the right way to think about these buckets?

Yes, Craig, and I'll let Steve talk to you a little bit more detail. Absolutely. I mean, we talked about [indiscernible]. None of the costs we're talking about are structural costs, really, where we structurally grow sales embedded in where we are, but they're all business based on interest and when the interest doesn’t worth, and you get all these cool things that sort of pop up. So, you summarized and unless Steve, you want to give a little bit more detail on that question.

Yes, Craig, I think what we demonstrated in the second half of last year is on those very direct COVID costs that when the circumstances allow, and I would reduce those with a reasonable speed. I mean, a lot of them for the second quarter, in particular, been the ramp-up of rapid antigen testing, we'll continue that through Christmas and assess that early in the new year. But circumstance allow and we'd obviously look to take those out. I think on the efficiency ones, we believe that they can come out into the question of how quickly, and I think that's the key focus for us in Q3 is to how quickly can get those out and -- but it certainly is our goal to just focus back on a very predictable and efficient operating trading pattern so that we can actually be much more efficient in both our shares and in our stores. On the e-com and digital investments, I think the choices I think we -- they can be, and Brad touched on this earlier, we can dial those up and dial those down based on the speed we want to go. And so, I think that will be a choice point. I don't think they're structural, necessarily, but it will be a decision as to how do we want to think about those. And obviously, the Christmas Thank You bonus is clearly a one-off, which would have seen us reference that will take at a group level.

Yes. So just with that $60 million to $70 million bucket, is there any way of dimensioning how many are elated to -- I just read it out, higher fuel volumes, fuel price increases and balancing that.

Yes. Look, I mean, Craig, they're not the big ones. The big ones are really a combination of just our shares and then just at a store level, having the right team in the right place and right time. So what the roster effectiveness in the store, really. And then, just our shares and getting them to operate to the potential we can see. I mean, actually, MSRDC, we really started getting into great rhythm on it and actually feel like that was working. But then, you end up with caught between transition of South and therefore, you run 2 frozen DCs, then you run 2 sets of trucks or those frozen DCs and you've got 2 loads alive often into the store. So, all those things are things we just need to flush out and get sourced, but they all come together. And the numbers are quite high to quantify. But essentially, what you end up doing is your cost per carton is just not where it needs to be. And as I say, when you look at your roster effectiveness in store, the team are there or get -- having to do more work than they should require if they just got the full load productivity when they should get us and got to break it out and work it once to the shelf. So that's really -- I mean it's a pretty basic issue, but in our business, that really adds up.

And just to clarify, Craig, the reference to -- I mean, we've had, obviously, the cost in both store and supply chain, the reference to fuel price increases for transport costs and volume are not included in the $60 million to $70 million, they are outside of that.

Your next question comes from Ross Curran from Macquarie.

Look, I was posting the same question as Craig. And maybe, another way of asking it, if the COVID situation doesn't improve in the next 12 months, would you expect the same quarterly run rate on one-off costs to carry over each quarter for the next 4 quarters, if it lasts as it is for the next 12 months?

No, Ross. I don't think we would, and I say, this is just a very different fundamental issue we've just been through. And we're all nervous, never say never is all agree. But I think we've just learned how to operate in this new world, and we will be more effective in June. So, if I look at e-commerce, and I think I mentioned this, in some weeks, New South Wales went to 17% e-commerce mix. That meant to open up enough stores to picking and doing home deliveries and doing everything for them, we've never done before, and there's a huge recruitment in efficiency there. If we need to do that again, we'll do it much more effectively, now than we did then, and we've put in the capital and made the fridges work and so on. So, if we look at where we are, Delta for rapid antigen testing, in the early phase, was immensely valuable and it really helped us. We don't have 700,000 RAT tests just for reference, and they probably cost around a true overall cost of about $50 a RAT test just to give you a sense of numbers. Once you have the cost of the test, the costs and the loss on the 15 to 20 minutes emitted . Whether those are effective in the next phase, we don't think so. And we can see reducing effectiveness of them today, we would look to change how we did that quite material, and there's the next level of saliva test, and they're much more effective than the cost of rapid antigen test is coming down and you can do it with an online nurse and so on. So, I think it was just fine. We don't feel uncomfortable of dealing with what comes next in a much more cost-effective way than this one. As I say, commissioning Heathwood, a meat plant in Brisbane as well as our Melbourne Fresh DC as well as moving from and finishing the scale-up of MSRDC, as well, as in the New York plant in New South Wales, I mean, in if you had known what we knew to do one of those in the quarter. But essentially, they were all done, and this will now consolidate them, and they will put us in a business with much better capacity when we get to Q4 and therefore, take away these overflow facilities, which we and everyone else would have and then duplication of truck drivers, which has been a major issue. So now, I feel much more confident that we're in a position to deal better with whatever the next challenges that's thrown our way. But asked to have a little pause between them, I might add, but we'll wait and see whether that's possible.

