Coles Group Ltd. (OTCPK:CLEGF) H1 2024 Earnings Conference Call February 26, 2024 6:00 PM ET
Company Participants
Leah Weckert – Chief Executive Officer
Charlie Elias – Chief Financial Officer
Matt Swindells – Chief Operating Officer & Sustainability
Ben Hassing – Chief Digital Officer
Michael Courtney – Chief Executive of Liquor
Conference Call Participants
Ross Curran – Macquarie
Tom Kierath – Barrenjoey
Michael Simotas – Jefferies
David Errington – Bank of America
Craig Woolford – MST Marquee
Ben Gilbert – Jarden
Adrian Lemme – Citi
Shaun Cousins – UBS
Lisa Deng – Goldman Sachs
Bryan Raymond – JPMorgan
Phil Kimber – E&P Capital
Operator
Thank you for standing by and welcome to the Coles Group FY ’24 Half Year Results Analyst Briefing. [Operator Instructions]
I would now like to hand the conference over to Leah Weckert, Coles Group’s CEO. Please go ahead.
Leah Weckert
Good morning. It’s great to be taking you through our first half results this morning. I’m joined in the room today by Charlie Elias, our CFO; Matt Swindells, our Chief Operations and Sustainability Officer; Ben Hassing, our Chief Digital Officer; and Michael Courtney, our Chief Executive of Liquor.
Before I begin, I’d like to acknowledge the traditional custodians of the land on which we meet today, the Wurundjeri people of the Kulin Nation. We acknowledge their strength and resilience and pay our respects to their Elders past, present and emerging.
I’m now on Slide 3. As I reflect on the last 6 months, I’m pleased to report that we’ve made good progress against our immediate strategic priorities. You may recall at our full year results, so I included a slide on my immediate areas of focus around availability, loss and quality, delivering value to customers, Simplify and Save to Invest program, as well as the customer experience. We’ve made good progress in each of these areas and I’ll cover these up in my presentation today.
We also made significant investments in value during the half at a time when we know the financial pressures many of our customers are facing. Deep value investments together with improvements in availability underpinned volume growth in our supermarkets business. We also continue to innovate and introduce new products in our exclusive brand portfolios across both supermarkets and liquor which is a key element of our value proposition. We experienced strong growth in ecommerce, digital and loyalty, with ecommerce revenue growth of 29.2% in supermarkets and 14.9% in liquor, with 42% growth in the Coles active users and the Flybuys active membership grew by 9.5%.
Finally, an area that we have faced head on is loss and have made solid progress across both ways to markdown and stock loss in the half. When we spoke at the full year results, I said that we would roll out loss technology solutions to more than 250 stores by the end of this December and we have done so. We now have Skip Scan in 305 stores and Smart Gates in 267 stores. We also implemented other operational initiatives to combat loss and I’ll take you through these later in the presentation.
Moving now on to the financial highlights on Slide 4. At a Group level, Group EBIT from continuing operations increased by 0.6% to $1.1 billion and impact from continuing operations decreased by 3.6% to $594 million. On an underlying basis which adjusts to the major project implementation costs relating to our 2 ADCs and 2 CFCs, underlying group EBIT from continuing operations increased by 3.3% to $1.1 billion and underlying impact from continuing operations was broadly flat at $626 million. We reported operating cash flow of $1.9 billion with a cash realisation ratio of 102%. For our shareholders, the Board has declared an interim dividend of $0.36 cents per share, fully franked which is stable on the prior corresponding periods.
Moving now Slide 5. Delivering a solid set of financial results like these, allows us to provide sustainable benefits to all of our stakeholders. At a time when supermarkets are under increased scrutiny, I did want to take a few moments to highlight what that means for the millions of Australians who are touched by Coles. Whether they are our customer, our buyer, one of our team members, a community partner or a shareholder, we are working hard to deliver good outcomes across the board. We have 850 supermarkets in all parts of Australia from Kununurra to Whyalla and Port Douglas. We are committed to delivering choice and value to the millions of customers who visit our stores.
We, of course, could not do this without the more than 8,000 suppliers that deliver more than 40,000 product lines to our stores and support us through the services they provide. We know the importance of having strong relationships with our suppliers. We will continue to work with them to deliver value to our customers and we will continue to support them, including through the Coles Nurture Fund.
Having a profitable business also allows us to employ our more than 120,000 team members across Australia. We are proud to be one of the largest private sector employees in Australia and extremely proud of [indiscernible]. We also know that we have an important part in the communities in which we operate in. We continue to make contributions to community organizations such as Red Card and Little Athletics and support important national fundraising campaigns, including FightMND in November. We also have a long-standing partnership with food rescue organizations, SecondBite and Foodbank and in the last 6 months alone provided the equivalent of 21 million meals to these organizations.
Finally, our shareholders. We know delivering a sustainable dividend contributes to the financial security of the more than 440,000 direct shareholders and the millions more that would hold Coles shares through their superannuation funds. We are working to get the balance right of delivering for all of our stakeholders but we do need to deliver sustainable financial results to be able to deliver on these commitments and I’m confident we will continue to do so.
Moving now to Slide 6. There’s no doubt that there are a number of industry dynamics at play. We are well positioned to benefit from Australia’s high population growth as well as the shift to in-home consumption. While we are facing cost pressures, we are taking measures to limit the inflationary impacts on our customers as much as possible. This can be seen in the second chart with 5-year food CPI growth in Australia well below other countries who are clearly facing the same inflationary challenges we have here.
Moving on to the next slide now which showcases how we are delivering value for our customers. We know that we need to focus on investing in and delivering value to remain relevant to our customers at this time. We deliver value in many ways, including through our exclusive brands portfolio in both supermarkets and liquor, our weekly specials, offers through our Flybuys loyalty program and, of course, the Big Red Hand which is synonymous with value.
During the half, we launched our Great Value, Hands Down campaign featuring the Big Red Hand with prices dropped on hundreds of products. This included through our Christmas range where we dropped the price on Christmas products, helping families make the most of their holiday budget.
During the half, we also launched the Coles Simply range, where we redesigned the packaging of many of our value Own Brand products. The packaging is bright and yellow which we know is a beacon for our lower-priced products. And while the actual products and recipes have not changed, they have a new look, so our customers can easily identify key Own Brand value products. At the end of December, we had over 45 Coles Simply products and are continuing to introduce more and more.
In addition to great value, we are also working to deliver great quality products, particularly in Fresh, where we have refocused our quality controls on stock we receive into the DC to improve the quality and home life for customers. Our fresh produce easy ordering is also improving availability, freshness and waste and markdown across all of our stores. And this has all been showcased through our Great Length for Quality campaign which launched in the half, demonstrating the exceptional partnerships we have with our farmers that grow the fresh produce for our customers.
