A view on Woolworths’ corporate responsibility report

If you eat or drink in Australia, you’re likely to have been a Woolworths customer once or twice this year. If not, you may have bought something in a big box from BigW or Masters, as Woolworths pushes to match its doppelganger Wesfarmers in every sector. Woollies is a big part of our national furniture, and it matters what they do. Someone asked me to have a look at their 2012 corporate responsibility report. I put it on the list and now, crossing off my last to-do of the year, here is a view. It’s too light a treatment on many issues, not least alcohol and farmer relationships, but there is still much to see.

The key issues

Woolworths is far from the evil empire that some believe it to be. It invests heavily in its people and, in a cosily competitive market, pushes to deliver good quality food and fun to millions of people. But it does have some serious issues. It’s good to see that early in the report it acknowledges them, having commissioned reputable firms to confirm what they are.

To paraphrase them, the issues are:

• The responsible use of market power, with support for local producers
• Delivering affordable, safe, fresh food, and healthy choices
• Ethical sourcing, with appropriate labelling and product information
• A healthy, safe and fair workplace
• Minimising environmental externalities, particularly carbon emissions, and
• Responsible service of gaming

It’s a good list, with the most problematic issues listed first and last. The phrase ‘service of gaming’ is new to me, but if it takes in Woolworths’ 12,000 poker machines, we’ll certainly get to that.

Distractions

How Woolworths presents these issues in the report is confusing, in at least three material ways.

First off, the report seems a battleground between those who own the ‘corporate responsibility’ baton, and those with the ‘marketing communications’ stick. This is often the case with draft responsibility reports before some integrated compromise is reached, but Woolworths has left the blood on the floor for all to see. There may have been a clear sustainability strategy and narrative at one point, but someone has come in over the top with all manner of loud irrelevancies, pictorial and otherwise. For example, the first substantive piece in the report is three pages headed with capitals that scream “BEST MULTI CHANNEL RETAILER”, an award irrelevant to the report, and a quarter-page quote I can’t read because of its font.

Complicating this is Woolworths’ split identities. Woolworths the grocery chain has sibling companies that span alcohol (Dan Murphy’s, Thomas Dux and BWS – with the alarming tagline ‘too easy’), pubs and pokies (ALH Group), family treasures (BigW) and the Bunnings equivalent (Masters). The report actually does as good a job as it can in clarifying what parts of the family are doing what, but the impression is it’s a grocery report after all.

The third distraction is the biggest. Indeed, it is all about big. It goes without saying that Woolworths is big. It sells lots, employs many and pays lots of taxes. These big numbers appear in big text, especially at the report’s top. There are photos to match. The CEO and managing director – the same person with two titles, for reasons I can’t quite grasp – appears smiling in a full page photo. It’s a big smile.

The problem with big is that sustainability and these reports are all about relativities. Big numbers don’t say anything. The first words of the CEO’s statement are “Woolworths aims to be Australia’s and New Zealand’s most trusted brand.” Big is a factor in trust, but it can cut both ways. It’s what you do with your bigness that counts.

Addressing the key issues

And so to the detail to find out how Woolworths handles its own size. Again, I stress my view that Woolworths is a valued company that is – with one obvious exception –responsibly run. If the things I mention grate, it is because how they’re presented in this report unnecessarily diminish the company’s brand and the trust Woollies wants to attain.

After the three-page Woollies app ad, we hit the issues listed above. Supply chain issues are so touchy with Coles and Woolworths that both have met fierce opposition in country towns when looking to open new stores. What Woolworths says about its supplier relationships reasonably acknowledges these issues, though blaming its competitor in the new Australian pass-the-buck tradition. Its measures in working with farmer groups are realistic and would seem to be paying dividends. The desire to build a more sustainable farming community seems real, though the dairy farmers supplying $1 milk will be hoping the efforts accelerate.

On ‘responsible gaming’ though, we find a less compelling response. I’ve touched on the issues of problem gambling elsewhere[1]. Woolworths’ response is that they take their responsibilities very seriously, but are just a small part of the problem: their 323 hotels are just 4% of Australia’s total, and hold just 6% of Australia’s poker machines.

These figures alone raise questions about transparency. For example, would an average Woolworths hotel therefore have 1.5 times more poker machines than the Australian average, a ratio that itself raises questions? Well, not quite. In 2009, Australia had about 198,000 poker machines in all: 12,300 in casinos, 116,000 in clubs and 70,000 in hotels.[2] The numbers haven’t materially changed. So, Woollies’ pubs hold 17% of all pubs’ pokies – 37.2 machines per pub, over 5 times more than the average of 7.2.

Woolworths has committed to be the first pub owner in Australia to insist on voluntary pre-commitment in its hotels by 2014. The report is silent on Woolworths’ engagement in the fierce club-led national campaign against mandatory pre-commitment, but it supported the campaign.

In all, Woolworths’ approach to the risks of problem gambling by its customers lies in stark contrast to how companies manage health and safety risks in the workplace, for example. The measures are to train staff, make machines less visible, support counselling and audit hotels. In the parlance of risk management, these are all ‘administrative measures’, the lowest rung of risk management. Higher rungs include engineering out the risk (in this context, perhaps machine limits?), isolating it (licensed players?), and eliminating it (banning machines?).