Can I ask, maybe, another way, one off, can you help us think about the glide path and pull the one-offs out of the business? So, how do we think about it over the next year?

Well, we're really focused on -- we don't know what we don't know. We just talked about that. That's our plan in Q3. Our plan in Q3 is just to take everything we know we've got and make it work the way it can and should work for us where they exist in operations or the initiatives, we in part rollout on. So we'll be able to, when we see you next in February, we'll be much more thoughtful in talking about where we stand and what that means for the full year.

Your next question comes from Tom Kierath from Barrenjoey.

Just -- can I ask a couple of questions on the gross margins. Are they likely to be down this half? I just would have thought with tobacco, kind of declining, that would be a tailwind to gross margin. So just to make a comment on that. And then secondly, just on the impact of beef, is that kind of a few million dollars? Or is it a lot larger than that? Yes, it seems like it's obviously hurt a fair bit this half.

Yes. Look, look, Tom, tobacco makes the percentage look great, but the absolute dollars look bad. The truth is, we covered tobacco with good trading and good gross margins. But if tobacco hadn't been where it is, we would have obviously probably not we had in this call today in truth. So, we've done well on absolute dollars in GP outside of tobacco on percentage. Obviously, the percentage looks better than it is just because of the tobacco low margin mix that it has. But we've actually traded well. We feel good about what we're doing at that level. As I say, the inflation is coming. It's still very early, but we'll see it more manifest in the second half and a very rational market of how we all been forced to deal with very legitimate tobacco -- I mean, inflation-driven pressures. So at that level, we've seen positive about the group. On meat, the cost-in-cost we were looking at in the hundreds of millions of dollars, not in the 10s. I don't know what number you said.

I think Tom asked is, in the millions. I think in the half and in the tens of millions of dollars.

Cost for the year.

Yes, certainly. So for the full year, the aggregate cost-of-cost inflation is up well over $100 million is pretty close to $200 million in terms of the increase in livestock and obviously, it's the ability to get to the net outcome subject to market conditions. I mean, you would be seeing some inflation in beef across the market. And it's just the question of what that net outcome that we're looking to manage.

Sorry. So, the net outcome is in the tens of million. So, after you've listed prices, the headwind or the profit impact to the business is in a ten of millions.

Yes. The first half, but it's...

In the first half. Thank you.

Your next question comes from Richard Barwick from CLSA.

I'm going to ask a completely different question because I just got a one line in the release around New Zealand. It looks like it's actually been going really strongly, is a little bit we can tell from the wording. Why have you not made life a little bit easier by giving some guidance there? What are you prepared to say?

Yes. Look, well, the New Zealand business has traded well. I mean, it had the same issue, by the way, Richard, on stock flow and actually more pronounced because it's a bigger import country and so many of you are aware of the issues in New York and Ports. So actually -- and we haven't quantified across any of our business, any lost sales from other stocks. So, it is not insignificant, in truth. It just doesn't materially, Richard, in a way. We just wanted to kind of lean in and on the Australian Food issues, the reasons not, I guess, in any way, fun.

I guess, I'm just checking on the wording sounds quite positive, Brad. So, yes, obviously, the Aussie business has been exponent, given the guidance here. Should we be expecting any sort of offset from your business?

Yes, I mean, Richard, I mean, if there's positives, we've come out of the lockdown and BIG W in better shape than we thought, to be honest. And we just relieved to be back trading into Christmas with where we stand right now. We see that as an enormous protection against the downside, that's implicit in what we're saying. New Zealand is actually going pretty well, but actually, the numbers just don't offset anything in Australia. So it is, but it doesn't in any way offset the size of our Australian Food business.

No. I mean just to add a comment, Richard, I think if you just reflect on the way the New Zealand government handle COVID, they've obviously been in lockdown for a lot longer, so the sales momentum has been higher because of the level of restrictions. We made a deliberate focus of this announcement on Australian Food and BIG W just because both were negative versus last few years, whereas we wouldn't expect New Zealand earnings to go backwards with year-on-year for the half.

Your next question comes from Phil Kimber from E&P.