Moving now to Slide 8. We are also seeing how our Exclusive range is resonating with customers, particularly in the current economic environment. In our Exclusive to Coles range, we have seen revenue growth 2 times that of proprietary and a similar level in our exclusive liquor brands portfolio. Fairly, the volume growth and sales revenue growth has also been strong and outperforming proprietary brands. This has been delivered through our extensive range with more than 6,000 Exclusive to Coles and 1,900 ELB products. In the half alone, we introduced more than 500 new Exclusive to Coles and almost 200 ELB products. These products are at all price points.
At the top tier for those customers that we see may not want to eat out of restaurants but still want to treat themselves, we have our Coles Finest range which saw revenue growth of 22% in the half. And while it is early days, we have seen a really positive customer response and volume growth in our Coles Simply range. Coles was also awarded the most — was the most awarded I should say, supermarket for Own Brand products at the prestigious 2024 Product of the Year awards. With 19 awards across a range of categories, including fresh meat, bakery, pantry and pet food, Coles was the most awarded retailer for the fourth year in a row.
Moving now to Slide 9. Another area where we continue to invest is in our digital channels and we are seeing strong financial results with ecommerce revenue growth of 29.2% in supermarkets and a penetration of 9.1% and in liquor ecommerce revenue growth of 14.9%. We have enhanced the customer experience with improved shopping features, including the introduction of Shoppable Recipes and Self-Serve Refunds for missing or damaged items. Importantly, we are seeing results with significant uplift in NPS across both home delivery and Click&Collect with gains in key metrics, including ease of shop and ease of checkout. Coles 360, our Retail Media business, continues to build momentum with media income increasing by 29% in the half.
Finally, on Flybuys. We have seen record engagement and participation as more customers seek value through reward programs and loyalty points. The swipe rate increased by 7.8% on the prior corresponding period. Unique customers redeeming points more than doubled and we were pleased that Flybuys was awarded the Most Satisfied Customers Award by Canstar for award programs as voted by Australian consumers.
Moving now to Slide 10. There’s no doubt that the results across our digital platforms as well as in-store were supported by improvements in availability. We have been very upfront in the past with availability challenges and this remains a key area of focus for me. Our aim has been to restore availability to pre-COVID levels and we’re getting there. Availability metrics continue to improve with delivered in full and delivered in full on time increasing to 96% and 92% of pre-COVID ’19 levels, respectively.
Our new Simplify and Safe to Invest program also delivered benefits of approximately $90 million in the half and helped to offset the cost inflation that we’re seeing in the business, particularly in wages and fuel costs. We’ve delivered a number of initiatives in the half. In stores, we are transforming the way we manage inventory across our network by removing non-value-added team member task, while optimizing availability for our customers.
In the meat department, store-specific ranging has enhanced in-store inventory processes, while also reducing our secondary handling of the products as we get them to shop [ph]. In supply chain, we continue to optimise transport routes and have also seen benefits from our faster pressure flows which is focused on improving product flow through the DCs and into stores, ensuring maximum freshness to customers. Finally, in ecommerce, artificial intelligence and technology automation continue to deliver call centre savings and improve system functionality and store mapping improved to pick efficiency [ph].
Moving now on to Slide 11. Operational and process initiatives were implemented across all stores to address stock loss and waste and markdowns, such as coaching and training to increase our team members’ capability. We have also accelerated range optimisation programs across high-risk use and increased our collaboration with police through the AURA program to identify and apprehend repeat offenders. We have also made improvements to the flow of our products through DCs to get products on shelf sooner for our customers, improving shelf life and waste and markdowns.
And as I said at the start of the presentation, we committed to roll out loss technology solutions to more than 250 stores by the end of December and we did. Skip Scan was in 305 stores and Smart Gates was in 267 stores at the end of December and the results from these stores has been positive. I also said that loss would be a headwind in the first half and it has been. Total loss represented an approximately 50 basis point headwind in the first half compared to the prior corresponding period. I also said that loss would be a tailwind in the second half. And pleasingly, we saw an improved trajectory throughout the second quarter on our loss rate with further improvements expected now in the second half which we are already seeing. We are not there yet and we know that continuing to address stock loss is a significant opportunity for us but the signs are positive and we’re on the right path to continue to turn stock loss around.
Turning now to Page 12. Before handing over to Charlie, I’d just like to briefly cover off a few slides on our strategy and the progress we’ve made over the last 6 months. You’ll recognize the boxes on the right as my immediate focus areas from our FY ’23 results. I’ll not cover all the points here because I’ve discussed many through the presentation already but it’s right to say that I’m pleased with the progress we’ve made but we know there’s a lot more to do.
Moving now to Slide 13. In the important area of ESG, we also continue to make good progress in the key areas of focus, including emissions, packaging, the community and diversity and inclusion. Some of the great work completed over the last half includes the partnership we entered into with Origin Energy to install solar panels on our 100 supermarkets and liquor stores. This is helping to reduce each participating store’s electricity used from the grid by approximately 20% on average. We also expanded the use of our methane reducing feed supplement, Bovaer, with 3 Coles Finest Certified Carbon Neutral Beef range suppliers, now including it into their feeding programs.
In South Australia, we rolled out certified compostable bags in the fruit and veg section, removing 28 million traditional single-use plastic bags from production in 1 year. We were recognized by the 2023 GivingLarge Report as the top corporate giver as a percentage of profit for the fourth year in a row and Coles was ranked fourth in the World Benchmarking Alliance’s Gender Benchmark for the food and agricultural sector. 48 food and agricultural companies were assessed as part of this benchmark, with Coles ranking 4 behind the Hershey Company, Diageo and Nestle.
Finally, it is no secret that we are operating in a heightened regulatory environment with a number of regulatory reviews underway, including the Senate Inquiry. I look forward to speaking further at this inquiry to demonstrate how Coles is delivering value to our customers.
And with that, I will now hand over to Charlie, who will take us through the financial results in more detail.
Charlie Elias
Great. Thank you, Leah and good morning, everyone. If I turn to the group first half ’24 results on Slide 15. Firstly, I’ll talk to the results on a continuing operations basis.
Sales revenue increased by 6.8% to $22.2 billion and underlying EBITDA increased by 4.1% and underlying EBIT increased by 3.3%. As Leah mentioned earlier, earnings on an underlying basis adjusts for major project implementation costs relating to our ADCs and CFCs only. Underlying EBITDA and EBIT was supported by continuing sales momentum, improvements in gross margin as well as a Simplify and Save to Invest benefits of approximately $90 million which helped offset cost inflation and headwinds of loss.
Reported net profit after tax declined by 3.6% and basic earnings per share declined by 3.9% to $0.445. On a continuing and discontinued operations basis, that is including Express segment, net profit after tax declined by 8.4% and basic earnings per share declined by 8.5% to 44.2%. The Board has declared a fully franked interim dividend of $0.36 per share, stable compared to the prior corresponding period.
