Woolworths' ascendancy in the pokies sector began with a turf war with Coles in Queensland in the early 2000s. Credit:Glenn Hunt This translates to about $1.2 billion in net pokie revenue for Woolworths alone from its holdings across the country. The report demonstrates that even as governments buckle to public pressure and restrict the number of poker machines in the community, the overall industry take continues to increase as each machine becomes more profitable. NSW Treasury estimates confirm the government is aware of the growth of pokie profits from pubs, expecting by 2021 that pubs will, for the first time, pay more gambling tax than clubs at an expected $893 million. Despite Woolworths' apparent embarrassment at its involvement in the industry, its pokies-owning joint venture, ALH, is fighting aggressively to increase the reach of its machines.

Illustration: Matt Golding On Friday ALH lodged a Victorian Supreme Court appeal to challenge a local government decision to block one of its pubs from installing 40 machines in Melbourne's northern suburbs. Today it has machines in 81 of its 82 pubs. Its aggression in the industry prompted the Reverend Tim Costello, director of the Alliance for Pokie Reform, to criticise Woolworths directly "I am appalled that ALH has decided to go to the Victorian Supreme Court in an attempt to force pokies into the Commercial Hotel in South Morang," he said. "Woolworths is already the nation's biggest pokies operator, with annual losses on its 12,000 machines approaching $2 billion of the world-record $13 billion a year lost on pokies in Australia."

So how did the Fresh Food People become the single largest pokie owner in Australia? It is a story that begins with a turf war with Coles in Queensland in the early 2000s. At the time Coles and Woolies were slugging it out in the race to corporatise the nation's high streets. They battled over the business once conducted by butchers and greengrocers, bakers and petrol stations. Then they began competing over bottle shop sales. The problem was that in Queensland, to be licensed to own a bottle shop you needed to first own a pub. Even better, once you owned a pub, you got the right not only to open up a liquor barn on site, but three bottle shops within a 10-kilometre radius. Soon the sunshine state was crawling with suits from down south looking for pubs to buy. One veteran of the pub wars, a former retail executive, recalls both parties were neck and neck for the first year or so, closing in on around 20 pubs each, most of them selected as having a suitable footprint for retail sales rather than having high-yielding gaming rooms.

Coles couldn't have known then that Woolworths had an advantage. At the 2000 Olympics in Sydney the then Woolworths boss Roger Corbett enjoyed a chance meeting with Bruce Mathieson, a Melbourne-based pub baron who had been one of the first in the industry to recognise how much money could be made from the pokie machines that were then starting to spread through the nation's local pubs. Corbett and Mathieson cut a deal and created a joint venture Australian Leisure & Hospitality Group (ALH) to take over pub businesses in Queensland. ALH bought the Foster's pub business, and in one move took over 131 pubs around the country. By 2004 Coles had been beaten cold. Under the deal Woolworths would provide the corporate might and hold a 75 per cent share of the business, Mathieson would keep 25 per cent and provide the pub and pokie industry expertise that Woolies lacked. (Today Forbes pegs Mathieson as Australia's 42nd richest man, with a personal fortune of almost $1 billion.) By comparison, says the former retail executive, Coles did not at first fully understand the business it had bought into. He recalls leading senior staff on a tour of the company's new Queensland acquisitions. They seemed unimpressed, he says, until they returned to Melbourne and, a short time later, saw a month's worth of figures from the pubs. "They rang up and said they thought we had made a mistake. We hadn't." Suddenly gaming was making real money for the retailers. Coles reported in 2009 that it grown its hotel portfolio to a total of 85 hotels on new sites in Western Australia, South Australia and Queensland.

Today Woolies, via ALH, owns 330 licensed venues and more than 12,000 pokie machines, far more than Star City or Crown Casino. By 2016 ALH pubs and clubs across Australia made an estimated $1.1 billion in net revenue from poker machines, while Coles' appetite for gaming revenue had waned and its return on about 3000 machines was much lower – around $185 million. With about 1460 machines in NSW, the annual net profit from gambling in ALH group hotels could be estimated at close to $140 million in 2016-17 and was put at $108 million in a 2012 study by Charles Livingstone, a researcher with Monash University's school of public health and a vocal opponent of the pokie industry. But the move into gaming did not come without some discomfort. Australian adults lose on average twice as much as those in any other Western nation to gambling.

