Welcome, everyone. Thank you for joining us for the announcement of our results today. I'd just like to start by actually introducing the team. We've a lot of new team members here that many of you may not have met. So I think you all know our CFO, David Marr; but if I then just go across, Claire, would you mind standing up? Our head of the Woolworths Supermarkets, Claire Peters. It's actually just 12 months now, I think, that you've just been in the business. Sitting next to her is Amanda Bardwell, our Managing Director of WooliesX. Amanda has been with Woolworths a long time, but it is now literally 1 year since we created WooliesX and put together our rewards or customer loyalty and digital business to create what we think is a very important growth vehicle for the future, and I'm sure we'll get a few questions on it a bit later. David Walker, our Head of BIG W. I know there will be a few questions on BIG W. But David has now been in the role for about 18 months, I think, David. So as we've talked about before, BIG W is a challenging business [ in that it's ] a long rotation business, especially in the apparel side, but now David's increasingly, hopefully, on top of the challenges we have in the apparel side, and I'm sure hopefully, we'll get a question about that later. Steve Donohue is our newly appointed Managing Director of Endeavour Drinks. Steve actually started at Dan Murphyâs at 19. So he has gone back home. I think it was 19, Steve, but obviously, had been the Head of Buying for Woolworths Supermarkets prior to that and prior to that in New Zealand. And last, but not least, on the phone is Natalie Davis, our new Managing Director of Woolworths New Zealand. Their Progressive Enterprises has gone back to being called Woolworths New Zealand and if she has any questions, she started in the role back in June. I suppose for the sake of completeness, there is another person that everyone should know, which is Colin Storrie, who is the Head of our Portfolio businesses and really has -- takes the lead accountability on ALH, the Petrol transaction, the Quantium investment and also helping David on the topic of BIG W.
I'll walk you -- I'll move through the presentation in a relatively rapid fashion, so we can leave a lot of time for questions, either from the floor or from the phones. So let me get going, but don't hesitate to interrupt me with questions.
In terms of F '18, it was, we think, a very good year for the group. We made progress against our plans. The key focus for us, as always, is around our customers and our team and trying to build the right culture inside Woolworths and being very focused on the customer. And of course, if you're going to be focused on the customer in a business like us you have to be highly focused on the team, in particular the team that serve the customers and the teammates that's in the stores. And we saw really good progress with our customer, Voice of the Customer scores increasing in all of our businesses, a lot more engagement on Voice of the Team and Woolworths as a place to work and a place to shop. And we have 200,000 people who work for us. So if they could just advocate for us to their families, we'd be in great shape.
And then a real highlight for the year was Voice of the Supplier, where the Australian supermarket business, in the Advantage survey, went back to being ranked #1 in a number of key dimensions, including how we engage with our supplier base and work with them.
So a really pleasing year on Voice of the Customer, Voice of the Team, Voice of the Supplier across all our businesses, and that to me is probably the most important highlight.
Unsurprisingly, we believe, when you look after the customer or the team or work collaboratively with suppliers, we had good sales outcome for the year and an even better EBIT outcome and profit after tax, of course, being up even more through the work done on managing our debt profile. So strong sales results, 3.4%, really on the back of Australian Food and Endeavour, both been in the force. And you saw the leverage that came through on the EBIT line, really driven primarily by Australian Food. And the second half, if you adjust for New Year's, saw the same percentage growth as the first half.
So -- and it's tradition, as you know, in retail, a slower time of the year, people just seem to buy a little bit less going into winter. So to sustain the first half growth, we thought, was particularly pleasing.
As I said, when I introduced Amanda, we continue to invest in digital and data. It's incredibly important part of our business, not only in terms of driving sales with customer, but actually transforming our underlying -- our core processes. How you measure this thing is a topic of thesis in its own right, but we are starting to make very good progress there. I referenced in the media call that on a run rate, all of our digital businesses on direct digital sales are about $2 billion. We expect it to be hopefully a lot higher than that on the run rate leaving '19. But actually, arguably, it's the least interesting number in digital because we know that about 80% of our customers are influenced by digital in what -- in how they choose to shop us.
We also know that rewards or data is key for us going forward. So we made good progress on WooliesX [ in all these years ]. We created the business and the pleasing thing for us is -- and one of the reasons we've moved it to 406 Elizabeth Street was the war for talent and very hard to get great data scientists and digital folks out at Norwest, and we think we've created a very aspirational space, and we have really made great progress in assembling what we think is a truly world-class retail digital team there.
We've then taken the same thinking and replicated in June in New Zealand for far more modest fashion. For those of you who know New Zealand or Kiwis present, it's actually above the Ponsonby store -- the Countdown's floor in Ponsonby, so it's just upstairs, which is -- I love because I always love us to be close to the stores, so it's really nice that they are above it. And we are replicating the same thinking in Endeavour, but in a slightly different way, given we've got a portfolio of brands. So hard to believe it's 1 year, but very good progress there. I think the only thing I'd call out on loyalty for us is being Woolworths rewards. We've now plugged it back into BWS and into BIG W. And the plug back in of the newly formed program is working very well. And just of -- about 2 weeks ago, we hit 11 million members in that new program. So still a long way to go to strengthen it, but a real highlight for me in the year.
We've made progress in BIG W, but it's still a long way to go. I called out in the media call, and I think I called out in our last sales announcement, that the key for us has always been turning around the negative trajectory we had in the number of customers buying products in the BIG W shops. We saw really pleasing transaction in the item growth. Item growth was sustainable across the year at over 4%. That led to a positive sales number for the first time since 2009. Still a long way to go, but you got to start by shoring up the customer base and getting back into customers' shopping use. So a pleasing year, in line with expectations, but obviously, a loss of $110 million is not the kind of numbers we aspire to deliver to our shareholders. So a long way to go there, and I'm sure we'll get some questions.
And then various reincarnations of Petrol. We've gone through many twists and turns. And we ended up, as you know, just announcing at the end of the financial year, the partnership with Caltex. Previous year, it had been with BP. We had, of course, tried to reflect on -- with the ACCC announcements and make sure we create a process that we could deliver on, and hence why we pivoted into the agreement with Caltex in a 2-step process to really deliver against our wholesale fuel prices and make them as competitive as possible and a number of other strategic benefits with Caltex. And then we're now hard at work on the second phase, which is a dual track RPI or trade sale of the Woolworths Food business. But we're very excited about the Caltex partnership and what we can do together, whether it's providing Woolworths rewards and extending it to a material new set of customers and giving more opportunities for our customers to earn or what we can do in wholesale and food and building a proper supply chain for small drop volumes into this part of the market, or what we think we can do with our new Metro format.
For those of you who live in the city, you, hopefully, will have seen the Metro that we just opened on Pitt Street. If you haven't, please go down there. It's a bit hard to find. We all know we've got to improve the signage to get you down the stairs, but it's performing very well, and we're quite excited by -- it's a material step closer to where we want to be and we hope to take yet another step with the opening of [indiscernible] in a couple of weeks.
And then finally, of course, David will talk further to capital management. There has been a lot of commentary, but we did have a good -- another year of good cash conversion in our group, not quite as good as the previous year, and David will explain the reasons, and hence why the final dividend of $0.50 and the special dividend of $0.10.
So we feel like we threaded the right line in the -- did the right thing for our customers, the right thing for our shareholders and continue to advance our strategic agenda.
For those of you who are interested in a whole series of very simple houses, this is the group's strategy. It layers -- the food strategy layers up into it. What we're trying to do with the group is build additional capabilities around our businesses, so that we can support the businesses, be as good as they possibly can. So for us, the bottom of the house really and it's all in supply chain and IT really, it's about end-to-end process, about how we create a lean operating model and leverage digital and data to do that. A priority for us this year is commissioning the MSRDC, which is an automated DC for us, which could have huge productivity benefits downstream. The highlight for this year in IT was we upgraded the wireless network in every store in the country, and then we implemented 1Store, which is a new POS system, a new ticketing system and a new inventory system. When I look at them simplistically as a non-IT person, the thing that we've done is transition into a more card-based IT infrastructure for our stores, and that creates enormous flexibility and benefit going forward.