If I now move to the Supers and Liquor segment financials on Slide 16. Starting with supermarkets, strong sales growth — sales increased by 4.9%, underpinned by positive volume growth. The strong sales growth and positive volumes was supported by improved availability, the success execution of key seasonal events, including Christmas, Halloween and Father’s Day and a positive customer response to the Curtis Stone Barbecue and continuity campaign.
Investment and value continue to resonate with customers with Exclusive to Coles sales growth of 7.6%. This included a 13.8% increase in packaged goods as customers increasingly focus on value for money. Ecommerce sales were up by 29.2% with penetration at 9.1%, driven by strong performance of seasonal events, particularly Christmas and Black Friday, improvements in availability, enhancements to the customer experience and continued network expansion.
Underlying EBIT increased by 4.5% with underlying gross margin increasing by 7 basis points as sales growth, range and promotional optimization initiatives and Simplify and Save benefits offset loss and inflationary pressures. CODB as a percentage of sales were broadly flat if you exclude implementation OpEx and D&A.
In liquor, sales increased by 1.8% as customers sought value to manage their overall spend. Transactions continue to grow with modest growth in spend per basket, while average units per basket were down. Delivering quality and value to customers through our exclusive liquor brand portfolio continued to be a key focus. Ecommerce sales increased by 14.9%, with penetration at 6.4%, underpinned by continued strength in the on-demand channel. EBIT growth of 5% reflected favorable sales mix and improved operating leverage across the business.
Turning now to operating cash flow on Slide 17. Operating cash flow, excluding interest and tax, that was approximately — was $1.9 billion with cash realisation of 102%. Within cash flows, net cash flow before financing activities of $806 million decreased by $209 million compared to the prior corresponding period, largely as a result of the timing of period-end payments impacting operating cash flow, coupled with higher capital expenditure. Inventory and trade payable days stayed relatively stable compared to the prior corresponding period.
Now, I’ll take you through CapEx on Slide 18. Gross operating capital expenditure on an accrued basis was $753 million, an increase of $130 million compared to the prior corresponding period. Within supermarkets, capital expenditure increased largely to the investments in new stores and renewals, with 5 new supermarkets and 11 renewals completed during the half and further investment in our CFCs. Efficiency initiatives also contributed to the increase with our investments in the ADCs as well as stock loss initiatives.
In liquor, capital expenditure was driven by new store openings and renewals with 10 new liquor stores and 71 renewals completed as well as investments in core IT systems. Coles continued to optimise its property portfolio and net property capital expenditure declining by $2 million compared to the prior corresponding period as higher property investments, divestments in the half offset higher property acquisitions and development, resulting in net property divestments of $71 million.
If we turn to the balance sheet on Slide 19. As at 31 December, we reported negative working capital of $1.6 billion, capital employed of approximately $11.2 billion and net assets of over $3.5 billion. We maintain a balance sheet strong with investment-grade metrics which provides flexibility for future growth. Working capital decreased by $93 million compared to 25th June with higher inventory balances, largely driven by the seasonal build of inventory more than offset by higher trade payables also impacted by the seasonal build and New Year trading activity falling at the end of the half period.
Property, plant and equipment of $5.3 billion, increased by $267 million compared to the 25th June, in line with our increase in capital expenditure. Cash and cash equivalents increased to $1.1 billion and total debt to $1.7 billion, largely as a result of the issuance of the AUD600 million medium-term notes, comprising $350 million of 7-year notes and $250 million 10-year notes.
If we now turn to capital management on Slide 20. We’ve extended our debt maturity profile and continue to make access to diversify funding sources. We do not have any debt maturing until FY ’26. At the half year-end, Coles average maturity of drawn debt was 6.1 years with undrawn facilities of $2.4 billion. As I said earlier, Coles Board declared a fully franked interim dividend of $0.36 per share with a payment date on the 27th of March. We retain our existing annual dividend payout ratio target of 80% to 90% franked to the maximum extent possible.
Finally, we have retained headroom within our rating agency credit metrics and a strong balance sheet to support growth initiatives with our current published credit ratings of BBB-plus with S&P Global and Baa1 with Moody’s.
I’ll now hand it back to Leah to take us through the concluding comments and outlook.
Leah Weckert
Thanks, Charlie. So I’m going to turn now to the outlook on Slide 28. In the first 8 weeks of the third quarter, supermarket sales revenue grew by 4.9%. This was underpinned by volume growth from strong execution of our value campaigns and improvements in availability compared to last year. Pleasingly, for customers, we’re also seeing deflation in fresh produce and meat and continued moderation of inflation in package and dairy.
Operational and process initiatives together with our loss technology solutions have started to deliver positive results this quarter with our total loss rate now at improved position compared to last year — this time last year and we expect to continue to see progressive improvements across the half. Underlying cost inflation, particularly wage inflation, remains and we will continue to work to offset this through our Simplify and Save to Invest program.
Now, turning to liquor. In the first 8 weeks of the third quarter, liquor sales revenue declined by 2.2% as reduced discretionary spending influenced shopping behaviors. Our focus for the half will be on inspiring customers, ensuring we’ve got a strong value proposition and leveraging our integrated food and liquor businesses to deliver long-term benefits to the group.
I’m also excited that we have some key milestones for our major infrastructure projects coming up in the next 12 months. These projects, along with the investments that we’ve been making in our digital assets and our stores, will improve efficiency and help to create a differentiated service offering for our customers which will establish the foundation for our long-term sustainable growth.
And with that, I’ll now hand back to the operator for some Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] The first question today comes from Ross Curran from Macquarie.
Ross Curran
Congratulations on great results. I might just start with inflation. It seems that you’re seeing a different outcome on inflation relative to your peers. Are you able to just help us to unpack what you’re seeing there?
Leah Weckert
Obviously, I can’t talk to anyone else’s numbers but we certainly would look at ours in comparison to what we’re seeing with the ABS. So if I look at the ABS food and — sorry, food and non-alcoholic beverage number, it went down from 4.8% to — sorry, to 4.5%. So that was a 30 bps decline in inflation in the ABS numbers we saw.
If I then compare that to our supermarkets inflation, excluding tobacco, we moved from 3.1% to 2.7% which is a 40 bps decline. So it’s more or less in line with what we’ve seen on the ABS number. So I’d probably point to that as that gives us some confidence that our number is sort of more or less in line with what we’re seeing out there in the industry. In terms of what’s going on within the inflation number, so fresh produce is in deflation; so some of the key lines are capsicum, avocado, berries. We’ve got meat in deflation as well, so beef and lamb and we’ve made significant investments in both the beef and lamb categories as part of our value campaigns over the last 6 months.
And then the areas where we’re still seeing inflation, so bakery, dairy, grocery, they’re continuing to moderate. So quarter 1 to quarter 2, we are seeing declines in their inflation rate but it is still elevated above the total. And then tobacco obviously moved back into high single-digit inflation in Q2 with [indiscernible].
