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After shelling out $560 million on an automated distribution centre in Melbourne's southeast, Woolworths Group (ASX: WOW) will spend a further $700-780 million on two new centres in Sydney's Moorebank Logistics Park.
Woolworths has signed a 20-year lease with Qube Holdings, which will invest $420-460 million itself to build the warehouses while the supermarket chain's spend will relate to the technology and fit-out.
The company's 70,000sqm Melbourne South Regional Distribution Centre (MSRDC) that opened last year is currently the largest facility of its kind in the southern hemisphere.
The latest project comprises an automated 34,600 sqm Sydney regional distribution centre as well as a 40,700sqm semi-automated national distribution centre, which are due to open in 2023 and 2024 respectively.
"The planned sites, which are subject to NSW Government planning approval, will materially increase our capacity for growth, improve efficiency, advance localised ranging efforts and deliver better and safer experiences for Woolworths stores, team and customers," says Woolworths Group chairman Gordon Cairns.
"The new facilities at Moorebank will build on the automated technology deployed at the Group's Melbourne South Regional Distribution Centre (MSRDC)."
Woolworths chief supply chain officer Paul Graham says cutting-edge automation will build tailored pallets for specific aisles in individual stores, helping the group improve on-shelf product availability with faster restocking, reduce congestion in stores, and enable a safer work environment with less manual handling.
"The new facilities will also help progress our localised ranging efforts, with the ability to hold many thousands more products centrally than we can in our existing facilities," says Graham, adding 650 roles will be available at the new sites.
"While this change is a few years away, we're absolutely committed to supporting our team members at existing sites through what will undoubtedly be a challenging transition.
"We explored options to upgrade our existing sites, but the ageing infrastructure just won't be able to support the growth in volumes we'll need to service in the years ahead."
Once established, the new facilities will replace the current ambient grocery operations in Mulgrave (Victoria), Yennora and Minchinbury, although the latter will still operate for temperature-controlled fresh food distribution.
"While this change is a few years away, we're absolutely committed to supporting our team members at existing sites through what will undoubtedly be a challenging transition.
Woolworths Group does not expect its investments to materially increase operating capex spend over the period of construction and installation, although it will result in a one-off pre-tax cost of $176 million to be recorded in FY20.
Management expects the investments will deliver a significant reduction in supply chain costs over time.
"Moorebank will transform the way we serve our NSW grocery customers," says CEO Brad Banducci.
"The new facilities will advance our localised ranging efforts, with the ability to hold over 30 per cent more products than existing facilities. Automation will allow the creation of aisle-specific pallets by store, and in doing so, reduce the time to restock shelves and result in better on-shelf availability for customers.
"We have learnt a lot from our MSRDC development, which is delivering against its business case and this gives us the confidence that now is the right time to invest in our NSW network."
The group says infrastructure investments by the Federal and State Government at Moorebank Logistics Park were key to Woolworths' site selection, given direct rail access to Port Botany will help remove at least 26,000 of the company's truck movements from NSW roads each year.
"The benefits of railing containers direct from Port Botany to a terminal co-located with warehousing across a site the size of the Sydney CBD will deliver Woolworths time and cost efficiencies," notes Qube managing director Maurice James.
"Our project team is looking forward to working with the Woolworths team in delivering an optimal solution for their operations."
Qube expects the development of the two facilities will provide more than 1,000 construction jobs prior to the commencement of the new operations.
Australian supermarket sales up 8.6 per cent
The supply chain transformation announcement coincides with the news Woolworths' Australian food operations have seen sales rise by 8.6 year-on-year in the fourth quarter to date.
The jump is even higher for Woolworths' Countdown supermarkets in New Zealand which increased sales by 15.1 per cent, while revenue is up 15.1 per cent for Big W and 21.4 per cent for Endeavour Drinks, known for such brands as Dan Murphy's and BWS.
"Trading has remained strong in Q4 to date, with the exception of Hotels where venues were closed until the end of May and have just begun to enter different stages of reopening," says Banducci.
"In Australian Food and Endeavour Drinks, sales growth improved in May and June following a more subdued April impacted by unusual trading patterns around Easter and Anzac Day.
"New Zealand Food sales remained strong throughout the quarter but have more recently moderated to high-single digit growth as restrictions continue to ease. BIG W reported very strong growth during the quarter across all major categories."
Banducci adds inventory levels are now running below what the group would like, but the team is responding quickly.
"At Q3 sales, we also announced expected Q4 incremental costs related to COVID-19 of $220 - $275 million. Incremental costs have been towards the high end of the range in the quarter," the CEO says.
"As the operating environment continues to normalise, these higher operating costs, which primarily relate to store hygiene, social distancing and increased supply chain flexibility, are gradually and cautiously being wound back.
"Hotels have begun to reopen but around two thirds of our venues are in Victoria and Queensland where operating conditions remain more restricted, particularly for gaming."
The group expects to report EBIT of $3.2-3.25 billion, compared to group EBIT from continuing operations before significant items of $3.29 billion in FY19.
$591m in significant items
In addition to the $176 million slated for NSW grocery chain transformation costs, Woolworths will also book $230 million in costs relating to the transformation of Endeavour Group even though its planned separation has been deferred due to the impact of COVID-19 on hotels.
These costs relate to stamp duty, external consultants and advisors, dedicated internal resources and IT associated with the separation and the division's merger with ALH. Once finalised, the total cost of the move is expected to reach $275 million.
Woolworths has also flagged $185 million in remediation for salaried store employees, stemming from an internal review released in October that found 5,700 staff were underpaid.
At the time Woolworths estimated a one-off impact in the range of $200-300 million, but the total cost has now been lifted to $390 million.
"The Group remains committed to fully rectifying any payment shortfalls across all Group businesses as quickly as possible. We thank everyone for their patience through this process," says Banducci.
These three significant items translate to an extra cost for the retail giant of $591 million.
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