Just wanted to check that I'm thinking about this right. I mean, you've given the guidance for the -- let's call it $1.2 billion. And if I add back $150 million direct and let's call it, $65 million of indirect, you're just over $1.4 billion. But if I go back and compare that to the first half of '20, I mean it's almost a 10% CAGR improvement. So, I mean, is that sort of what you're seeing in the underlying business? And I guess, that's where the questions are going, if these costs are genuinely sort of one-off, but when we start looking out to '23 that sort of -- that's the sort of true momentum we should be thinking about for the business in terms of earnings? Am I missing something there?

Look, Phil, I don't think we will give guidance for the second half or '23. I think your observations are fair that if you look on that -- and actually, in the second half, we're going to start look at 3-year taxes we particularly on the sales side as we cycle COVID, the businesses had strong sales momentum and we benefited from consumption coming into the home and we think some of that continuing in the home. I think our goal is to continue to make our business much more efficient and get strong and sustainable earnings growth. And the last 2 years every half has been quite difficult to interpret just in isolation. So I think, looking at that longer-term trend is helpful and does give some indication to the underlying health of the business. And the confidence we've got, in terms of the underlying customer franchise, our performance relative to the market and the metrics like NPS that we call out in terms of how our customers are seeing the Woolworths brand.

And can I just clarify, those, the group staff bonus, would that be taken through to the extent that it relates to the Food business through the Food business? Or would they go through like the corporate cost line?

No, we're planning to take that through the group costs. And so the numbers that we've presented for Australian Food and BIG W exclude that cost, and we'll take that at a group level.

And last year, was it the same? I thought they might have been taken through the period in last year, but I could -- I might be wrong on that.

We didn't do a bonus, per se, in the first half of last year. We did provide team discounts, elevates levels to discount, we should do that through the sales line just because accounting for. And so, they are somewhat different in nature, if that makes sense.

Okay. And I think that was about $52 million at the group level in the first half last year and the bulk of that went through the Australian Food line in the first half year, yes.

Your next question comes from Ben Gilbert from Jarden.

I just want to squeeze in one more. Just on BIG W. The sales look a little bit better, but EBIT, obviously a touch softer. Is this -- to what extent are you seeing sort of a later Christmas coming there and also some supply chain pressures, are they to the same extent or potentially even greater than what you're seeing in the cost business at the moment?

Thanks. Yes, look, I mean, I think certainly, in the first quarter, the e-commerce mixes in BIG W, because most of our stores were shut was quite material. So, there is a little bit of -- I think e-commerce mix at one stage, Steve, went up to like 30% or 35% on the BIG W business. So, that will be part of it. But right now, the growth is good, unsupplied in some key categories are probably eroding and impact on the sales line of it there, mainly in the consumer electronics type areas, but margin realization is okay. We did take some action on the winter to make sure we were completely out. And so, that's reflected in what we're doing, just to make sure we've got a very keen business going into this time of the year. But we feel we're in a good place. I mean, it's not going to be what we would like, but considering what we were looking at in mid-October, this is a much better place for us to be right now. Otherwise, you do you want to...

No, I think you touched on just some, I mean, we feel in a good stock position in general, actually, our stock levels are slightly up, at the end of November from where they were last year. It's a certain category where, actually, the suppliers aren't able to get all of the product season. So, yes, you'll see shortages in certain categories. I think you refer, you mentioned consumer electronics.

Some of the key toys.

Yes, that's right. But overall, we feel -- and we've actually invested some money to get inventory into position and into the country. So, that's part of the cost in the half to make sure we are, and that is the position for Christmas. And so, I encourage you to get into your local BIG W to buy your kids some toys, Ben.

I haven't, there's not many around, to tell you what. Good luck out there and have a good Christmas.

[Operator Instructions] The next question comes from Shaun Cousins from UBS.

And the -- both the question on AdBlue. What's the potential impact of the AdBlue shortage on distribution costs and capacity? What are your contingencies? And does your guidance factor in any AdBlue pressures or not, in terms of costs, et cetera?

Sure. And that's a cracking question, and I might need to get more information. When I spoke ahead of supply chain yesterday, it's an active monitor, but it's not a big direct issue for us right now compared to all the other ones we've talked about. So I'm just -- can I just give that as a way by way of follow-up? Not what the guys are worried about right now as we trade through Christmas. But clearly which I think -- clearly it does have some transportation impact. So, I wish I have more detail for you, but...

Your next question comes from Craig Woolford from MST Marquee. Pardon me, Craig, your line is now live.