The measures that Woolworths is taking are not onerous for the rewards on offer. For example, in 2012 ALH Group contributed $161,000 to “responsible gambling awareness programs”. Again, a seemingly big number. Yet it’s only $13 for each of Woolworths’ 12,000 machines. Each machine generates an average $55,000 profit a year (more on that later), so the impact of the $13, on either revenue or awareness, is minimal.

The GetUp! Campaign to set limits on the Woolworths machines failed for being too ambitious – policy changes are one thing, constitutional changes another – though there are reasons for the GetUp! tactical choice. For now, though, it seems problem gambling remains other people’s problems.

Earning trust

Which takes us back to trust, the first of the four themes in the Woolworths’ report. It’s a theme dominated by responsible supply chains and service. The opening graphic is a nice clear capture (tall red capitals excepted) of its goals and progress, including where Woolworths has ‘more to do’. This is good housekeeping – it’s fair to say that the modern consumer expects to buy goods from a grocery giant that are produced with some care. Woolworths is only starting the journey compared to some European chains, but it’s a start.

Its auditing of suppliers for human rights issues is as comprehensive as could be expected, though the results are shown for 2012 only. If Woolworths audited only two-thirds of its suppliers, and 54% of them were only conditionally approved, we don’t know if that’s better or worse than last year.

Is the preference for free-range chooks and eggs one driven by concern for chook welfare, or the quality of the produce? I’m never sure. Either way, the trend to free-range among consumers is strong, now reaching 14% of chook-meat and 33% of eggs.

Woolworths is pushing to certify that its groceries, fish products, paper and wood products are appropriately sustainable. If, as it seems, the report is as much for marketing and employee use as for ESG[3] investment analysts, it would be helpful to say what certified sustainable timber means, rather than just refer to the certifying website. But 100% of the paper it sells and uses is so certified, which is a good thing.

An opening highlight is that Woolworths has used 387 tonnes of sustainably-source palm oil, another big number. We don’t find out until six pages later that Woolworths used 4,350 tonnes in all.

On responsible service (of alcohol, food and gaming), there are some sound initiatives, particularly around advertising and the display of foods. Unlike responsible service leaders like Diageo, for example, there are no data on these issues, just commitments.

Serving community

Woolworths has a broad program for supporting local communities. It’s one of those areas where a large corporate is asked to be all things to all people. Woolworths touches industries and communities more than most, so its stakeholders have high expectations. Just the strategic priorities for the supermarkets business are incredibly broad: “supporting local communities, health and food, supporting Australian farming, helping Australians with sustainable choices and supporting children’s health”. If you sense there is some overlap here with ‘earning trust’, you’re probably right.

There is sensible alignment, however, between Woolworths’ other businesses and the social issues they take an interest in: children’s health for BigW, Legacy for Woolworths’ Liquor Group, safe driving for Woolworths Petrol, and Men’s Sheds for Masters Home Improvements. It’s unclear whether employees are engaged in these causes, or whether the support is mainly financial.

The section opens with another big number – the $36.6m Woolworths spent this year on community causes. Of that figure, $10m is management time, $3.2m is ‘in-kind’ and $14.6m is ‘leverage’, which is left undefined. The remaining $8.6m in cash is 0.015% of its $55.1bn group sales, 0.26% of EBIT, or $44 for each of its 195,000 employees. It is a large amount, to be sure, but is less than other companies of similar size in many sectors.

These amounts would include the $4.5m in Woolworths ‘donations’ to schools under its Earn and Learn program. This and its Coles equivalent hit the public school system with some force last year. Parents felt obliged to keep ticker-tape-parade quantities of dockets, while schools were carpeted with program posters and docket bins.

Over 6,900 schools shared in the spoils. That’s $652 for each school – not a lot at all for a lot of exposure, and far less than many local small businesses happily donate without fanfare. Some corporate responsibility initiatives might better be funded by the marketing budget.

Woolworths’ fresh food future program is well worth supporting and encouraging. It properly acknowledges the global need for more sustainable and innovative farming practices, supports the Australian industry in that direction, and aligns well with Woolworths’ fresh branding. Its financial support of less than $2m a year is spread quite thinly, but is well leveraged through a range of industry scholarship, productivity and rural leadership partners. Its management of supply chain issues will determine whether Woolworths rural relationships are where they should be.

Using resources wisely

Woolworths may still be getting a clear handle on its environmental measures, as they are somewhat confusing in the report.

Let’s take energy and carbon emissions first. The top of the report highlights that Woolworths has achieved a “16.5% reduction in carbon emissions compared to our original projected growth emissions for 2012”, which sounds good.  But the report’s environment section opens with a carbon intensity (tonnes CO₂e/$mEBIT) that has risen 10% in 2012, which sounds bad. Then two pages later, we see that actual emissions from facilities fell in 2012, which sounds good. What is going on?