So we're working, at the group, really at the bottom line just trying to get digital and data and using it through IT and supply chain, deliver it for our teams. Each one of the businesses, of course, has their own strategy in the middle of the house, and then the top of the house is how we try and, again, as a group work together. The culture, we're trying to have a very consistent culture in our business. But then the key thing we're trying to do in every one of our businesses, and we do the research, we know that our customers want more and more convenience. Their lives are stressful. We need to help them in every possible way, and we know that they want to have frictionless experiences. So it's not only the amount of time and activity it takes, but making it easy and as frictionless as possible, and we're working on both of those at the top and bottom of the house.
In terms of the key priorities, I'm very speculative. Few -- I'll just give you a bit of a sense of a few others, and we'll turn to David. These are the priorities that we had agreed with the board that flow off the house and the ones I feel accountable together with my fellow group [indiscernible] members. On the customer-, team-first culture, we do believe in purpose. We create better experiences together, that's the group purpose, and we are looking at how we activate it through our ways of working and our core values and been really good progress on that. We just need to continue to embed those. I've talked about our Voice of the Customer, Voice of the Team, Voice of the Supplier scores. We've managed to standardize all the metrics across the group, not an insignificant achievement, and now where we really do use it to reward our team and to drive decision making and that's the key.
The one I should talk to that wasn't on the summary, but it's actually a source of some pride inside the group is us changing the team member experience inside Woolworths, and we're trying to do that in a whole range of ways. We've got a new financial wellbeing program in partnership with Good Shepherd, where we're trying to provide our team with very easy, 0 interest microfinance loans and get them out of the paid or lending challenges that we found a number of them had and we were quite shocked by that. We worked very hard on that. We have also worked very hard on the Friendly Nation Initiative of actually placing a number of refugees into our business and training them and giving them careers. We've done a lot of work on indigenous employment and are now the biggest employer of indigenous team members in Australia. We've held 80% retention on the 900 we've recruited in the last year. And we just got Gold status for the AI -- AWEI, which I can never pronounce. [ Paul ], what does it stand for? The Australian Workplace Equality Index, but basically, the work we're doing on LGBTI and trying to get everyone to bring their whole self to work and really trying to create a very inclusionary workplace, which is incredibly important for us.
So a lot of work on customer and team, still plenty to do. There's still so many things in our team experience that we think are suboptimal, but a lot of exciting initiatives that we'll take into '19.
The connected, personalized and convenient shopping experiences, it can sound jargonistic, but it isn't meant to be. We know that the future is very different. Well, the present is actually very different to the way we've operated historically. F '18 was the year of pickup for us. We decided to make sure each one of our stores could provide a pickup experience, so you not only can shop the physical store, but you could pick up at the store, and we activated that across every store inside Woolworths, except for our Metro stores due to some constraints around spacing inside the Metro stores. So that was enabled across every store, created a lot of growth for us, but it also creates an opportunity for the next generation of growth for us importantly. If you can do pickup at a store, you can do on demand delivery from a store and that's the next generation of growth, that plus drive-throughs, some trying to -- get a customer, get the groceries loaded into their boots. So a very important achievement, I think, for the year. But as I say, we do believe on demand is going to be critical as we go into '19. We'll probably get an Amazon question. We think Amazon Prime now is the key vehicle. We see them being successful out in the U.S., and we simply will need to be better at on demand. BWS is actually leading the charge for the group in this, and we have 340 stores where you can order and get your chilled wine or beer delivered to you within less than 1 hour. I'd encourage all of you to give the service a go -- it's 2-hours, Steve?
[indiscernible]
I'm sorry, 2 hours. Hopefully, it's an hour. I'd encourage you to all give the service a go. And we've bought a small business, Jimmy Brings, which actually delivers in less than 30 minutes, which -- and the reason for that was to just force our team to confront the new world that we operate in, and we need to get faster and faster and what is actually -- what is possible. And so I've talked about CountdownX. We had a really good year on renewals and it's -- and our mindset to renewal, as hopefully everyone knows, is to recreate a store, not just to do a refurb. That mindset we're now trying to apply to all parts of our business. And that includes drive-throughs, which we've committed to trying to do 200 in F '19, but also, the Metro store that I alluded to down the road and other stores inside that were well outside the rest of our group.
Australia, New Zealand Food, look, it was a good year in Australian Food in terms of the numbers, I'm sure we'll come back to F '19 trading. The number one thing I wanted to call out was our Voice of the Customer on fruit & veg. It was outside of pickup, our biggest improving score, and we know that at the core of our business is fruit & veg, so we've focused on it. We executed against it, and we've still got a number of exciting initiatives there. We continued on the renewal and upgrade program. We started to rebalance renewals and upgrades. Some of you may ask what the difference is? One is, full store reactivation. The other is actually a more deliberate reactivation of certain components in the store, about half the spend and a materially less disruption. And just for some of our stores, we won't get the ROI of a full renewal, but we can do well on upgrade. Upgrades will become a more and more important part of our business going forward, but we did 54 last year. We'll ramp that number up this year and we'll change the shape of those as well, very importantly for us.
We will do macrospace reliances as well as a number of other things outside of just upgrading the front-end, which is what we used to do. Talked about New Zealand Food. We deliberately, as everyone knows, invested in New Zealand Food. Well, hopefully, everyone knows, in '18, you've seen in the numbers, so we did dial back our EBIT, but the investments we did in fruit & veg, service and online have paid great dividends for us, still early days. We need to deliver for the shareholders. We are aware on that, but you'll see that through the Voice of the Customer and the strong item growth we've seen in the business, in particular in online, which grew at about 37% for us. Very different competitive market, but a really important strategic learning ground for us in the online space. Obviously, a lot more still to do in both of those businesses. The expression we use inside Woolworths in these businesses, being consistently good on the fundamentals and then getting points of difference. And we know that you can never walk away from the fundamentals, and those are in stock positions on shelf managing down, stock loss in a sensible way, so that you get fresher, faster product through your supply chain. Doing a great job on the front end, leveraging what 1Store will help for us. Pickup, which is a really important experience.
So -- and then just, of course, just getting our efficiency right in the store as well.
Endeavour Drinks really was a good year, but on the EBIT side, we were slightly lower than our expectations had been. That is at least partly driven by the South trade sale, which was in previous year's number, which was $9 million. If you isolate for that, you see a profit growth slightly less than sales growth, but it was a challenging second half in some of our categories, and we're hoping that we'll have, as we reset our plans for '19, that you'll see that narrative change, but a good year. I'll call out My Dan Murphy's, which Woolworths rewards has 11 million members, My Dan Murphy's has 3 million, which is remarkable, just shows the resonance inside the brand, outside of what we've done inside Big W.
The portfolio. We talked to BW, talked to Caltex, ALH was actually a very pleasing year, and you will see the 2 announcements of the reviews that have just been done on the external review, given the speak up complaints as well as responsible gaming in Canada, looking at our responsible gaming policies. And they both reaffirm that we've got opportunity to improve, but we don't start from a bad place. So we're, obviously, very focused on actioning both of those.
And finally, end-to-end processes. I'd say 1Store is an enormously important strategic initiative to have implemented for us. It's taken 4 years. At its peak, we had 350 people [indiscernible] '18. So the opportunity cost of our team to do this has been ginormous, and we really want to focus now on clearly getting the benefits from that. The program we're using to really drive process cost out inside our business is simpler for stores and better for customers. We know that the key for us is not squeezing down individual costs, but improving end-to-end process. Invariably, it requires investment upstream to get benefits downstream, but that process is well underway. The team is cycling through all the core processes in the store and coming up with exciting short- and long-term opportunities to improve it, which is exciting for us. One of the key ones that we do have, of course, is MSRDC. Again, it's been a material investment over the last couple of years. It is an automated [ shed ] that will actually pick by aisle for us. Do a caught and picked by aisle so we can drive
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we commission that in February of next year. There will be some challenges as we dual run [indiscernible] Victoria until we switch across fully to the MSRDC in July of the next year, but the potential for us and what this can do and simplifying our install processes is very exciting but, of course, very daunting at the same time.
And there are a lots of other interesting initiatives we have underway. The big IT initiative for us this year is implementing JDA. Another we've done 1Store, we've pivoted to JDA, which will help us be a lot better at full cost in managing our shares. So those are the priorities. Pleasing progress against all of them, but great thing in our business is there's plenty more to be done and plenty more value to be unlocked and shared between our customers and shareholders.
