Woolworths chairman Gordon Cairns says Australia's largest retailer is paying the price for jacking up prices to meet profit targets but is optimistic it will eventually regain the trust of customers.
"The reason we got ourselves into the position we did we were trying to manage to a profit number and not manage to what the customer wanted," Mr Cairns told shareholders at the annual meeting in Sydney on Thursday.
"We jacked the prices up so it was uncompetitive and we reduced labour in the stores – you can't run a supermarket business competitively if you jack up prices and reduce service," he said.
Woolworths' response to Aldi had also been "somewhat lacksadaisical" and it had failed to take the discounter seriously.
However, Woolworths had learnt its lesson after reporting a 40 per cent fall in supermarket earnings last year and was confident that after investing more than $1 billion into prices and service over the last 18 months, and responding to Aldi by improving its private label offer, it would win back customers.
"'We are feeling optimistic about the future – that's not blind optimism, that's based on fact," said Mr Cairns.
"I agree we lost the trust of our customers, we abused it. It's very easy to lose it but very difficult to get it back. That's why it will take three to five years."
Mr Cairns defended Woolworths' decision to challenge Australian Competition and Consumer Commission charges that it acted unconscionably towards suppliers, but said the retailer had changed its ways.
Mr Cairns said the group had strong legal advice that its behaviour towards suppliers two years ago, when Woolworths demanded retrospective payments to plug a hole in profits, was not unconscionable.
"We defended it because our view was we were not guilty of unconscionable conduct but we'll hold ourselves going forward to higher standards."
Woolworths faces fines of up to $30 million and may have to refund the $18 million it successfully extracted from suppliers if the court finds against the retailer. Some Woolworths shareholders are now urging the board to claw back millions of dollars in executive bonuses if it loses the case.
Mr Cairns again ruled out selling loss-making discount department store chain Big W until profits had been restored to levels two or three years ago, but confirmed that Woolworths wanted to exit petrol retailing.
"If we try to sell it now we'd probably get nothing for it – it would be better for shareholders if we tried to improve it and then see what options we have available to us," he said.
Speculation has grown that Woolworths will seek to sell Big W sooner rather than later following the surprise resignation last week of Big W chief Sally Macdonald after just 10 months at the helm.
Mr Cairns said the turnaround of Big W had been harder than anticipated and admitted that Woolworths had allowed Big W to deteriorate.
"The optimum solution is to give ourselves the opportunity to turn it around - if we can, that increases optionality," he told journalists after the AGM.
"We've give supermarkets three to five years with proof points along the way, we have the same timetable for BIG W with the proof points, so we won't have to wait until five years to see whether it's on track or off track."
Woolworths has been in talks to sell its petrol business since September and is believed to have recently started exclusive negotiations with BP.
Mr Cairns declined to give an update on the negotiations but said Woolworths no longer wanted to be in petrol retailing.
"We are a supermarket retailer who wants to be in convenience stores as well but we don't have to be in petrol - it's a question of where your core competencies are," he said. "Our core competencies are not in retailing petrol."
Responding to questions about the mooted entry of US online retail juggernaut Amazon next year, Mr Cairns said Woolworths had established a separate unit six months ago to review competitive threats from new players such as Amazon and online food retailers.
The unit is run by Amanda Bardwell, the former head of Woolworths' online liquor operations.
One of Woolworths' priorities was to improve the performance of its home delivery business, which came under fire from one disgruntled shareholder.
"That's a key plank in the counter competitive strategy for Amazon - we have to have a great home delivery business," Mr Cairns told journalists. "There's an opportunity to do what we do better."
Woolworths did not have any intel on Amazon's plans, Mr Cairns said, "but you always have to assume the worst, assume that they'll come and plan for it rather than wake up one day and say 'oh my God they're here.'"
Woolworths' US-based non-executive director Kathee Tesija, who is assisting Ms Bardwell, said Amazon was a strong competitor online, where Woolworths "had a lot of work to do," but could not match Woolworths' brick and mortar network.
"They're a formidable competitor ... they're somebody we should take seriously," Ms Tesija said.
Industry players expect the online retailer to launch Amazon Prime and Prime Now in the second half of 2017 and Amazon Fresh, its online grocery delivery service, in a year or two.
Woolworths avoided a first strike against its remuneration report, with only 2.8 per cent of shares voted against the resolution.
The shares rose 10¢ to $23.50.