Ross Curran
Can I just sneak one quick one in about — you stressed trading. You said you’ve gone to positive unit volume growth. Can you give us a little bit more color? Is that keeping pace with population growth at the moment?
Leah Weckert
So we were a positive volume growth for H1 as well as for the first 8 weeks. So it’s just continuing the momentum that we’ve seen move in. I mean I think I’d say we’re very pleased with the volume growth that we’ve seen over the last few weeks. We do think that, that’s driven by a few things. First of all, is the value campaign. And I think the poster child [ph] in terms of the line for that has been the Lamb Loin Chops at $16 a kilo which we’ve just had an unbelievable customer reaction to just run out the door. That’s the cheapest price we’ve had on that product now for 4 years.
I think the other thing that is really helping the volume growth is availability. So if I rewind 12 months, we were having a conversation with you about chicken, eggs, water, soft drink at this time last year and a lot of the challenges that we had in that space from a materially better spot this year in terms of availability across the board versus where we were last year.
And then, I think the third contributor for me is that we are running a kids collectible this year with the Pokemon program. It is Pokemon Day today. So happy Pokemon Day, everyone. And last year we did not run a kids collectible but our major competitors did. And so I think that’s also impacting the results.
Operator
The next question comes from Tom Kierath from Barrenjoey.
Tom Kierath
Just got a couple of quick ones on loss. So you’re saying total loss includes stock loss, waste and markdowns and that was 50 bps. Can you maybe comment on what waste and markdown did within that 50 bps? Was that a headwind or a tailwind? And then I’ve just got one on the exit rate as well.
Leah Weckert
Yes. Sure. No problems, Tom. So, as we’ve talked about before, there’s two components that make up the total loss, waste to markdown which is our markdown on products approaching expiry and then the stuff we have to put in the bin because it can’t be sold and then the stock loss which is set. So our waste to markdown was flat to the pcp. So you can read that, that 50 basis points was all that.
Tom Kierath
And then, just on the exit rate of that. So you made obviously good progress throughout the half. Can you maybe comment on what the exit rate is on a year-on-year basis? Just to give us some context of how much progress has been made throughout the half?
Leah Weckert
Yes. So let me talk you through that in a little bit of a roundabout way. But we saw the number increase on stock loss for the first couple of months of the half. And then from October onwards, we saw improvements in the rate. And then when we got to January, the line for last year and the line of this year crossed. And so for January, we were in the position where the stock loss rate was better than January last year and we expect to continue to improve from that position. Now the differential between those 2 numbers of this year and last year is narrow at the moment. So it’s in a tailwind situation but the tailwind is small. In terms of what we saw last year in H2, we shared at the time that, that was a drag for a total loss of about 70 to 80 basis points. What we would expect to see for H2 this year is to recover around half of that in terms of the tailwind. Does that help?
Operator
The next question comes from Michael Simotas from Jefferies.
Michael Simotas
Happy Pokemon Day to you, Leah as well. Can I…
Leah Weckert
Michael, we had a joke at home about how many analysts on the call would actually be Pokemon fans but you can all tell me later.
Michael Simotas
I won’t say anymore. Can we talk a little bit more about your start to the third quarter? Because it really seems like you’ve opened up the gap to your major competitor there. You’ve given us some of the drivers. I’d just be interested in your view whether you think there’s been any customer response to various media and political commentary in recent times that’s benefited you?
Leah Weckert
We’ve spent a lot of time on picking the numbers. And the 3 drivers that I identified which are the value campaign, the better availability year-on-year and the collectible program and the fact that we’re running one this year and cycling a position where we did not have one last year. They are, by far and away the 3 major drivers here. Everything else is immaterial.
Michael Simotas
And then the second one for me on the ADC and the Ocado costs. So they’ve come in a bit lower than what most expected in the first half and you’ve pushed out some of the cost guidance. Can I just confirm that, that OpEx excludes D&A? And you previously guided to about $60 million D&A in ’24 combined across the 2 buckets. Has that changed in line with the delay into ’25? Or should we still think about that as the number for this year?
Charlie Elias
So let me just take you through the numbers. We guided at the beginning of the year that OpEx for the year would be about $150 million, excluding D&A which you’ve identified as $60 million across both programs. In relation to that spend, so the Witron ADCs were about half of that $150 million. Ocado was again half of that $150 million. We did guide though that 1/3 would be incurred in the first half and 2/3 incurred in the second half and that is the timing we do expect. So we do expect that to be incurred in the second half. You will note that we actually did lower though, our expectation for the full year of about $130 million [ph]. And that $20 million differential is purely just timing of some year-end payments.
And just to again give you further guidance in relation to that $20 million difference, it was 50-50 between Ocado and Witron. And for your modeling purposes, I’d suggest you just add that to the first half, the fiscal ’25 number. And you’ll note that we gave you the FY ’25 numbers at the previous results. In relation to depreciation, back to your earlier questions, we do still guide to $60 million depreciation across both of those programs for the year, for ’24.
Operator
The next question comes from David Errington from Bank of America.
David Errington
For the record, I’m not a Pokemon fan but I am a fan of dollars, cents and return on invested capital. So hopefully, it leads to those things. But anyway, on — following on from Tom Kierath’s question on the loss. On the back of the envelope numbers and please, if you can — again, getting back to dollars and cents, it seems that you’re at a run rate in that second half of an extra incremental, about $180 million of extra loss in that second half. You’re doing an extra — around about $100 million extra in this half. And in the second half, you’re basically saying if you get that back, you’re probably going to get it back to an incremental $80 million [ph] over and above what it was. So there should be a tailwind of a run rate of about $100 million in the second half on second half. Is that the sort of number — That’s the first part of the question, are they the sort of numbers that we’re looking at?
And then going into FY ’25, what sort of level can we expect from these investments? I mean, you had a bit of a look at this new technology. Can we get that back to where it was? Can it get back down to zero [ph]? Or do we just have to accept that it’s going to be at a certain level higher than what it was before? So I’ve thrown a lot of numbers at you there but if you could have a go at helping us because, geez, we’re talking big numbers here, I mean, we’re talking 10% of your profit here in the half. That’s a big number.
Leah Weckert
I agree with you, David. It’s a big problem to go after and solve which is why we have thrown so much focus at it over the last half. So the H2 number last year was — we said it was about 70 to 80 bps. So I think probably if you’re working on the order of $150 million or something like that, that’s in the order of what we were talking about a drag that we had in the P&L. And you’re right in saying that I’m saying the tailwind we should generate is about half that in H2 this year. Does that answer that question?
And then, I might have Matt talk to — and then, I’ll get to Matt to talk to what we’re doing in terms of the actions and whether we think it’s sustainable and will we invest more and can we get it down to the pre-COVID.