Without further ado, I'll turn over to David Marr to talk about the financial highlights of the year. Over to you, David.
Thank you, Brad. Good morning, everyone. For those on the phone, I'll start on Slide 8 of your -- of the pack. Consistent with 2017, and the first half reporting, Petrol continues to be classified as a discontinued operation. We had a very small impact from Home Improvement, which is also reflected in the first half as a discontinued operation.
So focusing firstly on the left-hand side, continuing operations. Sales from continuing operations were $56.7 billion, up 3.4% on the prior year, driven largely by Australian Food at 4.3% and Endeavour Drinks sales growth of 4.5%. EBIT from continuing operations of $2.55 billion was up 5 -- 9.5% on the prior year primarily due to Australian Food 9.6%. All businesses reported an improved result, with the exception of New Zealand due to the investments that Brad had just mentioned.
NPAT from continuing operations of $1.61 billion was up 12.9% with EPS on a similar basis up 11.4%. NPAT, including discontinued operations on the right-hand side, $1.7 billion was up 12.5% for the year. I'll cover dividend and return on funds employed in a moment, but turning now to Slide 9 for the EBIT breakdown.
EBIT from Australian Food, as I mentioned, was up 9.6% to $1.76 billion, driven by a strong sales performance; higher GP, in part driven by stock loss improvement and offsetting some of the continued investment we're making in areas such as digital and data; some one-off costs, which we called out today; and higher depreciation.
Endeavour Drinks' EBIT of $516 million increased 2.8% on the prior year, but as Brad rightly pointed out, if you exclude the gain on sale on the prior year, EBIT increased by 4.7%. Lower underlying EBIT growth in the second half in Endeavour reflected a more competitive environment and some higher supply chain costs.
New Zealand EBIT of NZD 284 million decreased 8.2% on the prior year, driven by the investments we mentioned in fruit & veg, service and stores and online. Those investments have been recognized by our customers with our recent sales growth, the strongest in a number of years.
BIG W reported a loss before interest and tax of $110 million, which was within the range of the $80 million to $120 million provided at the first half results. BIG W reported its first positive annual comp -- comparable sales growth since 2009 and an improvement in GP. We expect losses to reduce further in FY '19. However, obviously, we remain very early in the BIG W turnaround.
Hotels delivered EBIT of $259 million, an increase of 11.1% on the prior year, driven by sales growth across all key parts of that business as well as some mix improvements and good cost control.
EBIT growth in the second half was more moderate as we cycled very strong earnings in the prior year.
And finally, central overheads of $136 million declined on the previous year, largely driven by a $13 million gain on sale of properties, and we do continue to expect central overheads of about $150 million for FY '19.
In terms of discontinued operations, as I mentioned, there was a very minor EBIT contribution of $1 million from Home Improvement in the first half and Petrol delivered $168 million, which was an increase of 7.1% on the prior year.
You might note that the first half benefited from a reduction in depreciation once we reclassified the business as a discontinued operation. And on a normalized basis, FY '18 EBIT declined marginally.
Turning to Slide 10, which is the key balance sheet metrics. Average inventory days for continuing operations reduced by 1 day to 39 days as part of our continued focus on working capital improvement across the group, which was in addition to the improvements made in FY '17. We saw average inventory day improvement in Australian Food, Endeavour Drinks and BIG W and New Zealand remained broadly flat. The 9.5% EBIT improvement for the group drove a 1.9% improvement in return on average funds employed for continuing operations, and that number is 24.1%. And on a lease-adjusted basis, ROFE for continuing operations was up 90 basis points to 14%.
Cash flow on Slide 11. We're quite pleased with the cash generation through the period. Cash from operating activities before interest and tax was up -- of $3.8 billion and was driven by very strong EBITDA result in continuing operations of 8.6% and a group EBITDA, including all businesses, of 3.8%.
Comparison of that line to the prior year is distorted by the Home Improvement exit in the prior year as well as the lower STI provisions -- STIP provisions. Adjusting for these, operating cash flow increased by 3.6%, which is broadly in line with the EBITDA growth.
Interest payments were lower in -- than FY '17, reflecting lower debt levels. Tax remained broadly the same due to reduction in the tax installment rate. Our cash realization ratio was positive at 101% with working capital benefits more than offsetting the cash utilization of provisions. Cash used in investing activities increased by $79 million to $1.51 billion but lower proceeds of property plant and equipment and businesses and investments slightly offset by lower purchases of PPNE.
Cash dividends of
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Turning to CapEx on Slide 12. Our operating CapEx for the year was $1.69 billion, an increase of just over $100 million in the prior year and at the low end of our previous guidance of $1.7 billion to $1.8 billion.
CapEx on renewals and refurbishment was roughly 1/3 of that, you can see that in the pie chart at the bottom, as we ramped up our renewal and upgrade program across all businesses, not just in Australian Food, but across all businesses with other growth investments, including digital, also increasing.
Property development CapEx was broadly in line with the prior year. However, property sales were lower, reflecting our strategy to keep more properties on balance sheet.
In '19, we expect operating CapEx to remain broadly at the same level, but depreciation and amortization will continue to increase as some of the multi-year transformational projects -- programs that Brad has mentioned, 1Store and our MSRDC start depreciating this year.
Slide 13, capital management. The board today approved a fully franked final dividend of $0.50 per share as well as a special dividend of $0.10 per share, reflecting our improved balance sheet position and benefits from the recently announced Caltex deal. This dividend results in the 22.6% increase in the total dividend for the year and 104% payout ratio for the second half. We do continue to target a 70% payout ratio for '19 and subject, of course, to trading conditions. However, assuming a successful sale of the Petrol business and further capital management would be considered at that time.
Net repayable debt decreased by 35.5% to $1.2 billion, down the left-hand side of that slide, at the end of the period due to the strong free cash generation, as I mentioned. And finally, fixed charge cover ratio continued to improve and increased to 2.6x compared to 2.5x in the prior year.
Finally, I wanted to touch briefly on the transition to the new accounting -- lease accounting standard. We are well advanced in our preparation for the full implementation of the standard, which comes into effect in FY '20. Whilst it's not going to change how we run the business, or in fact has no cash flow implication, it will significantly change our financial statement disclosures, which we're working through at the moment, trying to work through exactly how we best account for these disclosures going forward.
Assuming the standard was implemented this year, the year reported of FY '18, you would see $14 billion to $15 billion of lease liabilities come on to the balance sheet. There would be a corresponding right-of-use asset of -- in the order of $12 billion to $13 billion. This mismatch creates a deferred tax asset and the balance largely gets recognized through retained earnings. Clearly, a big change and we'll continue to keep you informed on our implementation as we progress.
Thank you. And I'll just pass you back to Brad.
Thanks, David. It's tough to flip through, hopefully, everyone's -- hopefully, the slides are all pretty understandable.
So we come back to the outlook for F '19. Pardon me for -- oh, Slide 42. Say, any questions on any of the other slides, we'll pick them up in the Q&A if that makes sense.
As I alluded to in my introductory comments, we still see enormous opportunities to improve our business, and we're working very hard on those. In Australian Food, we called out in our results that we've had a more challenging start to the year than we had expected with sales of 1.3% in the first 7 weeks. And this is due to a whole series of factors coming together, the phase-out of single-use plastic bags, which made us to have quite a challenging start to July as we saw lesser items in baskets, in particular in small basket shoppers as people just got used to bags or being bag-free and how they then balanced up their shopping experience.
We've also had the impact of competitor activity in general within the continuity program that one of our key competitors is running, which came into action in -- later in July. And we had moved and we're cycling our earn and learn program from last year, which had been running at the same time, which we're not running at this point in time.
So those factors impacted us plus also the ongoing deflation we've seen in fruit & veg and to some extent, in meat, although we've seen that change as we go forward. So that's caused us some short-term sales challenges, of course, but when we look at our numbers and we look at our customer metrics, what we're seeing is our customer metrics have all bounded back to where they were prior to the changes, particularly single-use plastic bags. And then very important, our brand metrics have started to show an increasingly positive sign in terms of us building gaps against our competitors, in particular, on price perception, brand preference and fruit & veg. So we look at those together with our trading plan as we go into Christmas and feel very confident that we need to focus in executing against those plans. And as you know, it's all about the run through Christmas in all our businesses, but in particular BIG W.
