Compare The Pair: Woolworths Versus Coles

Feature Stories | 10:00 AM

Analysis of the battle of the supermarket titans in the March quarter, assessing performance and outlook.

-Woolworths sales growth falls short of Coles
-Big W remains a problem
-Coles winning the online/automation war
-Simply Liquorland offers promise

By Greg Peel

Woolworths Group ((WOW)) posted modestly better-than-expected growth in same-store food sales of 3.0% year on year in the March quarter. Growth lagged the 3.2% recorded by Coles Group ((COL)), even as the much larger Woolworths ran a collectibles promotional campaign based on the wildly popular Minecraft game in the period.

While the gap was narrow, Citi believes Coles was still meaningfully ahead on an underlying basis given Coles was cycling a very strong Pokemon campaign a year ago (the Harry Potter campaign this quarter was not nearly as strong), and Woolworths indicated the Minecraft campaign likely increased like-for-like growth by around 1%, with no such promotion run by Woolworths a year ago.

It was a tough quarter, with Woolworths flagging costs of -$20-25m related to extreme weather in the quarter in Queensland and northern NSW, due to airlifting essential items into stranded towns and elevated losses of stock and damage from flooding.

The set-back came on top of the -$95m cost last year from Victorian industrial action shutting down distribution centres, supply chain commissioning costs of -$111m expected in FY25 (-$30m in FY24), and increased promotion costs, such that FY25 earnings margins are likely to hit a nadir, UBS suggests.

Woolworths' Own Brand was again a key highlight, Morgans notes, with sales up 5.7% as customers continue to seek value in the current climate. Growth was above Coles' Supermarket Own Brand growth of 4.5%.

Delivery growth fell to 13.8%, below Coles' online growth of 26%. While the weather impacts were noted, management also acknowledged Woolworths has lost some share to Coles in certain suburbs serviced by Coles' new Ocado customer fulfilment centres.

Woolworths' average food prices were flat for the quarter, compared to Coles' Supermarkets price inflation of 1.5%. Management noted customers continue to gravitate towards discounts and promotions. Woolworths' comparable sales continue to be driven by volumes, Macquarie points out, with a focus on lower pricing.

Macquarie notes average prices (ex tobacco) have now declined for five consecutive quarters. This has been partially driven by higher promotional take-up, albeit the broker expects Woolworths will continue to focus on its value proposition as it seeks to drive momentum back into its Supermarkets.

Woolworths' aim of circa -$400m of annualised cost savings by the end of 2025 was re-affirmed, although apparently there is dissatisfaction among head-office staff around job security and redundancies. In Ord Minnett's view, this uncertainty is no doubt affecting the company's performance and is an issue which needs to be addressed sooner rather than later so Woolworths can focus on implementation and execution of its longer term strategy.

UBS would be more optimistic on the turnaround potential at Woolworths if there was greater ambition and urgency in cost savings, as while -$400m is pleasing, arguably more can be done given limited progress since 2016.

In Ord Minnett's view, there is potentially more than -$400m in costs that can be carved out of a business that in recent times has not been focused on the simple maxim of giving its supermarket customers the product they want at a good price, but on forays into other retail segments, such as its poorly performing W Living operations (part of Big W; and Petstock is also underperforming.

Big W

Distinguishing Woolworths from Coles is the Big W discount department store chain, a perennial problem child.

Big W once again disappointed, posting a -$70m earnings loss, up from -$40m a year ago, predominately reflecting underperformance in clothing, the late arrival of spring/summer, and a higher level of mark-down and clearance. Big W sales increased 1.9%, which was actually above consensus forecasts, but sales growth was reliant on said clearance of spring/summer stock and a slower start to autumn/winter.

While management acknowledged the disappointing performance of Big W, it is yet to make a final decision on the future of the business. All businesses in the portfolio are part of an ongoing review with a further update expected to be provided at the FY25 result in August.

Positively, notes Macquarie, Woolworths' New Zealand business is seeing solid performance despite challenging market conditions, increasing comparable sales by 3.8% in the March quarter, as some two-thirds of stores acquired have now been rebranded as Woolworths.