Woolworths is punting pubs and pokies out of its business, announcing plans to spin off its drinks and hotel interests next year.

Key points: Woolworths is spinning off its $11b alcohol, gaming and hotel business

Woolworths is spinning off its $11b alcohol, gaming and hotel business Woolworths is currently the third biggest gaming business in Australia, behind the Crown and Star

Woolworths is currently the third biggest gaming business in Australia, behind the Crown and Star Gaming has always been contentious for Woolworths, but it says it is getting out of it to let various businesses reach their full potential

In a release to the ASX, the supermarket chain said it would package together its drinks, hospitality and gaming interests in the Endeavour Drinks and ALH Group businesses ahead of either a de-merger, or "other value accretive alternatives", such as a trade sale, in 2020.

Woolworths said the separation would deliver benefits from a simplified organisational structure and greater focus on its core food and retail businesses.

Woolworths entered the gaming industry in 2004 with the ALH joint venture, co-owned by the big hotel owner Bruce Mathieson.

The partnership owns 12,000 gaming machine licences, making it the third biggest Australian pokies operator behind the casino businesses, Crown and Star.

The soon-to-be spun out group represented about 30 per cent of Woolworths' total profit last year.

"As a separate entity ... [we're] about two and a half times smaller than Crown and about half the size of Star. So it is an important part of the business but it does need to be kept very much in context," Woolworths chief executive Brad Banducci said.

The merger of Endeavour Drinks and ALH will create Australia's largest standalone integrated alcohol and hospitality business, with sales of around $10 billion and pre-tax earnings of $1 billion.

The new Endeavour group will house more than 1,500 BWS and Dan Murphy's outlets and 327 ALH hotels.

Reputational damage

Woolworths' involvement in gaming has been a reputational thorn in its side for some time.

Last month Liquor and Gaming New South Wales lodged a complaint about practices dating back to 2017 at the Westower Tavern in West Ballina and the South Tweed Tavern on the NSW north coast.

The allegations centre on the two hotels supplying patrons with free alcohol in order to keep them playing poker machines.

However, Mr Banducci said the demerger was more about letting various businesses reach their full potential than exiting gaming.

He said dealing with the allegations of breached responsibility obligations had slowed down the demerger plans.

"We've worked incredibly hard to address those and we're only doing this on the back of all the hard work that's been done and we need to lead in responsibility in all of our businesses," he said.

"We've always believed that it's no different to whether we're responsible in our sale of service of alcohol or responsible in how we operate our gaming machines, and certainly in the context of a publicly listed company we work on the assumption that that pressure or questioning would not abate going into the future."

Globally significant move

The Alliance for Gambling Reform spokesman Stephen Mayne said it appears Australia's biggest retailer has buckled to the public pressure and decided it can no longer risk the reputational damage of running the world's biggest chain of gaming rooms.

"This is a globally significant development for the gambling divestment movement, not unlike Rio Tinto getting out of coal," Mr Mayne said.

"Australians are the world's biggest gamblers with $24 billion a year in losses and Woolworths is responsible for about $1.5 billion of this through its 12,000 gaming machines in 286 hotels across Australia."

Mr Mayne, who is also a renowned shareholder activist, said Woolworths's move was also a positive from a corporate governance point of view.

"It is good to see Woolworths regularise the corporate structure of its pokies empire, diluting the power currently held by billionaire joint venture partner Bruce Mathieson, who owns 25 per cent of the current ALH structure but has management control," Mr Mayne said.

"Bruce Mathieson will own 14.6 per cent of Endeavour Group and have one board seat, so his days of running it like a private company are over."

Diversity eroded, social licence improved: analysts

The demerger is part of an on-going retreat back to Woolworths' core business that started with the closure of its disastrous foray into "big box" hardware, Masters.

By the time Woolworths had scuttled Masters in 2016, it had cost shareholders around $2 billion.

The global rating agency Standard and Poor's said while the demerger would reduce the Woolworths' scale and diversity, it would not affect its creditworthiness.

"In our view, the group's Australian and New Zealand food business remains strong, although the separation will reduce the group's scale and diversity," Standard and Poor's analysts Sam Playfair and Craig Parker wrote in a note to clients.

"In addition, the reduced exposure to hotels and gaming removes significant regulatory risks and improves the group's perceived social licence to operate."

Investors backed the demerger move, with Woolworths shares jumping 3.3 per cent to $34 in early trade (11am AEDT).