In New Zealand Food, we saw strong core sales momentum growth in '18. It's how we then translate that into improved results in '19 and the team are focused on that as well as continuing the investment into CountdownX. It shouldn't be nearly as immaterial investment as we had in WooliesX, given the team are planning and are already drawing off the capabilities [indiscernible]. Endeavour Drinks is really about continuing to evolve the experience, not only in a convenient sense, but also what the team have called range curation, what is getting the right range in the right store. It's worked very well for us in BWS and it's a question of how we apply it more forensically to Dan Murphy's as well as given the service proposition right. So quite a lot of work there and, of course, leveraging digital and data to do that. BIG W is a year of reducing the losses, but as I alluded to, it's all about the run to Christmas. So it's not something that we can look at in any -- it will be determined by the next couple of months. So that's very hard to say much more than that.
And lastly, as David alluded to, further capital management will be dictated and where we get to on fuel and the team are working very hard on our plans in that regard. Frighteningly, we'll be back to see you in the first of November to talk about how all these numbers have gone anyway. So that's not very long way.
So without further ado, I just turn the floor open to questions. Are we going to do the floor questions first and then the -- sure. I think Bryan beat you, David. I can't...
He's home [indiscernible] business first.
Okay, age over youth. David?
Can I get a mic?
David, I think you might. So people can hear you online, apologies.
Sorry, Bryan, visitors first, anyway. Brad, I'm trying to get a read on what the 1.3% means? Because clearly, it's been a big slowdown. I'm trying to work out, was it because you weren't able to respond to the tactical strategies that the competitor was doing? Was it because you failed, and that's probably too harsh a word, but you misexecuted on the plastic bags? What is your read on how we should read -- because clearly from our perspective, we're disappointed on the 1.3%. We're disappointed, given all the investment that you've been making, given the momentum that you had, given the Voice of the Customer, everyone's liking what Woolies are doing, the 1.3% leaves us a little bit flat. So what's your read on that?
It is, of course, the key question. I mean, I'll point out, 7 weeks doesn't make a year, as you know, David, especially a 53-week year. So we get -- but a combination of factors came together, I think, over in July and August that have resulted in this outcome. And so funny enough the brand and customer metrics were strong and growing. And so we really see some really exciting mid-term potential from those metrics. But single-use plastic bags, I think we're all -- the impact and the time for customers to get used to it has been greater than any of us had thought. And we did make a few things that we would do differently the second time around in terms of how we try to holistically solve it for our customers, but it was and has been a more painful adjustment than we thought and out of line with what we had seen in South Australia, Tasmania, the U.K., France, South Africa. So it has been quite painful just as -- but we know that, from our experience in our pilot stores, that 8 to 10 weeks, people adjust. So we're still in that early stages of the adjustment, but it wasn't a lot harder than we thought. And we were surprised in the small basket shopper to see a few of the items fall away. We thought it might happen in the big basket shopper. I know that you're nodding your head because it was a good note that you wrote, so may I say, Bryan, but we were surprised by that short-term issue on the way through. So -- but we see it come back. So that was, of course, the major issue in July. Then the continuity program, it's, I think the fact that we are doing one at the moment is part of our challenge and there is one in market. It's a successful program, it is having traction. We've run many as you know in the past, the last one we ran was 13 months ago. So there's been a lot of clear air between them. It was moved at the last moment, so it wasn't something that was anticipated, now it's supposed to be back in May. So we thought we had a good plan, the program has gone well. We know that these are short-term programs, and we need to just keep focusing on what our plan is coming out of the program. So were the numbers greater than we expected? Probably a little bit, but actually when we went back to look at the history in New Zealand and South Africa with Shoprite Checkers and New World in New Zealand, probably a little bit, but not as much as at first thought. So those 2 factors, they are what they are in the first 7 weeks. The produce one is -- we're starting to see that turn, David, which will be very positive. I mean, it's just been a painful process all the way through, been great for item growth, great for customer expectations, great for healthy eating, but we will hopefully see it click back into inflation in the short term and hopefully the same will be true in mid. So we think we can see our way through that. But that said, the metrics look good. 7 weeks doesn't make a year. It's all about how we now rotate out of that and build into Christmas. So we feel pretty confident where we're at.
I mean, it's no secret that they're coming to list in November. So it should be no surprise to you that they're pumping to get a bit of momentum. I mean, that's no surprise I mean, that's not a secret. What do you got planned then, coming into Christmas? Are you going to do anything different than what you did last year? Or have you got a few things up your sleeve? I am not expecting you to share, but what's disappointed us in the market, I suppose, is that we're seeing Woolies probably a little asleep at the wheel in the last 2 months. That's the general feedback that while Coles have hit the market pretty hard, you guys really haven't done much. Is this just a period of time that you're just consolidating or -- and you're going to come hard at Christmas? Is it a period there that it's just a quiet time in your new promotional program? What is it? Because at the moment the feedback that everyone's getting is Woolies aren't really -- they're not that noisy at the moment, they're quiet. So what is going on at the moment?
[indiscernible] but watch the space. It is normally -- it is, obviously, in the middle of winter, in the trading period of winter. It is all about the run to Christmas. Clearly, we believe we have a strong trading plan and the 1st of November, we'll be able to talk about how it's gone. So rest assured, we are very focused and clear on the team and all of us are very focused on what's really...
So you're not that worried? You just -- is this the short-term...
I worry about every day, David, just so you know. Can I get up at 5:30 and look at the numbers and worry?
I want to see the emergency here...
[ Well, ] plenty more gray hair since I took this job. I do worry about every day, but what I do know is short-term reactions don't succeed good planning, good execution, but the right long-term plan is the key.
And you're comfortable with all that?
And that's what we're focused on. Now we also need to learn from mistakes we've made. We've talked a lot about things we may have done differently with plastic bags, and I think they are -- we wouldn't have changed our decision, but we would have changed the way we executed against it. So we also have to learn from what we're doing, and we're having a lot of dialogue about that, but we feel that if we execute and we focused and calm about execution that it will resonate with our customers and we'll get the right results.
Bryan from Citi. My first one is a follow-on actually on the trading update. Just wanting to put a few numbers around it. So you had about 180 basis points slowdown from the fourth quarter '18 to the first quarter of '19, 3.1% to 1.3%. Just trying to work out how much is in each of those buckets as broadly as we can. Now deflation is probably a bit more quantifiable, I'd imagine, than little shop and plastic bags, but perhaps through the lens of transaction numbers and item growth, you've called out some broader trends, but that 180 basis points, is that more in the items per basket area than...
It's such a short time, as you can imagine, not to be [indiscernible] it's actually quite hard time pick up because of the time. Plastic bags really is an item per basket issue. Once [ we've isolated ] for what both major players did, it really was a few less items in the basket, you don't need many to impact the basket. And then the continuity program was really a transaction issue with some of the transactions, particular for grandparents buying plastic toys for their kids went to the competitor. So that was sort of the broad macro trend between the 2. Because they happened at the same time, it's very hard to [ in truth ] and pickup, but they both contributed to where we were. It wasn't immaterial though, the deflation issues, and a little bit of infant formula as we came back into supply and we've just adjusted the can limit. So I wouldn't overplay those, but they were the other factor there.
Okay. So my other question then is around the margin composition in food in the second half. So [ missed monomers ] anyway. We continue to be surprised that gross margin is stronger than we think and then cost of doing business is also higher on a per square meter basis, all relevant to sales, irrespective. Can you talk a little bit about, first of all, the stock loss profile? You've given us some numbers in the past and what the benefit was to gross margin from that? And then maybe we'll come on to CODB.
Yes, look, can I just say, by the way, I don't -- you need to look at department gain and not CODB separate to GP because they are highly related, and I'll come back and talk about that. I think it's one of the simplistic ways that we look at running the business. And I'll come back to talk about that. But stock loss, we've made progress, as we've talked about. So we had on average in F '17 running about 3.1% of the year, you run higher stock loss in the second half to the first because of the different sales velocities and seasonal variations in fruit and veg. We achieved -- we went from about 3.1% or somewhere thereabout to about 2.8%. So you saw that benefit come through, which is what we call that in the GP. The other thing that worked out for us in the GP, by the way, was we saw quite strong growth in perishables with chilled products, which is a slightly higher GP product. It also has some additional cost to merchandise and an additional cost to deliver. So you see a little bit of it come through as it makes sense into those numbers. There are a few other factors that went the other way, but it was one of the highlights for us of quite a strong part of our performance and very deliberately given we see it as a part of fresh in our business.