Matt Swindells
Yes, sure. Thanks, Leah. I think the — if you recall that time, I talked about 3 areas of focus and the technology rollout was only one of them. Notwithstanding delivering Skip Scan into 305 stores and Smart Gates in 267 stores before Christmas is probably one of the largest and fastest end-to-end programs I’ve ever been involved in, in Coles, credit to the team for delivering that. That technology has delivered in line with our anticipated benefits. And importantly, it is an immediate structural change. So when that technology goes in, you get an immediate effect. And we also see an improvement in some of our customer service experience, the number of interventions one way [ph] half. So it’s not just all about cost. There is an upside there, too. The technology was not the only area.
The second area we talked about was the end-to-end operational focus. And we’ve reviewed assortment, space, velocity of products. We’ve put more products through our faster fresh flows network and we’ve had a particular focus in [indiscernible] where we’ve gone really deep and changed everything from the end-to-end supply chain through to stores to see those benefits. That will continue. So we will go beyond the tech rollout and keep refining that process and keep reviewing everything in the end-to-end operation.
The third area that we talked to was in data and analytics. So how do we make sure we’ve got a radar that can tell us for both internal and external issues where our bigger problems are and we direct our loss teams towards solving those. And that’s really how you should think about material key, repeat vendors. And whilst the majority of our customers and store team members do the right thing, we also have 120,000 team members and there’s a radar across our operation to. You should think about the improvement as a curve. It takes time for these changes to then be executed and flow through to the results. But in no way are — the point where the technology rollout has been deployed, we will keep going. And the aim is absolutely set it back to those pre-COVID levels.
David Errington
What time frame [ph]?
Leah Weckert
Well, we don’t think we’re going to quite get there in H2.
Matt Swindells
No.
Leah Weckert
So there’s going to be more work to do on this going into FY ’25 but we see it’s a real opportunity to your point around big numbers that we can go after. We’ve got a strong plan around that.
David Errington
That’s encouraging that you think — I mean I was thinking at 26%, 27% but it’s encouraging to hear that you might be thinking you can get to pre-COVID levels by around that maybe mid-’25. That’s encouraging, if that’s what you’re saying.
Leah Weckert
Let’s say the end of FY ’25.
Charlie Elias
I think the point here, David, it’s a bit like the productivity program. The loss piece never goes away. It’s always on. What we’ve done is we’ve put the real surplus on it to recover the position. And then we’ve got to make this part of how we operate and keep looking not just at loss for waste to markdown and freshness and quality in other parts of our business.
David Errington
You seem to be making good progress on Simplify and Save to Invest. That seems to be going quite well, $90 million in the first half. I mean, that surprised me a little bit to the upside. I knew that you had another $1 billion but can you give us a bit of a sketch as to what you’re actually doing there, Leah? I mean, there seems to be some interesting things but is it requiring investment to get those wins? Or is it just doing things better that you should have always been doing?
Charlie Elias
David, it’s Charlie. I’ll take that question and great question. So as you know, we’ve had that — we’ll establish productivity and efficiency program now for 5 years. I mean if you recall the previous program, 4 years Smarter Selling, we did take $1 billion of — or we realized $1 billion of productivity and efficiency savings. And again, as we announced the last results that we are targeting $1 billion over the next 4 years. So as you indicated, we actually did realize $90 million of the benefits in this first half, 75% actually work their way into CODB and 25% in the GP line. We do — typically in these sort of programs expect a fairly even run rate over the 4-year sort of program on a year-by-year basis but it does vary at times between years, slightly over in some and slightly under in others.
Look, we are — any investments that we do make in the Simplify and Save to Invest are actually captured in the capital and the like that we have guided. And I think Leah really did mention some of the things that really impacted the first half in that regard, diluted some great savings and things like transforming the way we manage our inventory, some of the programs around meat specific ranging, optimizing some of our transport routes and leading to better logistics costs but also very much, yes, the use of things like artificial intelligence and tech automation to deliver benefits in our call centers and pick efficiencies in stores with respect to ecom. So it’s really across the board and across a lot of our end-to-end processes.
Operator
The next question comes from Craig Woolford from MST Marquee.
Craig Woolford
Certainly a good result overall and encouraging on the stock loss. Just on the gross margin performance, excluding stock loss, it was, I guess, essentially a 60 basis point improvement. You’ve highlighted tobacco and the Retail 360. Is there anything else that we should note as a driver of the gross margin outcome in the supermarket business?
Leah Weckert
So — I might just cover at a high level. So I think, obviously, you’ve identified, we’ve got the stock loss in terms of a downward pressure. We also made investments in value in the half. And then the key offsets on that, obviously, is the tobacco which is about 20 bps. Then Coles 360, the benefits we see from Simplify and Save. And then we did do a little bit on the optimisation of promo and range which we shared with you at the Q1 result which contributed to that as well.
Charlie, did you want to add any more color on that or?
Charlie Elias
Yes. I think just on the Simplify and Save to Invest, I think, as I sort of mentioned earlier, I think 25% what we realized really worked their way into gross margin, for example, in places like that meat specific ranging and transport and logistics optimisation.
Craig Woolford
So I mean it’s just hard to see — there must be some other countervailing factor given there was obviously an investment in value in the half. I think the Simplify and Save was about 11 basis points, just hard to piece it all together given the underlying gross margin performance, excluding the stock loss issue was quite an encouraging move higher.
Leah Weckert
Well, they’re the major drivers we’ve called out. So there’s the vast bulk of what we’ve seen in terms of movements in the line.
Craig Woolford
And just on the operating cost performance. Simplify and Save has done a good job. You’ve outlined the transformation. It does look like underlying cost growth, excluding those moving parts, actually improved compared with the trend in the second half ’23. Are there other things that would fall outside the Simplify and Save program that would have led to a more modest cost growth run rate, mindful that wage rates have obviously been a headwind for all retailers?
Charlie Elias
Yes. Look, just to reiterate, firstly, on the cost of doing business in terms of the underlying first half, that only excluded — what we look at on an underlying basis there, it only excludes obviously the project and implementation costs, not D&A. All we try to give you what we’ve said, though, if you want to look at it on a cash basis, it was broadly flat as a percentage of sales. So if you exclude the D&A uplift, it’s broadly flat as a percentage of sales. The major movements and Leah called it out earlier in terms of what are we seeing in terms of cost pressures in the CODB, they are clearly inflation through wages.
If you recall, we had a 6.25% inclusive of super fair work decision. We’re navigating things like the payroll tax levy here in Victoria that was sort of introduced. Yes, this was sort of — this approximated about 60% of the sort of increase in costs in the half. We did see some growth. About 25% increase relates to growth through things like growth in new store investments, ecom channel mix, et cetera and 15% in other investments like Coles 360 and tech and digital. But again, as you highlighted, this was largely — and we had a real laser focus on costs through the half, including our Simplify and Save to Invest program and 75% of that $90 million worked its way into CODB.
Operator
The next question comes from Ben Gilbert from Jarden.
