Compare The Pair: Woolworths Versus Coles

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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.

Looking Forward

Looking into FY26, Goldman Sachs continues to expect a strong recovery in both group sales and group earnings, supported by Australian Food sales and earnings, as Woolworths recovers lost market share in the first half of FY26 and the elimination of one-off costs (industrial action, cyclone).

Goldman is also seeing green shoots of a New Zealand turnaround and expects Big W’s second half FY26 profit to reduce the earnings loss in the second half FY25 due to reduced seasonal stock-clearance, though Big W remains a broader strategic question.

Ord Minnett prefers Woolworths over Coles due to greater upside potential over the longer term despite recent operational underperformance.

In Morgans’ view, Woolworths is a good, defensive business with dominant market positions and long-term earnings tailwinds from population growth and leveraging its scale advantage. While the March quarter sales performance was solid and suggests the core Australian Food division may be turning the corner, margins remain under pressure from customers shifting to lower-priced items and buying more products on special, higher costs (including wages), and a negative mix shift due to higher eCommerce sales versus in-store.

While there was limited evidence of a turnaround in customer perception and sales, Macquarie remains attracted to long-term upside driven by recovering momentum in the key Australian Food segment, further detail on cost savings, and the rising importance of retail media.

Citi holds the view that on an underlying basis, Woolworths is still underperforming Coles. Citi continues to believe it will take significant time to rebuild customer trust, as was acknowledged by management at the result release.

Woolworths has re-rated in the flight to domestic-facing businesses with limited exposure to trade wars, notes Bell Potter, along with peers locally and globally. At current levels, Woolworths is trading at a multiple broadly consistent with Coles, but it is difficult for Bell Potter to see the catalyst to see the shares return to a premium rating.

Coles

As noted, Coles reported like-for-like sales growth of 3.2% in the March quarter, to Woolworths’ 3.0%, from its dominant supermarkets business, above consensus expectations, although flat sales in its liquor division, below consensus, disappointed as the wider market for alcoholic beverages languished amid reduced discretionary spending by constrained consumers.

This was a solid result, Macquarie suggests, following comparable 3.4% sales growth in the first half (which included benefits from Woolworths’ supply chain disruptions). Coles cycled comparable growth of 4.2% in the March quarter FY24.

Online sales increased by 25.7%, with growth across all “missions” (next day, same day, rapid), while next day home delivery growth in NSW and Victoria, which use new Ocado customer fulfilment centres, was well ahead of the rest of the nation. Looking forward, the significant investments over recent years, especially Witron and Ocado, are expected to drive medium-term sales growth, with this upside arguably underappreciated, UBS suggests.

Citi considered it a good trading period considering, as noted, the Harry Potter campaign was far less popular than last year’s Pokemon campaign, and Woolworths ran a successful Minecraft collectible campaign with no corresponding campaign last year.

Macquarie expects management will continue to focus on market share, driven by two major initiatives: i) Ongoing review of its strategy and pricing architecture in non-food (noting rising competition from groups like Amazon, Chemist Warehouse ((SIG)) and Bunnings((WES)); and ii) continued scaling in the customer fulfilments, with the group previously noting average online basket sizes 4.6x larger than in-store and 2.2x greater spend from omni-channel customers.

Simply Liquorland

Coles is implementing changes to improve the liquor business performance. In March, the company unveiled the rebranding of all Vintage Cellars and First Choice Liquor Market sites to the main Liquorland brand.

Coles will proceed with the national rollout of its “Simply Liquorland” program, which will deliver an alignment in product range, promotions, loyalty programs and the digital offering while still enabling stores to tailor for local demographics. While program costs of -$7m are expected to be incurred in the second half, with further costs in FY26, Morgans thinks the move will be positive over the long-term.

This program is “pleasing”, yet UBS points out the liquor category faces a combination of cyclical and structural challenges which weigh on liquor consumption.

Citi is encouraged by the thinking behind the Simply Liquorland program. The rebranding should drive topline benefits through improved brand awareness and value perception, the broker suggests. It should also deliver efficiency benefits through streamlining in-store and online offerings.

Citi nevertheless forecasts flat sales growth for the second half FY25.

Looking Forward

In Morgans’ view, Coles is a well-managed business with defensive characteristics and strong market positions in both supermarkets and liquor. Management continues to execute well in relation to operating efficiency, product availability, and reducing loss with major supply chain investments (automated distribution centres and customer fulfilment centres) to support improved margins over the longer term.

While Coles remains Morgans’ preferred exposure in the supermarkets sector, the broker sees the current valuation as full and prefers a better entry point.

Bell Potter sees FY25 as a year of consolidation on a reported basis for Coles, but continues to see Coles as providing a defensive earnings growth profile through to FY27.

The growth profile is driven by: (1) delivering $1bn in cumulative savings by FY27 through “Simplify & Save”; (2) the sustained benefit of lower loss rates (theft); (3) delivering targeted returns on capital investment programs in automated distribution centres and customer fulfilment centres; and (4) expansion of the store network at a pace consistent with population growth.

In the near term, Coles is likely to be a viewed as a domestic-facing defensive business with limited exposure to international trade wars.

Citi continues to favour Coles’ value positioning and execution over Woolworths. This broker sees upside to FY26 consensus forecasts as benefits from automated distribution centres and customer fulfilment centres continue to be realised and implementation costs fall away.

Macquarie remains attracted to Coles’ defensive growth profile, with earnings momentum to drive shareholder returns.

Clean Up Aisle Three

So where does that all leave us?

Seven brokers monitored daily by FNArena cover both Woolworths and Coles. Among them, Woolworths attracts three Buy or equivalent and four Hold ratings, while Coles has five Buys and two Holds.

The consensus target for Woolworths is $33.04, up from $32.29 prior to the March quarter update. For Coles the target is $22.05, up from $21.61.

Outside of the group, Goldman Sachs has a Buy rating on Woolworths with a $36.50 target, and a Neutral rating on Coles with a $19.00 target.

Jarden has an Overweight rating on Woolworths with a $36.30 target, and a Neutral rating on Coles with a $20.60 target.

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