And so then just on the cost of doing business side. So on a per square meter basis, probably the simplest way to think about it, sort of you're still growing around a 4.5% mark in the second half, which is consistent with the first half. I just want to understand it because when we're sitting here in the first half, we're talking about some investments you've made in second half '16, first half '17, which you were annualizing through service and labor hours, et cetera, totally understandable. The question is, that was supposed to sort of annualize through and cycle out and clearly you found other more things to invest in or you put more hours in. Can you just talk about that second half '18 profile of cost of doing business? And what might have lifted that above what's an organic run rate of 3-ish percent, 2%?
Yes. So there are a couple of factors and we called a few out in the PI itself. David, I don't know if you want to just go and break down into the individual activities, which you're going to -- sitting ready there to answer that question.
Well, given the growth is the same in both halves, broadly, year-on-year, it's probably just -- we'll focus on the full year actually. So the full year, CODB growth in terms of dollars was up about 6%. About half of that is underlying inflation, new store growth, which is volume less than productivity. So that sort of explains almost exactly half -- the other half. We've tried to lay out for you in the pack and it's sort of 3 broad areas. The first one was areas of strategic investment or the cost associated with some calls we've made, whether that's some one-off costs as you will have seen, it's about $35 million in there, it's $55 million of higher depreciation. And then there's about $40 million across WooliesX, some customer-first ranging, et cetera. It's all sitting on that page in the Australian Food. That's the first bucket. The second bucket is what we call customer impacts, which effectively shift the shift of wages out of the weekend to weekends to meet the trade requirement. All of which, by the way, we've tried to put some measures against or proof points against in terms of Voice of Customer improvements or availability improvements, et cetera. So that's a big one as well as growth in online. Online being a very material one, whether it's pickup or home delivery and fresh produce units growing faster than sales. So having to move -- obviously, wages are based on unit to move rather than dollars. That's the second bucket. The third bucket was really around what we call structural, and that's effectively electricity increases. You'll have seen, I mean, we're not the only ones in that, as well as just the change in mix of customers tend to [ type ] -- they're are no longer taking cash out, but we used to get a rebate for that. And they're using cards more than cash, as you know, and therefore, we pay merchant services fees on those. But some of those -- the structure will remain, online growth will remain, depreciation will increase, but some of those will fall away like the one-off costs.
And was there any [indiscernible] change as well for you guys this year, which had an impact on your staffing cost levels? When does that kick in properly for you guys?
Well, we're in negotiations right now, and so we can't sort of talk to what are pretty confidential negotiations. So that process is well progressed, and we're hopefully, in the next month or 2, can be able to give an announcement on that. So that process is underway, but the cost structure does reflect a -- obviously, a sensible view of what those costs are given where we are in the process.
Final one for me just on this point is that the return of funds employed [ at least adjusted ] at 14%. How do you think about the return on investment you're getting out of some of these? Obviously, electricity, et cetera, doesn't have a return on it, but some of these investments you've made, do you feel that it's roughly accretive on the basis of the way you think about your investment profile, do you think it's getting you the return you're after?
Yes, absolutely, I mean, I think you've got to split out the SRb from the growth investment, right, I mean, that's the key of it. And there's no question we've been in the catch-up on SRb, whether it's a wireless network that doesn't work in its full, which was a big investment, does work now or the refrigeration and the contingent liability we've had there. So if you split those out, there's no question on the growth investments we get in the right return.
It's Michael Simotas from Deutsche Bank. Could we follow on from that investment point, please?
Sure.
In the outlook slide you've got up there. There's investment mentioned a couple of times. Interestingly, it's not in Australian Food. So firstly, does that mean you're coming towards the end of your investment cycle in Australian Food? And I was just hoping you could put a little bit more context around the investments that you've got planned in New Zealand or does that mean earnings get back with again and then in liquor as well?
Yes, thanks, Michael. I mean, in Australian Food, we really -- the narrative is we -- if we haven't, we will have annualized the investments we made to get to the right shape of our business. So we felt we really were in a catch-up phase in digital and data, we've invested, but we're increasingly annualizing those and there's only so much capacity you can have to invest and so that's been the story in Australian Food. That's been about annualizing what we've done.
So just to be clear on that.
So if I then come back -- sorry, after you.
Just to be clear on that. So that means we should start to think about cost growth on a inflation-type basis less than productivity, plus the structural impacts that you've called out?
As we go forward, absolutely. How it winds its way through will, of course, be dictated by the sales profile of the year, but increasingly, that's where our focus is. The big hurdle we've got this year though, is in the second half, the commissioning of the MSRDC, which should have enormous benefits in F '20, but will be commissioned in February, but outside of that, that is certainly the focus. On New Zealand, we made a number of investments last year. We do not expect to see the EBIT go back, whether it goes forward is -- of course, the team are working very hard to start to realizing some of the benefits of the additional growth, but we have factored in some investment into digital, given the cooperative nature of our key competitor, there's a very important strategic opportunity there for us that we need to take advantage of. And the same narrative, really inside Endeavour Drinks and making sure that we position the business effectively from the midterm in digital and data, but in both of those, we certainly don't expect to see it go backwards.
Okay. And then just second question for me, just to round out the plastic bag issue. Can you just qualitatively give us some commentary on the additional cost associated with the disruption through the store?
Yes, I'd like to see our competitors' version of numbers, when they think it's marginally [indiscernible].
Zero impact, I think.
Yes, I'll get my calculator out. Look, it was never going to be a profit driver in truth, even in a theoretical sense, setting aside 2007 reports that were done a decade ago. It was always going to be based on phasing out bags to make Australia a better place and some slowdown at the checkout, meaning that any incremental dollar you had through and not giving away a free bag would be more than used by the erosion of checkout [ speeds ]. So on the $0.15 bag and then on the $1 bag, we declared that we would be giving away the profits, which we are, to charity. So there's never going to really be a productivity boom, but it was an important fact that we thought it brand positioning and doing the right thing in the context of Australia and pending government legislation. I mean, as you know in WA Queensland and inside Victoria. So it is certainly not a profit generator. It's proved to be more challenging than we thought. So therefore, it's caused more cost than had been thought, in particular in the short term on the checkout, and we've had to invest very deliberately back into putting the right hours in the stores, so that we get those checkout Voice of the Customers experiences right, so that's...
And long term, is there a material change in the number of items that a checkout person can process?
We don't -- with our new -- we think with our new 1Store system, which does increase the scanning speed and make it much simpler for our checkout operators, plus the way we're now changing our flow in the checkout, we don't think so, and that's not our experience in South Australia. So when we sort of modeled the whole thing, we looked at it saying, in particular, [ is our ] metric on this one, but it does -- when you got -- we've got 120,000 people who work inside Woolworths Supermarkets, it does take a while for everyone to get into the new rhythm, absolutely.
Shaun Cousins, JP Morgan. Just a question regarding maybe just further on CODB. I'm just curious about your confidence that maybe you might have misinterpreted the answer to Mike's question, but you think you can get sort of CODB to grow at a slower rate, even though you've got -- you need 3% comp, say, to fractionalize fixed costs and you're running well below that now, and your MSRDC cost is going to be a reasonable sort of impost and it looks as though the only cost that drops out in -- from fiscal '18 is the $35 million, whereas what we've really seen so far in fiscal '18 has just been a step-up, you're not paying WooliesX people less, you're just hopefully getting some sales benefit out of them. I'm just curious about -- or maybe just to be clear there, do you think CODB to sales will actually be flat this year or will it be [ gaining ]? I'm sorry?
Shaun, we're not in the process of giving the full cost, and the point I'll try to make was we are annualizing a lot of the investments we've done. So there's not a lot of incremental investment coming through. So it's an annualization story for us in Australian Food. To what extent that leads to an improving CODB will be dictated by the sales profile of the year, plus how we manage the MSRDC transition in the second half. So we're not in the process of giving a full cost. Our aspiration, of course, is to get the CODB to be growing lower than the sales number, but those are the key factors that we're working through this year.