Ben Gilbert
Just the first question from me — just two, if I could. Just the first one on ecom [ph]; it was a great result and I think sort of been since you’ve sort of consolidated [indiscernible] getting some great traction. Just — do you think you need Ocado now? I know you’ve obviously well advanced and it’s coming through but you’re seeing some of the global peers like Kroger and M&S, a bit of a fight with them at the moment over delivering and activity? Is the confidence that you’re going to get a material uplift when you launch that still there? Because it seems like you’re getting some really good momentum without it at the moment.
Leah Weckert
So I’ll start on that one, Ben and then I’ll hand to Ben to build a bit. So I think from our perspective, the big benefits that we have coming with Ocado is, first of all, that we know from all the other CFCs that have opened around the world, that there’s a really significant step-up in the customer satisfaction and that is driven by the really superior perfect order rates that you get out of the facility that are just really difficult to achieve in any store environment and Ben can probably build on that a little bit more.
I think the other piece for us, Ben, is from an operation — so that’s the customer piece. I think from an operational perspective, we’re adding in the ability to service in the order of $1.5 billion of sales out of there. And what we will be doing is taking those sales primarily in the first instance out of the home delivery stores in Melbourne and Sydney which are our most congested stores. They’re the most difficult stores to run. That gives a much better experience for the customer that’s shopping in those stores because you don’t have all the trolleys in the aisle doing picking but it also then creates capacity for us to continue to build Click & Collect [ph] and immediacy offers that we’ve got out of those stores and we’ll continue to grow there. So this is — it’s a great outcome from a customer perspective but it also builds our capacity and reduces congestion and affects the customer experience.
Ben, you probably would have to build on that, I imagine.
Ben Hassing
It’s kind of hard to add any tops into that, Leah. But I would just reinforce the point, it’s customer experience. First and foremost, I mean, we did see some pretty good gains in NPS [ph] but this would be experience that would be differentiated. It’s very hard to replicate the step jump that a customer would get in fill rate. Again, the major pain point that we have in online grocery, just talking with the friends kind of around the world is, I’m a customer, I order 45 items, I get 44 and the 45th I either don’t get or it’s a poor substitute. And that’s because you’re picking from the store. But with the CFC, you drastically minimize that pain point for the customer.
And one of the things we did for our customers today is to actually automate the ability for them to self-serve and say, hey, I’m missing an item. And we run an AI in the background to make sure there’s — the right customer gets the right credit and that sort of thing. But it’s really going to be a step jump in customer experience, centered around fill rate, expanded range and also the ability — and certainly in fresh items, like you think about minced meat egg whites [ph]. And those things are going to be really meaningful, we think, in a differentiated way in this market. So I would say, yes, we’re very excited that CFCs are going to go live soon.
Ben Gilbert
And just second one for me. It’s — obviously it’s a great trading update you provided and appreciate the drivers. Just interested in, one, do you think you’re starting to see less leakage to some of the non-traditional channels, such as [indiscernible], etcetera? Do you think you’ve managed to call some of that back? I noted you said that was weak last time. And secondly, how do you hold on to these customers because they’re proving to be pretty promiscuous and people at the moment shopping all over the place? If you got plans in place to really try and retain the customers because it seems like you’ve done a very good job getting them through these initiatives in January, I suppose that the keynote is to holding on to them?
Leah Weckert
Yes. I’ll take that in two parts. So on the non-food side, I mean there’s no doubt we’re seeing a lot more competition in that space and some very assertive pricing and value delivery from the players that have entered into those spaces. I think I shared at the Q1 that we were seeing an impact on our non-food business from that. We did take some actions in Q2 and we’ve taken further actions in Q3 to date to reset what our value proposition for the customer is in that space and we are seeing good levels of improvement of that coming back which is pleasing. So we will continue with that.
I think in terms of the question on how do you hold on, I talked a bit on the media call this morning. We’ve been doing a lot of survey work and customer focus groups. And I think interestingly, the big trend, I think, that has started to emerge in the last 6 months that I feel wasn’t there as predominantly before that is customers willing to travel now to find low prices. And so — whereas for many, many years, we held very high that the convenience of the location really was king. I think what we’re seeing now is that there’s a growing cohort of customers that are willing to not only shop around better travel distances to get value.
Now that really raises the stakes for us and we’re very, very focused on how do we put together a really compelling end-to-end customer value proposition. Now that starts with great everyday prices but the thousands of weekly specials that we run plays a big part in it. The Down campaign that we ran in January and we’ll continue to run going forward plays a part. The Flybuys is also an important aspect here and we have really stepped up in the half what we’ve done on Flybuys. So we have been rolling out instant redemption of points at POS [ph]. We have a large number of stores across the country where that’s now in place, a few more to go but really good progress on that and that has been very well received by customers. Customers actually have large banks at Flybuys points and so being able to convert those into dollars off your shop is a way to realize value really quickly for them.
And then, we also have relaunched things like What’s for Dinner and the Coles Savvy Dinner Plan with taste and things like that which are actually helping the customer to identify how to cook meals to a budget. And then in that space, in the e-commerce space, things like in the app where we now have the filters that you can filter by unit price, for example and the ability to build a shopping list. So you know that it’s going to fit within your budget and then you can come into a store and you shop that list where each item is in the aisle and you know that it’s going to add up to the number that you can afford when you get to the checkout. It’s those types of tools that we know customers are increasingly looking to use.
As an executive leadership team, we actually did shop a couple of weeks ago with customers and they rated us on how we did, Ben and Michael won which — the rest of us are never going to live down. But one of the things that we found out from doing that with the customers is just how many of them were actually building lists in the e-commerce environment before they went to the shop to manage to their budget in a very disciplined way. So that’s a very long-winded answer, Ben. But I think the answer really is we have to step it up and we’re going to have to step it up again in terms of how we’re communicating value, delivering value and making it easier to find value across the stores.
Operator
The next question comes from Adrian Lemme from Citi.
Adrian Lemme
My first question was on the supermarket store renewals. I think there were only 11 in the first half but I think you were planning 50 for the full year. So I just want to understand, was this perhaps impacted by the loss technology rollout taking resources? And do you still expect to hit the 50 target, please?
Charlie Elias
Yes. Thanks for the question. Look, it’s purely just a timing of when those store renewals actually occur. We always do sort of gather momentum in the second half with respect to renewals. We’re still targeting to approximately 14 in the second half. In the same time, liquor; we did 71 renewals in the first half. We expect to do over 30 in the second half for — in that regard.
Adrian Lemme
And if I could just ask a follow-up, just if you’re able to talk to how recent store renewals are performing in terms of sales and profit uplift, particularly, I guess, the 8 stores that you’ve done?
Charlie Elias
No. Well, we’re really comfortable that when we actually make an investment in our store renewals that they actually do perform — that they actually deliver good sales momentum and one of the things that continues to encourage us in terms of improving that shopping experience for our customers. So we absolutely do see a sales uplift and hence, our renewal program.
Operator
The next question comes from Shaun Cousins from UBS.
