Plastic Bag Charge Slows Sales at Australian Grocery Giant

Australia's biggest grocer Woolworths Group flagged on Monday it had rapidly lost sales momentum after starting to charge shoppers for plastic bags, sending its shares lower.

The slowdown, combined with signs of a revival at major rival Coles, where bags are still free, signals a possible end to years of outsized growth at Woolworths, which has dropped prices heavily to win business, Reuters reported.

It also shows the financial cost of the backlash by Australia's customers against the move, with shoppers cutting purchases they could not carry home. Despite the so-called "bag rage", Woolworths has stood by the levy, betting opposition to it will be short-lived. A Reuters straw poll of shoppers outside a Woolworths Sydney city store found most supportive of the move, but it was an issue for a few.

"I know Coles are trying to keep their sales up and so if I didn't have a bag, I would go to Coles instead, especially if you're buying meat or something," shopper Anthony Woolcock said on his way out of the store.

Woolworths shares fell 3.5% at start of trading on Monday to a two-month low before erasing most of the losses to close down 0.6%, while the broader market rose 0.1%.

  Temporary Impact

"Although it is a temporary impact it's a slight negative—it's changing consumer behavior," said Jason Teh, Chief Investment Officer at fund manager Vertium Asset Management, which owns Woolworths shares.

Similar moves to curtail bag use, aimed at reducing waste and protecting the environment, have mostly proceeded without a hitch in some 60 countries, from France to Korea. But after Woolworths removed one-use bags on June 20, checkout staff reported abuse and angry customers vented online, with the outrage prompting the company to put off plans to charge $0.11 for reusable bags until July 8.

"In the early stages of the adjustment we did see our customers have slightly less items in their basket," Woolworths' Chief Executive Officer Brad Banducci said on a conference call, adding it also led to packing problems.

"Both of those issues we see falling away, quite frankly, at the moment... we see customers remembering to bring their bags," he said.

  Profits vs. Principles

Stuart Palmer, who heads ethics research at Australian Ethical, a pension fund that avoids investing in sectors such as coal, oil, tobacco and gambling, said the move did not amount to a tradeoff between profits and principles.

"People are seeing a company which is living its values around fresh food, which requires good environmental conditions in which to catch fish and grow food," Palmer said, adding that sales lost due to the levy will probably bounce back.

"I think that longer-term alignment between what they've done and their brand and their future profitability is pretty strong."

Coles, which has ended one-use bags but continues to hand out reusable bags for free, last week reported no effect of the change on its sales, which are gaining just as Woolworths' have faltered.