Just -- if I can just add, just recognizing though, depreciation will increase as I mentioned earlier. So depreciation will increase, and the growth in that line cost will obviously increase as well. So they are the 2 sort of going the other way.
Maybe then, I guess, philosophically, the aim here for Woolworths is to try and invest with a view that you get the win in sales growth and comp growth and you get op leverage as really the way you win it, rather than actually how we get to a phase where we can actually get dollar CODBs to -- dollar CODB to grow at a lower rate?
Well, I mean, the name of the game is to drive profit growth and cash conversion. And how we do that is while we're trying to balance between making sure we don't underinvest in what's happening in digital at the same time as we drive true efficiency in our stores without compromising the customer experience. So we're balancing those factors. So I don't see CODB as unrelated to GP, they both end up in the same place, and that's what we need to be judged on, no question.
Fair point. And maybe just in terms of BIG W, particularly given the strong comps you did in the fourth quarter, were they just more expensive to get, which meant that your profit -- or pardon me, EBIT loss was a little bit towards the higher end of your $80 million to $120 million. I'm just curious about how you think about the trajectory to breakeven? Is that possible and kind of what needs to happen for that to occur?
I think it's a great question. I'll have a bit of a go at it and then I'll ask Dave to make some qualitative comments. Q4 was quite strange because we had the end of summer followed by the snap winter. So there was a kind of almost like a quarter of 2 halves. There wasn't winter and all of a sudden, there was. So it was quite a confusing quarter, I think, to actually -- to look through on the apparel side, in particular. But Dave, I don't know if you want to give any other color to Q4?
I mean, I think, Bradford, that's the key to it is, the challenge was until late winter and which has been widely reported. The challenge for the late winter is you don't typically make up the sales.
Dave, you just need to start again.
Yes. Okay. Sorry, I mean, Brad's right. The key challenge for us was, obviously, the late start to winter and typically, when winter starts late, you don't make up the sales. We're fortunate that we tailored our buy for winter. So we ended up finishing our year with a lower inventory position, particularly in winter. So we're in a good position now. The other challenge that we had obviously was Easter and the school holiday transition that we talked about in Q3, which really -- Easter, we're still quite a heavy event-driven business. And when the key events are challenged because of the school holiday and Easter, then that obviously then flows through. So it's -- but certainly, I mean, the other element in quarter 4 that worked strongly for us is our Toy sale. So we finished with our Annual Toy Sale and that really -- that lifted in the last week or so or the last few days and then played on into July. So we finished the year, the last few days of it pretty strongly with a key Toy sale event, and we saw that leading into July for that period.
Okay. Great. And about the outlook and breakeven [indiscernible].
Well, in truth, it's not to be disingenuous, but it is so leverage BIG W to Q2 that anything we gave would just be -- in honestly, we don't want to give guidance anyway, as you know, but on this area, I think, we're just -- we would be -- it's hard to tell, but we have got a decent start to the year as Dave alluded to. We did have a good Toy sale half in F '18, half in F '19, better than we had expected, given the issues with the liquidation of stock inside Toys 'R' Us. So we'll see how we go.
And just finally, how do you think about Hotels, just given maybe over to you, Brad, or for Colin, it's a portfolio business, [ do you think ] BIG W's loss making, so can't really be moved on, and Petrol, you've been quite upfront about, considering new ownership options. How does the company think about Hotels? Are you watching the calls, potential divestment in Queensland as an angle there, given that it seems like the reputation impact is arguably intensifying rather than deteriorating. And I'm just curious about what the plans are for the Hotels division as a portfolio business?
I'll throw it to Colin in a moment. Look, it had a good F '18, as I say, there was some good work done on responsible gaming, which we still need to implement. When we look at the reputational issue, Shaun, in truth, it is in very small pockets, having someone like us as a very responsible player, we think it can work and does work, but we just need to make sure we are right -- have the right bar associated with that. Be interested to see what happens on the other side. I mean, it all comes down to legislation in Queensland, but I don't know. Colin, is there anything else you would want to add?
Not really, Brad. I think you've covered most of it. We do think it's going to be quite difficult for that structure to get through the regulator.
Someone back there.
Richard Barwick from CLSA. Can I just ask going back to the first quarter at the start. I mean, the description you've given the Voice of Customer numbers sound super strong and heading in the right direction and yet, obviously, the like-for-like step-down, you've talked to some of the reasons, but obviously, in talking to your customers, do you get a sense that the part of the strong promotion from Coles will lead to a fleeting boost to them and the shopping of Coles because I wanted to before they got their 30 little goods and then back to you after that?
It all depend on how well we're executing against sale store experience, Richard, in truth, so that's what our focus is on, making sure we've got a great experience. So when they come back into the store, they realize why they normally shop at Woolworths. So to us, it's as straightforward as that. We've run these programs before. So we have some experience with them, but that's our focus.
I was just wondering more if this case, with people saying, we actually like what you're doing, but we're shopping at Coles just for the month of July -- or August, sorry?
I don't know if people quite say it like that. I did intercept a lot of customers outside a Coles store with a green bag and asked them a question. As you might imagine, thank goodness, no one arrested me. But we know that our customers like us, and we know [ we're proud with ] a lot of experience, all things being equal, they will shop us and that's what we need to focus on. Who knows on some customers whether they like that experience, on the other hand, there are probably some people who might have felt polarized by it, so that will be the question which only time can tell.
Okay. And maybe one for David. One of the comments you made was about the less property sales is part of a strategy to actually hold more property on balance sheet. Is that -- we're talking selective properties in FY '18, is this a part of a new strategy that you'll be keeping more going forward? What should we think about property sales because it's a reasonable delta when we're thinking about net CapEx?
Yes, it is. Yes. Look, we would -- we normally focus on operating CapEx anyway. It's the underlying CapEx invested in the group. Sales of property and/or development of property tends to be very lumpy as you know. We never quite get it right even when we do forecast for it just because things can happen. More broadly, though, we've -- we are a very lease-intensive organization, as you'll know, and more recently, we've just said, we want to diversify away a little bit from that. It will take some years, but we've tiered our assets into Tier 1, 2 and 3. Clearly, Tier 1 assets, where we feel they're in key markets that we feel have a greater value. We would like to hold, rather than develop and sell. So it will be a migration over time, rather than an enormous change overnight.
Okay. And just, I guess, partially following on from that. Depreciation, obviously, ticked up this year, just reported. How should we think about the depreciation leading to '19?
Yes, well, I've certainly indicated it will continue to grow. I mean, one of the challenges we've had, as you know, is we've increased our CapEx spend quite materially the last 2 or 3 years. We simply needed to catch up, particularly on IT foundational spend and getting to a run rate of renewals. We're now at that level, and in addition to that, we've had 2 big programs that have taken several years, the 1Store program and the MSRDC, both of which will be complete -- largely complete already on 1Store, MSRDC, both of those come out of assets under construction and start being depreciated. So depreciation will rise across the group. It will be slightly into the double digits. We would think we haven't called it out by business, but overall.
In absolute terms just like double digit?
Yes.
Scott Ryall from Rimor Equity Research. I was, Brad, intrigued with your micro lines to in place. Really quick question on that. How do you communicate that with 100-and-something-thousand staff?
Not very easily, but it's in all the team rooms, it's a big narrative in a store. My lens through the business, which is when you look at Australia, we are a microcosm of Australia, with a number of people who work with us, with all the challenges that the average Australian faces, that's our team members. And so we found a number of our team members couldn't get a credit rating to get a Woolworths credit cards, which is how the journey started for us, and we were deeply shocked by this. And then we had to look at it and found out what the key issue was and we're lucky enough to engage with Good Shepherd to provide the market loans and process them for us. We take on the -- this is your interest line. So that's how we started on the journey. It has been communicated. We're starting to get quite a lot of uptake on it. It does -- it's quite a painful experience to realize just how challenged some of our team members are and how prevalent payday lending is, but we're the biggest microfinance, I think corporate facility in Australia now, and we're focusing on not [ promoting ] it to the wrong team members, but to those who need. So it's actually a -- it's not something we talk a lot about, but it's a good story for the kinds of things we want to do for our team.