Just a follow-up on online profitability. In the past, I think the framework has been directly attributable profit. You mentioned it's still dilutive, but the profit margins improve in online. You managed to keep that Click & Collect me. And I assume, delivery density efficiencies improved year-on-year given the volume growth?

Thanks, Craig. By the way, I should have said in response to Shaun's, instead supply chain between a AdBlue and Pallets has spent 90% on pallets and 10% on AdBlue just to give you a sense. So we're more worried about getting the right pallets to the right supplier to make sure we get product out for Christmas and New Year. And that's really where the big issue is in supply chain might be more than the cost impact of AdBlue. Craig, look, on online, it's same stores of stores. We never quite got the efficiency. We're at the moment of it when it just was really going well and make great plans but then the whole series I think end up in a bit of gridlock in terms of underlying operating efficiency of the business. So, what we did prove to ourselves is that direct-to-boot business pickup as a service desk works very well. And we can hold somewhere between 38% and 40% of the business there, and that's key to the overall economics on the e-commerce business. So, we did prove that to ourselves. In the in-store picking though, we didn't get to monetize the new picking algorithms, which are very good. Say, it can really digitalize them up. We just didn't get there because of the challenges of just working in that cost of the fleet. And there's a huge cost there about of stocks in the store and trying to, therefore, do substitutions back to the stores to substitute as regarded to these gaps on shelf, which is not immaterial -- probably running 35 hours a week of store somewhere thereabouts have actually run in the sub second route to the store. So, we didn't try to get all we wanted to amend find enough growth in our capacity which is good in the long term, but then we had to move it -- adjust it in November, which the same was material. I mean, you'll be able to work it out on the numbers side. I think, I can share our online business went up to 108 in Australian Food, and then sort of miss back down to 91. So, it got up to the 108 back up from 91 was a huge scale and rescale because of inefficiency. And then lastly, on e-commerce on -- for our CFCs, which are about 15% of our e-commerce business, we are having the same issues with rapid antigen testing and split shifts. And in those stores, in particular, we are having to run one way for the picking algorithm which has caused a lot of challenge. So, our CFCs have been relatively constrained but slightly unwinded in the new year. So yes, same story is the store and short answer to a long -- a short summary to a long-term.

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

Sorry, Brad, I just hate a follow-up question. You've given some great answers today. Really good, terrific detail and thanks for doing all of that. But to summarize, I'm just trying to work out how much of this cost blow out today was within your control? And how much is it just issues that, you know what, we just couldn't -- it is what it is, guys. We just have to deal with it. We're going to get -- we're going to do what we can, but this is just what we're living with at the moment. Compared to how much is it, well, hang on, no, we could have done this a lot better. Can you summarize, because this is just probably the last question about now, but can you just summarize that is to say to give us as investors, how much of this was in your control? And how much was just outside your control and it's going to unwind next year. Can you just summarize that because it's a lot of detail here?

Yes, David, I mean, this is probably an indirect answer to your question. Right now we just focused on actually taking it out of our business on the glide part and not sort of many decisions we now look at it, I think maybe we would have made different decisions in the last couple of months. Most of what you see is readily addressable if we just focus on getting back into the right operating rhythm and adjust our COVID settings, given the world we're now going to rotate into, which is a very different world to the world we've been in with Delta. We have been in a world of operating with the vaccinate team in a vaccinated scenario. So, I think, virtually, all of that is addressable on the go forward. Are there things we would change on what we did the last 6 months? Yes. I mean, no question about it. We look and say to the team, thank you, given what we know now, would we have put that into Christmas. Steve, myself said, we're not certain. We think, recognizing our team was important. There was times in places we did it. We've done it through awards, actually, through everyday rewards points. So it does give us some long-term investment but through our team engaging through our rewards program. But yes, do we think it's addressable? Absolutely. So, this -- just on the time of the negative energy of did we do a good or a bad job, but is it all fixable and focusable? Absolutely. And do we feel we're in a good strategic position? Yes. Do we feel we're in a good position with customers? Yes. Do we feel we're in a good position with sales, trading momentum to Christmas and stock flow and the way our stores look? Yes. So, I know that's not answering the question quite the way you'd like me to. And as I was giving the perfect ending actually, from my side. Thanks for opening the question, David. We're sorry to bring one of your out on a wonderful day with a couple of weeks to Christmas, where we're all in with friends and family and enjoy the rest of Australia has to offer. So, thank you for your patience. Thank you for your questions. We hope that you all have a very safe, friendly, enjoyable time with friends and family over Christmas. And if you need the product guarantees or on time is going to be in towards again there, going earlier before we sell out on the hands and Merry Christmas to you all.

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