Shaun Cousins
Leah and Charlie, maybe just a question regarding Witron. You’ve been very bullish around Redbank in terms of stock-outs. I think you indicated it was sort of half the level previously for the first 30 stores and then there seem to be more cost savings that you’ve identified in store that weren’t part of the business case. I mean has Coles seen a continuation of the reduction in stock-outs as more stores have been supplied by the Redbank facility? And is there upside risk to the qualitative return on capital comments you’ve made which I think was a return on capital in excess of WACC plus a risk premium, please?
Matt Swindells
Shaun, it’s Matt. I’ll let Charlie answer the risk premium part. But on Redbank, yes, we have been very pleased. We were more than outbound in April. We’re very focused upon this move around from delivering peak trade through Christmas. I was in that site the week before Christmas. It did in excess of 3 million tons [ph], that we expect to save as well within its capacity and capability. We are now working through across the sites, the transport and the stores, what’s the right setting to optimise our end-to-end cost-to-serve. And so I would say that at scale, that’s reasonably early work but in the stores that we try those settings and the feedback is incredibly positive. And we will continue to work through that with our partner, Witron, to optimise that facility.
The outbound performance is really a function of the inbound fulfillment. And so when we talk about further improvements in availability, really focusing upon restoring that inbound [indiscernible] back to the pre-COVID levels is the key to unlocking the ongoing performance in Queensland [ph] and there’s a bit of work to do in that space. But at this stage, we are still very confident in Redbank’s performance and its future potential.
Charlie Elias
Shaun, there’s not much more I’ll add to that. I think you’re getting the view from Matt, clearly that we’re really encouraged by where Redbank is at and its early performance. It’s far too early to be talking about any sort of further guidance above what we gave you at the Witron site to —
Shaun Cousins
And maybe a question for Michael, just on liquor. Maybe just what’s driving the weaker performance relative to Endeavour? And there were some comments around e-commerce in terms of the growth rate slowed in the second quarter ’23 as the business reviewed its promotional mix across channels. Is this referring to the 20% off on coles.com.au because there were some sharp online promotions that you’ve been offering during calendar ’24 which we could never — sorry, calendar ’23 which we could never really understand? But can you maybe talk a bit about what’s gone wrong or what’s driving the different performance relative to Endeavour and then also maybe what that comment in your release means, please?
Michael Courtney
Yes, happy to do this, Shaun and thanks for the question. So I might first just talk about the number that was in our outlook and then I can get a bit more specific around what the comment means in relation to e-commerce. So firstly, the 2.2% sales decline that we mentioned in the trading update. Just as you know, in the footnote on Page 13 is that, if we excluded for the change in timing of New Year’s Eve, then third quarter to date we would be at 1.5%. So timing has a factor on that. I think then with the 1.5%, there’s 2 key factors to speak to. One is hotels as we’ve called out in release. And then the other factor is, as you quite rightly mentioned, the comment we made in relation to the promotional mix across our ecom channels.
So these choices that we’ve made, they are a drag on headline sales growth in the second quarter and that has remained the case in the third quarter. This simply relates to a decision not to cycle some unprofitable sales from the prior year. So excluding those 2 factors, then our headline sales growth for the quarter to date was marginally positive. So hopefully, that gives you a sense of — from an underlying perspective where are we at. Whilst that’s causing a short-term — a near-term headwind for us in terms of sales, we think it’s the right thing to do in terms of balancing the sales and profit outcomes over the long-term.
Now just on the second part of your question around e-commerce sales. So firstly, there’s a number of different channels through which we transact in e-commerce. So firstly, we have our own channels which is our own web banners in Coles Liquor across the various brands and also Coles Online, as you’ve mentioned. And then we also have partners, whether that be Uber, DoorDash or whether it be sales where we attract sales through affiliate channels. The Coles Online component, whilst we’ve made some changes to our Coles Online offer throughout the latter part of the half, Coles Online is actually a fairly small part of what our e-commerce business is. So the changes in promotional mix that we’ve been talking to were more relevant to our partnering platform.
So, what we’re doing through affiliate sales and the level — the depth and breadth of promotion that we’re choosing to run and also across the on-demand platforms. So hopefully, that answers your question.
Operator
The next question comes from Lisa Deng from Goldman Sachs.
Lisa Deng
Question one would be on depreciation. We talked about $60 million still attributable to 2, ADC and CFC. Can we understand how much of that was realized in first half? And secondly, just on that same point, we previously guided for the full year at $1.65 billion. Is that still holding?
Charlie Elias
In relation to the $60 million, I would go about $15 million or so [ph] in the first — approximately $15 million in the sort of first half. You’ll note in relation to depreciation, we’ve kept our depreciation guidance that’s in the outlook and that remains at $1.65 billion for the year. So we’re not guiding any change to depreciation. Sorry, the second part?
Leah Weckert
That was the second.
Charlie Elias
That was the second part, yes.
Lisa Deng
And then a second question is more around our tech investment ex these major projects. So last year, I think we worked out — or we discussed about $90 million in the CODB was in relation to sort of the digital investment. And then we had $13 million, about 50% share of Flybuys. This year, in terms of a lot more focus, especially on Coles 360 Flybuys, all of that, what should we expect in terms of digital investment and also the full year sort of Flybuys contribution as well?
Charlie Elias
Yes. Lisa, we have never given any specific guidance of what we actually invest in terms of our tech and digital. I think you can see our efficiency and growth initiatives that we — you can find in our CapEx. We called that out but we don’t actually split out what we invest in tech and digital.
Lisa Deng
Directionally, would it be a higher investment year or a lower investment year?
Charlie Elias
Lisa, we continue to invest in tech and digital. I’m not going to call out what those dollars are or directionally.
Operator
The next question comes from Bryan Raymond from JPMorgan.
Bryan Raymond
Congrats on a strong result, particularly on costs and in trading update. A question — just maybe a bit taking a step back. Just feedback we’re getting and surveys we’re seeing externally is sort of pointing to price perception amongst customers for both Woolworths and Coles coming down over the past 3 to 6 months. Obviously, there’s a lot of talk around the industry. Do you think you need to address this through targeted investment in price? I know you are doing that already but a step-up in that run rate of investment to address this perception issue? We just — some of it’s obviously unwarranted but it is something that’s getting into the public mindset and just trying to think about ways to get on top of this issue, partnering with suppliers or other opportunities you could have to do it? But is that something you’re thinking about and taking action on? Or do you think that the lower headline inflation that you’re seeing at the moment will eventually flow through to this being less of an issue over the next 12 months?
Leah Weckert
Yes. Thanks for the question, Bryan. I might also take a bit of a macro view on it, if it’s okay which is we are spending a lot of time surveying customers, talking with customers, doing focus groups. We’ve just completed our January cost of living survey which we’ve done on a pretty regular basis now for 18 months. So what we’re seeing out of that is that 2/3 of customers are worried about their ability to cover their household needs.
