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Woolworths Group has been under serious scrutiny in the public eye and behind the door of shareholder meetings for more than a few months. The company and its pokies have been the target of much consternation, most notably Woolworths’s ties to the Australian Leisure and Hospitality Group (ALH).

Woolworths Group Investigation

Internal investigations have been ongoing since 2018. That’s when a whistleblower alleged that staff at Woolworths supermarkets across nearly two dozen locations had been offering special service, including free drinks to gambling customers in order to keep them at the slot machines longer.

Woolworths Gambling Scandal

ALH Group, the company that operates tens of thousands of pokies and of which Woolworths owns 75%, admitted to mismanagement. Some employees were fired, others were disciplined, and new training was offered to all staff.

But it wasn’t enough.

One of Woolworths’ primary shareholders, Perpetual Investments, pressured the company to remove all pokies from Woolworths-associated establishments. The investment firm called the pokies a threat to Woolworths’ entire brand and reputation.

Another investigation ensued due to complaints stemming from 2017. The New South Wales Independent Liquor and Gaming Authority subsequently stepped in to conduct its own investigation. It was a far-reaching and comprehensive one that inquired about pokies at numerous venues.

Big Woolworths Group Decision

The pressure did work.

Reuters reported last week that Woolworths will combine its drinks and pubs units as a spin-off and focus more intently on its core business.

In what it is calling a demerger, the company will offer a standalone operator called Endeavor Group for investment that will operate 1,500 liquor stores and 327 pubs. That figure represents approximately 30% of its business. The worth of that business will be approximately A$10 billion. The purpose is to reduce Woolworths’ reliance on slot machine revenue, resorting back to the family-focussed brand it once was.

The company also has the option to pursue a “value accretive alternative,” such as a trade sale, which would happen – if pursued – sometime in 2020.Woolworths CEO Brad Banducci said:

“We did it to unlock potential, not to avoid issues.” He added that the intention is to simplify both businesses to better compete with competition from internet retailers. “There will be more simplicity, which will lead to more agility”.

Banducci claims the move has nothing to do with investor concerns over gambling. Or the NSW Liquor and Gaming Authority investigation, for that matter. He says those issues have been and continue to be addressed responsibly and within the inner workings of the business.

Problem Not Solved?

Many analysts do not believe the move is enough. They also believe investors will not respond in the way Woolworths is likely hoping they will. Clime Asset Management Portfolio Manager David Walker noted: “A significant proportion of the world’s funds under management that would invest in this stock is concerned about its ownership of hotels and poker machines. Whether that’s the intention or not, it just removes a hurdle”.

ABC News reported that the move is a start in the eyes of the Alliance for Gambling Reform. This is one of the primary organizations pushing for changes at Woolworths. Spokesperson Stephen Mayne, who is also a shareholder activist, said: “This is a globally significant development for the gambling divestment movement, not until Rio Tinto getting out of coal.”

Mayne pointed to statistics that show Australians as the world’s biggest gamblers. They reportedly lose $24 billion each year in various forms of gambling. He said Woolworths “is responsible for about $1.5 billion of this through its 12,000 gaming machines in 286 hotels across Australia.”

Market Approves

The Australian Securities Exchange tells a different story than wary investors. Stock prices have gone up consistently, especially so after the news of the demerger.

The price dipped as low as $28.35 in February, before briefly climbing up to $34.82 in May. However, Woolworths Group Limited jumped from $32.92 to $34.03 upon this announcement. Since July 2, it has not dipped below $33.90.

It is unclear as to how much longer the NSW Liquor and Gaming Authority will continue its investigation. When and if it releases its results, this may prompt more action from Woolworths. Still, the demerger might be enough to satisfy most investors and much of the general public.

If the stock market response is any indication, Woolworths made a smart move. It should thus keep its pokies and groceries separate and apart going forward.

See the destruction of Aussie lives brought about by the pokie plague in Australia

Pokies protest outside the Woolworths AGM in 2015. Picture: Stephen CooperSource:News Corp Australia

Supermarket giant Woolworths is going to combine its liquor and hospitality businesses before divesting them in the next financial year.

Woolworths Gaborone

Woolies will merge Endeavour Drinks, which includes Dan Murphy’s and BWS, with the hotels and gaming-focused ALH Group by the end of the calendar year to create a stand-alone business called Endeavour Group.

“Following the combination, Woolworths Group intends to pursue a separation of the business through a demerger or other value-accretive alternative … in calendar year 2020,” the company said on Wednesday.

Woolworths did not say whether it plans to sell or list the new business, although it does expect to retain a minority shareholding whichever route it takes.

Wesfarmers pursued the latter option when it divested supermarket chain Coles last year, retaining a 15 per cent stake as Woolworths’ fierce rival listed on the ASX.

Woolworths Gambling Winnings

Woolworths, which has already offloaded its petrol business, said the separation will create a simplified structure and a greater focus on its core food and everyday needs markets.

“The board believes that a merger of Endeavour Drinks and ALH followed by a separation, is in shareholders’ best interests and will benefit customers and team members of both groups,” Woolworths chairman Gordon Cairns said.

Endeavour Drinks and ALH together were responsible for more than 30 per cent of Woolworths’ earnings in the last financial year, with Endeavour Drinks the group’s second-largest contributor after Australian supermarkets in terms of both sales and earnings.

The integrated Endeavour Group will comprise of more than 1500 BWS and Dan Murphy’s retail drinks outlets and 327 ALH hotels and neighbourhood pubs.

Other businesses to be included in the merger include Endeavour Drinks’ own and exclusive brands business, Pinnacle Drinks; Langton’s, a fine wine auction and retail business; Cellarmasters, a wine subscription business; and an 8.7 per cent stake in ALE Property Group.

Bruce Mathieson Group, the junior partner in the ALH joint venture that includes hotels and pokies, will swap its 25 per cent stake for a 14.6 per cent interest in the new Endeavour Group.