Okay. Can you comment on way you think -- obviously, some of the deflation items have been a bit all over the place in the last a little while. Just looking forward 3 to 5 years, do you see a deflationary environment in general in Australia and sitting like at retail?
Boy, that's a big question. I don't think I can predict the future, to be honest with you. We've got enormous cost pressures building on fresh supply costs, as you would know. We have seen some inflation come through on butter and cream and certain portions of it. So on the fresh side, there is inflation building, I think the draft will unfortunately cause yet more inflation in that part of the business. If I look at long life groceries, it's probably not quite as acute, the natural inflationary pressure there, but there is pressure there, clearly. So I'd hate to give a forecast on this one because I simply don't know. We aren't...
So you don't think competition dictates that? You're actually thinking more of the input cost?
No. I think it's a combination of the 2. I mean, it's the underlying characteristic of what's going on, and we certainly aren't against inflation. We got to be very careful that it's -- our products are affordable for our customers in truth and doing the right thing for them, but it's not a philosophical issue, we're against it as always.
Okay. And maybe if I can just ask a question of either Amanda or Claire, and I don't mind who answers it, but how often do you guys sit down together, please?
I'm glad you both sat together today. What if they both answer and see if they give different answers?
Well, we're -- we're on? Okay. We sit down very regularly, don't we, Claire? Include not just today, we're -- we have frequent texts to communicate as more than anything, but then we spent -- we spend a lot of time together, and we, I think, both understand that for digital and our store teams to work well together produces a better outcome for our customers and so our teams also spend a lot of time together as well.
Okay. So can I just get a bit more clarity on that? Text messages aside, maybe I'm from the generation that doesn't see those as effective forms of communication, but how often do you guys actually talk or sit down together? If you can quantify that please, once a week, twice a week, every day?
Multiple times a week, and multiple times, we'd be in the same meetings together, as would our teams be, as well.
I think my add-on to that would be, Amanda and I have got specific teams who report both into Amanda and myself, so at every state level, there would be teams who are dedicated on online and pickup and they would report into the supermarket team as well. So daily review on whether that's efficiencies, whether that's customer data from all the online channels, which then Amanda and I would review weekly and monthly and, on specific issues like bags, it would be hourly.
We have our 5-hour meeting on Thursday, I should [ lobby for ], but in all seriousness, the Australian Food Group, the way we do it, we've got the FoodCo team focusing on quality Own Brand, the digital team on trying to get their digital experience right and then really it all comes together with Woolworths Supermarkets and how we then need to write the Own Brand into the strategy for Woolworths Supermarkets or the digital experience, and that's something we all collectively work on it. A big issue and we're talking about ways it's working, it's not meant to be a soft word, it's meant to address that very specific issue, which is how do we work together, but also having our focus on the key issues that matter instead of trying to be good at everything, which none of us can be. So it's the ongoing challenge.
Brad, it's Johannes Faul here from MorningStar. I have a question on the private label strategy within Australian Food. Do you have a long-term target you're heading towards and where do you currently sit in terms of [ penetration ]?
No, it's always -- yes, it's always an interesting issue, do you have set targets for our Own Brand penetration is an issue that's been around for a very long time and everyone has a different view. Our view is that we don't because we want to do the right thing for the customer, and so each brand needs to rise and fall on its resonance with the customer whether it's ours or a third-party brand. So we take quite a hard line on it, and we think that that's appropriate, given what we want to achieve range. And we do want a leading range in Australia, that's not through having the biggest range necessarily, but by having the right range in every store. And so when you look at it, we want to solve for that store. So what we might want to do in Woolworths Double Bay could be very different to what we want to do in Mandurah or whatever the case would be, and we might have a higher Own Brand penetration in the second versus the first. So we've resisted the temptation to put in targets because that can just lead to very short-term decision making. It makes it a bit harder, I might add, but we think that's right for our customers.
Yes, that makes perfect sense. Whereabouts do you sit now?
Look, I think, do we break it out? I'm not certain that we...
It's still less than 20%.
It's still less than 20%. We don't break it out. It is actually going well, and that's because the brands were actually better than they were. We've just reformulated 5,000 SKUs and really with the focus on Select becoming Woolworths, what was -- editing the number of essential products we have. So that's there as well as growing our macro range in some of our category brands in nonfood. So it is going well. 5,000 SKUs for -- when you really convert a product, it's way less than 20%. And one of the dangers when everyone quotes Own Brand is if you just include lettuces or fresh food that haven't been converted, you can get to very large numbers, but it's not truly Own Brand. So for our conversion numbers, it's 16%, 17%. But the range is 16% smaller and it had 5% more volume growth than it did 2 years ago, which was key to us. We needed less SKUs that had more customer resonance at higher volumes so we could get better cost, and that's happened. And now are all much healthier and we've got 5-star ratings where possible. We've taken out every -- we don't have any artificial colorings or flavorings in it and so we're feeling that's becoming more what we would like it to be.
Great. And just a quick one on shrinkage, if I may. Are you currently sitting around 6 -- sorry, 2.8, and you've done obviously great in bringing that down over the last 2 years. Do you see this as a sustainable level or can you push that down further, you think?
No, well, it's -- there are material opportunities to improve it, and we've got to be very careful on how we do it from here on in, I think, Claire, we both agree because of the risk of doing it. You want good stock loss, not bad, where you don't supply a product or you sell a product that's not as fresh as you might like. So we need to be quite careful from -- however, we've seen -- we still see a lot of opportunities. I don't know, Claire, if you would like to...
Yes, the only piece that I'd add on is similar to as Brad described and consistently good. So across the thousand stores, you can definitely see some stores where there's still further opportunity, which would pop through what we would call an accelerated program. We also know we probably got 50 stores where we'll need to pop some added infrastructure support in to those stores, and we also know, as we transition through to our different partnership with Hilton and Meat, that there will be opportunity in the future there as well. But it won't be as significant as what we've seen over the last 2 years.
I know we [indiscernible] questions by phone. Is that right to -- anyone do them, pull them, is someone going to read them or put them on? Sure.
The first phone question comes from Rob Freeman from Macquarie Group.
Just on the CODB commentary, so just to be clear, in your mind, the only item that is genuinely one-off is the $35 million, which is around 10 basis points of sales?
Rob, it's David here. No, there are a few things, it's probably worth just pointing this out. So the shift in the weekend hour is, effectively, we're now normalizing the base. So the things that will remain higher will be continued growth in Online and pickup. So there's a run rate here that just by virtue of our plans and the customer need, that will continue to grow. The structural impacts, just by their definition, will continue to grow, which we called out for you and effectively higher depreciation, which hopefully I've covered today. The one-off costs are in -- are now effectively in the base and the shift of hours into the weekend was largely in the base and the WooliesX investment is largely annualized as Brad mentioned.
But those weekend hours, they're obviously not coming back, so it might be a source of profit mix to you, either will the credit cards, they -- so just at a high level, you're calling out New Zealand to be flat. Hopefully, DW is slightly less loss-making. There'll be a bit of profit from drinks in terms of growth, but with 1% comps and the kind of investment phase still increasing, how should we think about your ability to grow next year?
I don't think we said that New Zealand was going to be flat, just for the record. I think we said that we expect the momentum we had in '18 to continue in '19, and we expect to get some return out of it, even though we continue to invest in CountdownX. So I don't think we've said that. I also don't think we've said that we expect to have 1% sales comp for '19. We've said rather a challenging start to the year, but we feel we have a good plan as we go into the critical second quarter. And we certainly hope for more than just a little bit improvement in BIG W. So we're not giving an outlook here, but I don't think that's what we've said. So apologies for that. David, did you want to add anything?
No, I think that's right.
The next phone question comes from Ben Gilbert from UBS.
Just one for me, just around -- just, I suppose, the ability to get the customers back into store, sort of post obviously this Coles Little Shop. It's interesting, obviously, Voice of the Customers, Coles is looking quite strong. But I think if -- that's obviously it's an absolute [ least ] score, and if we look at some of the shopper metrics as well with Coles, looks like they're improving at similar if not higher measures. Obviously some other sort of steadies out there. And I suppose on that basis, I'm just wondering, how you think about whether you're actually getting appropriate return on the investment that you're putting into the business? At the moment, you've got more staff per store, in theory you've got better capabilities with respect to data, et cetera, et cetera. The Coles are staying to rip a lot of customers away very quickly and recently, easily over the last sort of 6 to 8 weeks. But I suppose just your level the confidence in getting those back?