The problems are with the relativities, which are the core of sustainability reports. That Woolworths is 16.5% below its projected emissions sounds good, until we discover that the projections were made in 2006 based on different assumptions of energy efficiency and low-emission technologies. But it’s still commendable, as total emissions are falling.

Measuring carbon against earnings (tCO2e/$EBIT) confuses the issue again. Say Woolworths generates 1 tonne of carbon in selling 1000 boxes of pasta. If it does so at a good profit, the carbon intensity will also look good. If the profit is smaller, for reasons unrelated to carbon, the carbon intensity will look bad. Same pasta, same business, but different result. Because $EBIT is the denominator in the equation, changes in earnings will shift the numbers more than a change in emissions.

Indeed, a like-for-like measure such as transport emissions per carton moved does show valuable improvement. Relative emissions have fallen by 25.6% (we’re not told since when), even though the fleet is 29% bigger than projected. It’s not exactly clear what “99.8% of the Australian fleet has converted to the new fleet of diesel and hybrid vehicles” means, but it is paying dividends in lower costs and emissions.

There have been some strong performances in waste, including re-usable crates and initiatives to get baseline data on packaging, particularly for Woollies’ own brand products. Overall waste to landfill fell by 16.7% in the year, after a similar fall the previous year.

Instead of highlighting these, though, Woollies chose to go with Mr Big. It diverted

1,678 tonnes of food waste from landfill into feedstock, and 1,664 tonnes as food donations to Foodbank. We discover some pages later, however, that the food donations make up just 0.6% of Woolworths’ waste. Supermarket waste to landfill makes up 37.6%, and there are no trends offered. This suggests that Woolworths is sending 96,000 tonnes to landfill, somewhat over-shadowing the food diversion highlight.

The best retail team

The last section of the report is a comprehensive account of how Woolworths is developing its people to be a world-class retail team. Unlike the other sections, its opening veers away from the usual metrics for responsibility reports, stating the sole goal of “Combine the best retail talent in Australia with the best in the world”. Employee recruitment, development and engagement then feature. It is unclear whether the global talent is being ‘combined’ in Australia and New Zealand, whether New Zealand is the global talent, or whether Woolworths is set to embark on an as-yet unannounced global expansion.

Once it returns to more traditional responsibility measures, the report is comprehensive, though trends in data tables are left unexplained and so possibly misunderstood.

Woolworths is a good guide to diversity progress in corporate Australia – everyone’s a customer, so it may makes sense for the workforce to reflect that. More than most firms, it does. As with most firms, though, female representation is light in the more senior ranks: only 27-28% of senior management are women, compared to 40% of general management and over 50% of office and store employees. Executive appointments in 2012 will recover some lost ground: about 40% were female and about 40% were internal appointments (though it could be the same 40%). However, over two-thirds of employees over 40 years of age are women, an imbalance that makes the senior management statistics look a little weaker.

Woolworths seems to have been very slow to move on two areas that other firms have found very rewarding: employee engagement and indigenous employees. Woolworths is measuring engagement for the first time in 2012. It launched its first indigenous employee initiative in June 2011. As a result, the number of indigenous employees rose from 615 to 949 in the year. Retention of those employees remains a national problem to be solved, as Woolworths’ own figures attest: of 378 who commenced pre-employment training, 334 started, and 232 remained by year end.

As with most of corporate Australia and New Zealand, regulation and better risk management have ratcheted down injury rates. The frequency of both staff and customer mishaps continues to fall, down by 20% over the last two years. However, we are left to wonder why the average hours lost as a result of an injury are trending upwards: are the injuries more serious, the treatments more comprehensive, or the rush to get back to work less intense? Likewise, the report tells us that the ‘occupational disease rate’ has gone up by 17% over two years, without telling us why, nor indeed what an occupational disease is. Safe Work Australia defines it as an acute, recurring or chronic health problem caused or aggravated by work conditions or practices.

Unlikely bedfellows

Poker machines and groceries seem odd companions in a company whose aim is to become the most trusted pan-Tasman brand. Many institutional investors would prefer a straight investment in groceries and retail, whether or not they have mandate constraints on investments in gambling. Certainly the index-makers would. But for a final perspective on Woolworths’ responsibility report, it is useful to read it with its year-end financial reports and presentations.[4]

Woolworths’ Australian retail business earned $2.9 billion, or 6.65% of sales, at a gross margin of 24.8%. But future growth may be limited, given Woollies’ large share of a mature market.

On the other hand, Woollies has just 4% of the Australian pub market, with little corporate competition. Its hotel earnings are small, but are ‘quality’: a gross margin of 81% and earnings 16.25% of sales.

The hotel business had sales of $1.2bn, and earnings of $196m. The published accounts do not report how much of this income is from poker machines. Poker machines clear an average $55,000 per year in Australia. If Woolworths’ 12,000 poker machines earn even close to that average, they would earn the company over $500m annually. Without them, the hotel business is a far less attractive proposition.

With them, however, a large shadow is cast over a largely responsible company, and its reporting.

© 2012 Dowse CSP, partners on corporate sustainability, ESG investing and related actions and communication: www.dowse-csp.com.au.