According to research by the Australian Institute of Family Studies published last November, 1.4 million Australians gamble on the pokies. People dependent on welfare play pokies at a higher rate than most and those with a gambling problem account for 17 per cent of regular punters, the study found. Problem gamblers account for more than half of all spending on pokies. (In response to questions from Fairfax Media, Woolworths said surveys it had seen suggested less than 1 per cent of Australians were problem gamblers.) Other research suggests that around 20 per cent of the world's pokies can be found in Australia and 10 per cent in NSW, though Clubs NSW disputes these figures, saying they do not include other popular forms of electronic gaming around the world. None of this sits easily with Woolworths' sunny public face, nor according to some reports, with the views of some of its most senior executives. Time and again over the years following the ALH deal Corbett himself was asked how his devout Anglican ideals accommodated the expanding gambling business Woolworths controlled. In 2006 he told AAP in response to a question along these lines, "My greatest obligation is to do what I'm employed to do by the shareholders and that is to do my very best in their interests at all times, and that was the overriding principle," he said.

"So you never considered walking away?" "I wouldn't say that," he replied. It is not clear how much brand damage the company's pokies interests is causing Woolworths, though public sentiment appears to be turning against the industry. Two Essential polls in 2012 found there was 67 per cent support for pokie reform, while other polls suggest 80 per cent of Tasmanians now support a Labor policy to remove the machines from the state's pubs and clubs. In 2012 the activist group GetUp! campaigned to have both Coles and Woolworths agree to stop expanding their gaming portfolios, reduce gaming hours and impose $1 bet limits, in line with a 2010 Productivity Commission report. Woolworths declined. When a group of shareholder activists brought forward anti-gambling resolutions at an annual general meeting they were defeated by a resounding 97.5 per cent. Soundly beaten in the race to dominate the sector, Coles has embraced many of those measures and is calling for Woolworths to join it. Some analysts have suggested Coles is simply seeking to curtail its competitor's bottom line. Asked in 2016 if this was the case, the then boss of Wesfarmers, which owns Coles, Richard Goyder, denied this. "That's way too Machiavellian – this is something we've been thinking about for a while," The Australian Financial Review reported him as saying.

Woolworths rejects the characterisation of ALH as a pokies business. In a statement it told Fairfax Media that its ALH venues "offer a diverse hospitality experience including sports bars, bistros, restaurants, cafes, electronic gaming, retail liquor, accommodation, nightclubs and wagering" and that it employed 16,000 staff. The shareholder activist and journalist Stephen Mayne, who also works with the anti-pokies group the Alliance for Gambling Reform, rejects this outright, and uses the group's aggression in the sector in Victoria as an example. "This is not a pub business, it is a pokies business," he says, citing ALH's legal battle to have pokies installed in all of its pubs in Victoria, a state where just 18 per cent of pubs overall have pokies. Any qualms Corbett might have once had in taking a key role in gambling he appears to have overcome. Corbett left the helm of Woolworths in 2006 and later served as a consultant to the group. In 2016 he took over as chairman of ALH. Total revenue from ALH hotels in 2017 was $4.25 billion, with profit after tax of $206.8 million, in 2016 it was $4.1 billion with profit after tax of $122.8 million, according to the Woolworths annual reports. In 2015 it was $3.95 billion with profit after tax of $158.8 million.

Livingstone says the damage done to the community by Woolworths' pokies is exacerbated by its corporate reach. With sophisticated analytics of customer behaviour around the country, Woolworths is able to focus on the purchase of the highest-yielding pubs, most in areas of social stress. In Sydney, for example, its most profitable pubs are the Pritchards Hotel, the Cambridge Tavern and the Smithfield Tavern, all in the local government area of Fairfield. Not by coincidence Fairfield LGA has the most profitable machines in NSW, and is one of the most disadvantaged areas in the state. As a result, says Livingstone, it is likely that pokie machines owned by Woolworths are more profitable – and more destructive – than the industry average. "It is a very cynical way for a company that portrays itself as family friendly to behave."