Yes. Thanks, Ben, I think it's a great question. I distinguish between Voice of the Customer and brand NPS, which are quite different. Voice of the Customer is people who've shopped us, what do they think, how do they feel, they're our core customer. Brand is actually kind of asking everyone in the market what they think and it's only in the last month we'll lead a price perception, we'll lead on brand preference and we'll lead on fruit & veg and that's been building over 4 months, the other 2 have clicked across in the last 6 or 8 weeks. So we see increasing points of difference for us at a brand level with our competitors, which is very pleasing. That's not to say we're not worried about how we get our customers back into our store at the end of this continuity program and make sure they get a great experience. But it is the first time since 2013 that we've seen those metrics, certainly my first time, that we actually have some stability and differentiation in those core metrics.
Okay, great. And just one follow-on, just on the fuel piece. Is there [ any kind of ] update on timing with respect to a decision or any sort of action with respect to the fuel business?
Let me just say the team are working very hard so that we don't spend Christmas Day yet again talking about fuel, which we have the last 2 years. I don't want the trifecta, but we're working hard. I don't know, Colin, if there's anything else you'd like to add.
Sorry, yes, so we are making good progress. We do have a fair interest in trade, and we're progressing the [ dual ] track. So we've got a lot of strong momentum in the IPO process. So -- and my benchmark is not to have it at Christmas Eve this year.
3 years in a row exactly. Thanks, Colin.
The next question comes from Tom Kierath from Morgan Stanley.
My first question is on the remuneration report on Page 44. You've achieved your stretch EBIT targets, but your sales target, I think, on my math came in or your sales came in $1.35 billion below the stretch target. Can you just explain kind of how that happened? I mean, usually, when your sales are stronger, your EBIT, it does better. It kind of looks like it's the reverse has happened.
So obviously you've been reading the reports instead of listening to the presentation, Tom. But that's okay, we forgive you. Look, what -- in truth, we had very high stretches against a lot of our numbers because that's the issue our board has had as we've come out of the challenging times. They've expected a lot to pay at stretch. So the stretch has been quite challenging in truth across the whole group and that's the reason why we didn't get there. So I can't give you much else. David, I don't know if there's anything else we could...
Just on the sales piece. The sales was impacted slightly by the fuel volume. We had fuel volume going against just given the higher price. So there's a slight mismatch there.
Okay, that's understood. And then just a second one. I think the Coles Little Shop, it happened about halfway through the quarter. Is it fair to say then that your comps have decelerated through the quarter as that impact happened in the second half of the quarter?
Well, look, it's so hard to even talk about 7 weeks, never mind to transfer the 2. We haven't broken it out, and it's actually quite hard to break it out in truth, so I don't think we can comment on this. David, is there anything you'd like to add?
No.
The next question comes from Grant Saligari from Crédit Suisse.
The new distribution center in Southern Melbourne, once you actually get that up and running, can you talk to how much more competitive that makes you, like what is it actually doing for the business?
Yes, Grant. And apology, Shaun, for calling you Grant. I just have this mental thing I've got to get over. So you'll be here in spirit. The MSRDC really is an indicator to the future. There have been a number of these sheds, I should add, built across the globe. I believe there's over 20 now operating globally. But what it is, is essentially a very automated distribution center and it can basically assemble -- pick by carton and assemble pallets for specific aisles in a store. So what it does is it can change the whole store efficiency where you can drop a pallet into a aisle and basically be able to replenish the shelf directly from that pallet, which is very hard outside of this automation. So obviously it saves money in the shed, but it does give a material in-store efficiency, as importantly, you get a much bigger pigface because you don't get to regulated a pigface, everything becomes a pigface in one of these automated sheds. And so you can't put your long-tail products into the shed and deliver them to the right spot in the store. We still have way too many DSD orders to the store. I think we have over a 100 a week going directly to the store closes, a lot of inefficiency in the store. And if -- and it also prevents us from ranging a number of really interested products we would like to range in localized demographic. So there is the efficiency in the shed, but then that is just changing the whole DSD experience at a stores as well as changing the whole in-store pick experience. That's key. I don't know, Claire, there's anything else you'd like to add?
Yes, I think that's everything you've covered. I think the only obvious one that our customer would see as well as is it gives us the ability to change when we replenish our stores by matching the infill and outfill time that probably gets to the store. And particularly, in some of our high sales stores in Victoria, that would have a significant improvement of ease of congestion by replenishing overnight.
The other point I should add is that current capacity, we're overcapacity, so we use a lot of overflow facilities as we go into Christmas and things like that. So there's all those hidden efficiencies that should come out ultimately, of course, as well.
So the reports that I've seen indicating CapEx of around $350 million. And maybe you'd want to sort of [ how long that's ] incorrect or not. And that you're planning another one, or you're planning one for Sydney as well. I mean, my thinking on that type of CapEx, which would be, you'd have to be looking at sort of a 4- or 5-year payback to make this number stack up on that type of investment. Could you maybe correct me if I'm incorrect there or [indiscernible] detail?
Yes, look, I mean, this is a decision that was made quite a few years ago, in truth. It's been a long time in the power plan, you're broadly correct. We would like to see how it goes before we do something somewhere else. So we are watching and learning from this before we make major commitments outside of this 1 shed. So the proof will be in the pudding, Grant, on this one before we go and commit to a whole series of additional ones in truth and we certainly haven't announced any additional ones at this stage. I don't know, David if you...
I think -- Grant, the CapEx number is broadly right. And as you would expect, the benefits which are yet to be proven, will be in the tens of millions of dollars, both in supply chain. And then a follow-on benefit through the store. We haven't quantified the actual dollar benefit yet because we've got to get it operational, but they should be significant.
The next phone question comes from Andrew McLennan from Goldman Sachs.
Just a quick question on the costs again. You did highlight [ some of ] the details, what's happened in 2018, so thanks for that. But what other issues, such as the wage inflation and further energy costs are likely to play through? Is there any significant issues we need to contemplate there?
I don't know if I fully heard the question. What...
Well, the energy costs...
Yes, I covered, right?
The energy costs are included in that structural bucket that I outlined, Andrew. So we would expect those to continue to run through to '19, along with the tender point on cash. On the EBI, as Brad said, it's still very early to call. We're still in confidential negotiations. We would expect an increase clearly, and so I would expect at least an increase is in line with our history, possibly a little more, but we haven't yet concluded that.
Do you know roughly when that's likely to be concluded?
We're working through that, we're close.
Okay. And just in terms of Online, another strong growth rate here, from both the sales and your competitors. I'm just wondering how you're seeing competition online compared to sort of previous years? And on my calculations, and correct me if I'm wrong here, looks like about a third of your average sales per square meter growth was represented by Online. Can you just comment about that trend?
Look, it's a material part of our growth. Most of it in '18 was related to pickup. So it was store related, it wasn't separate to the store, it's just how you choose to account for it. But it is an important part of our growth profile. We've seen Coles actually just line price their online with their stores, we did this 2 years ago. So they've clearly also invested and become more competitive there. And the 2 of us are obviously competing for that connected shopper because we know that someone who buys online tends to also buy more in store and you get a greater share of wallet from the individual customer, so there is a lot of investment. Both businesses, we've -- we're annualizing what we choose to do, which takes a while to ramp up, but that's because it is a critically important area for growth. In terms of the overall online marketplace, clearly, that's all about how the Amazon story unfolds during the year. It's still too early with the launch of Prime to really have a clear bead on that right now in truth. But it's -- it is very competitive. We've seen a few other smaller players exit, which is probably not a bad thing, but it's still early days. We'll see how it plays out over this year. I think it'll be an important year in online.
At this time, we're showing no further questions over the phone.
Right. And unless there are any further questions from the floor, thank you all for joining us today. We will, of course, see you on the 1st of November. And I said to all the media, please, the best way to shop Woolworths is experience always to come and shop our shops. So look forward to seeing you in the store and look forward to any comments you might have on that experience.
Thank you very much.
