Woolworths posted its strongest quarterly sales growth in more than a decade, with group sales rising 10.7 per cent to $16.5 billion in the March quarter, but warned that a cost blowout and big monthly losses in hotels would offset some of the benefits.

Woolworths’ total Australian supermarket sales rose 11.3 per cent to $11.2 billion in the 13 weeks to April 5 and same-store sales rose 10.3 per cent – falling short of consensus forecasts around 11.8 per cent.

This compared with 4.2 per cent growth in the year-ago period and 3.8 per cent in the December quarter.

Chief executive Brad Banducci said food sales growth had spiked in March as shoppers filled their pantries with essentials such as toilet paper, tissues, pasta and rice. Sales growth peaked in the week ending March 22, jumping more than 40 per cent, after rising 3 per cent in the first seven weeks of the quarter.

“The last four months has been one of the most challenging periods in the history of the Woolworths Group,” Mr Banducci said.

“The COVID-19 health crisis is far from over, but we are entering a new normal and I’m confident we’ll get through this together.”

Woolworths underperformed Coles on same-store supermarket sales growth for the first time since the September quarter of fiscal 2019, when Coles’ successful Little Shop campaign boosted its same-store sales by 5.1 per cent compared with 1.8 per cent at Woolworths. Coles reported a 13.1 per cent increase in same-store food sales on Wednesday.

At Endeavour Drinks, whichs owns Dan Murphy’s, BWS and Pinnacle Drinks, total sales rose 9.5 per cent to $2.25 billion and same-store sales rose 8.9 per cent as customers stocked up on takeaway liquor in March after a soft start to the year due to the bushfires. Liquor sales growth in April eased back to pre-COVID-19 levels

But hotel sales fell 12.9 per cent to $350 million after more than 330 ALH hotels were forced to close on March 23 as lockdown laws tightened. The closures and the collapse in equity markets prompted Woolworths to postpone the $10 billion demerger of the hotels and drinks business until 2021.

More than 3500 hotel staff were redeployed to supermarkets and online, and discussions are ongoing with landlords about rent reductions.

However, Mr Banducci said that due to ongoing costs, hotels would lose $30 million to $35 million a month (including March) while the business remained closed.

At BIG W, total sales rose 9.5 per cent to $866 million and same-store sales were up 9.9 per cent, although the sales mix shifted towards lower-margin everyday needs and leisure and extra costs were incurred.

Mr Banducci still expects BIG W to make a small profit this year, even though analysts believe sales will plunge in the June quarter, leading to large losses in the second half.

In New Zealand, total sales rose 14.8 per cent to $A1.8 billion, with same-store sales up 13.4 per cent.

Woolworths’ online sales rose 34 per cent to $817 million – more than double the 14 per cent online growth at Coles – fuelled by a 26 per cent increase in online food sales, which reached 4.1 per cent of total sales, and 73 per cent growth at BIG W (to 6.5 per cent of total sales).

Online sales grew strongly even though capacity was constrained and Woolworths was forced to temporarily suspend home deliveries and click and collect to all-but vulnerable customers due to overwhelming demand.

In recent weeks, Woolworths has doubled its online home delivery capacity, using hundreds of stores to despatch orders, opening a pop-up delivery hub in Notting Hill, Melbourne, and harnessing on-demand delivery services including Sherpa, Drive Yello and Uber.

Mr Banducci said sales growth in March was particularly strong in food and drinks, but was partially offset by higher incremental operating costs due to increased wages in stores, e-commerce and the supply chain to meet demand and support safety and social distancing. Incremental costs had also been incurred for cleaning, security and safety equipment.

Additional costs were expected to continue in the June quarter, including costs associated with the temporary employment of 22,000 new staff to support safety and social distancing, additional warehouse capacity, scaling up online (particularly the expansion of home delivery) as well as ongoing security, cleaning and PPE costs.

These incremental costs were expected to be in the range of $220 million to $275 million for the group (excluding hotels) in the June quarter, while Woolworths indicated incremental costs in March were around $70 million to $90 million.

“The extent to which these costs can be offset for the remainder of the financial year will depend on the rate of sales growth and required level of safety settings,” Mr Banducci said.

Additional operating costs in 2021 would depend on how government restrictions changed.

Woolworths also plans to pay its frontline staff a bonus at the end of the year in recognition of their hard work. These bonuses are not included in the cost forecasts.

“My great hope is coming out of this we’ll be a better organisation and more in tune with customers and the community,” Mr Banducci said.

This story originally appeared in the Australian Financial Review. Read the original story here.

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