Now that’s higher than what it was 18 months ago but it’s flat to where we were in the survey in August 2023. So it seems to have sort of stabilized in terms of customers that are feeling that sort of level of pressure. What’s been interesting in the latest survey is the number one issue now is mortgage costs. And so a number of the other drivers of cost of living pressure like mortgages and rents and energy and fuel and the like, insurance — they are becoming now more prominent in terms of what customers are calling out, say, where we were 6 months ago versus what they’re saying about grocery. And I do think that some of that is the impacts that we’re seeing as inflation comes off. We’ve got fresh produce and made — obviously in deflation and we’ve seen the moderation in the package space. And if you think about it, a supermarket ex tobacco for us, our inflation in Q2 was 2.7%. That’s starting to get back to a level that’s sort of sitting in that target inflation range.
Now, I think all of that aside, customers are reminded about the price of grocery 2 or 3 times a week when they go and do the shop. And so we are acutely aware of that. We are acutely aware that there is a real opportunity here to make sure that we are making investments into value that really impact their basket and to communicate that to them in a thoughtful way that really helps them to find that value and access it. I don’t think the focus on that is going away anytime soon. I think that is going to be — continue to be just — an absolute top priority for us to do over the next 12 months.
And your point around the external environment, I mean what’s been pleasing over the last 6 months is when we look at our customer scores for in-store, we’ve called out in the release the customer score online which have improved but we have seen improvements in the customer store — scores as well which has been driven by things like availability and service and quality. And actually, price has been relatively stable in that. It’s down year-on-year but it’s relatively stable in terms of what we’ve seen over the half.
It’s pleasing that we are actually seeing improvements in how the customer is viewing their overall end-to-end experience they’re having with us, both online and in-store. But there is no doubt that the external environment is impacting, what I would describe as sort of the brand customer view, that sort of more strategic NPS that we would look at.
Bryan Raymond
I mean just to follow up on that. I mean, following from Craig’s question earlier around the 60 basis points of underlying gross margin expansion, I mean, it is hard to reconcile that without product margins having improved for you guys year-on-year. It’s sort of a similar question what I put to your competitor last week. Are you getting the balance right around reinvestment? Clearly, your sales are doing a lot better than worse at the moment. So you’re ahead on that front. But just wanting to understand, is there more investment required, or reinvestment of some of the gains you’re seeing through Coles 360 and other things that you’re doing on the cost front through your cost-out program, et cetera, in order to really be — to really engage customers to be the winner over a more sustained period than what we’ve seen in the last few months?
Leah Weckert
Well, on the GP piece, I mean, what I would say is we — as we shared with you at the Q1 update, we did really push hard on where could we find ways to help us to offset the downside on stock costs in the GP line. And so we did push really hard on what could 360 deliver to that equation. We pushed hard in what logistics were able to deliver to that equation. And we also did work in terms of things like really looking hard at the promotions that we were running and optimising that to take out ones that were not effective for customers and we’re not, where we needed them to be from a GP perspective as well.
And then, we’ve also done some range optimisation across the half. So there are a number of factors that went into the GP line in terms of that optimisation work that we did. As I said before, value is our top priority customer perspective at the moment. We are absolutely focused on it. We feel like the results that we’ve got for January so far has been indicating that, particularly the summer value campaign has really resonated with customers and you can expect to see more of that promise.
Bryan Raymond
And just one final one is just on the interest costs. You did — or finance cost, you did say that they’re likely to step up for a number of factors. Is it possible to get sort of a quantum or some sort of guidance around the interest cost, just so that’s not an uncertainty in the outlook, if possible?
Charlie Elias
Yes, absolutely. Let me take that one. So if we look at interest on a continuing basis, interest costs did step up by about $26 billion in the half. And we are actually expecting a similar increase in the second half but let me just take you through those increases. So in the first half, it really did relate to increased interest on lease liabilities associated with growth, things like new leases and lease renewals but also we did have higher borrowings in terms of high drawn debt on our revolving facilities. So if you look at the interest, roughly 50% of that increase is, if you like, rate-driven and about 50% of it is actually driven by higher average borrowings. We do — in terms of the second half, as I said, we do expect a similar increase, so around that sort of mid-20% [ph] number, driven by an increase in the average net debt over the half and borrowing costs associated with the ADCs that were previously capitalized. So again, about a 50-50 split between rate and borrowings.
Operator
The next question comes from Phil Kimber from E&P Capital.
Phil Kimber
Actually, it was just a clarification question, firstly, on the D&A. I think based on your guidance, it stepped up, say, $40 million in the first half and based on your guidance, it will step up about $80 million in the second. Can I assume that most of that is going to be in relation to the supermarket business? I assume it is but I just want to double check.
Charlie Elias
Yes, absolutely. So that step-up, as you alluded to, was $40 million in the first half. We’ve obviously given you a full year guidance in terms of our expectations at $1.65 billion for the year and the majority — clearly, the vast majority of that increase is in the supermarket side.
Phil Kimber
And then just a follow-up on liquor. Michael said something there that the majority of online sales actually don’t come — for e-commerce in liquor, don’t come from the Coles site, they actually come from partner sites and I was surprised by that and maybe I missed it but I just wanted to clarify that?
Michael Courtney
Phil, Michael here. Happy to clarify that and thanks for giving me the opportunity to do so. So within — on our own platforms, there is colesonline.com.au, so the supermarket site through which we sell liquor. And then there is the online websites for the various liquor banners. The point that I made in relation to Shaun’s comment was that colesonline.com.au is a relatively small percentage of our total e-commerce sales. The reason why I made that comment specifically was because some of the promotions that Shaun was referring to are ones that we have historically run through the coles.com.au site.
Leah Weckert
The Vintage Cellars and the Liquorland and the First Choice sites, they are our sites, Phil.
Phil Kimber
And they’re the big majority of e-commerce sales, I assume?
Michael Courtney
Yes, that’s right.
Phil Kimber
Sorry, I just — when I heard it, I thought it didn’t sound right but that’s what I wanted to clarify.
Operator
At this time, we’re showing no further questions. I’ll hand the conference back to Leah for any closing remarks.
Leah Weckert
Well, thank you very much for your time this morning. If I can just reiterate the key points for me. So we think we’ve had a really solid H1 result across both Supermarkets and Liquor in places we believe that our value proposition is really resonating with our customers and this is converting to volume growth for us. Loss continues to be a real focus and has been improving throughout Q2 and from January, we’re now in a position where the loss rate is better than last year and we expect that to improve progressively now throughout H2. We have our Simplify and Save program in place to drive productivity and efficiency and help offset the cost inflation that we’re seeing coming through into the business. We’ve got a good start in Supermarkets for Q3 and a more challenging start for Liquor and we have continued to have good progress on the ADCs and CFCs and our strategic focus areas.
And with that, we look forward to talking with many of you over the course of the week. Thank you very much.
Operator
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.
