Coles Does It Better, Woolworths De-Rated

Feature Stories | 11:00 AM

Stark divergence in sales momentum from FY25 into FY26 highlights Coles’ superior execution, while Woolworths seems lost.

-Coles’ sales momentum accelerates in late FY25 and into FY26; Woolworths’ decelerates
-Coles executing well, Woolworths bereft of strategy
-Trend set to continue in FY26
-A Woolworths recovery expected to take time

By Greg Peel

Coles Group ((COL)) and Woolworths Group ((WOW)) reported FY25 results on consecutive days in the final week of the August reporting season. Coles shares rose some 8.5% on release, while Woolworths shares fell almost -15%.

For two companies effectively in the same game, with the same target customers, why such a divergence?

There are a couple of differences nonetheless. Woolworths is much bigger, and carries the load of the perennially underperforming Big W discount store chain. Coles does not have an equivalent to Big W but does still own a retail liquor chain (Liquorland) while Woolworths divested of its liquor businesses into Endeavour Group ((EDV)). Woolworths also has a presence in New Zealand. Coles does not.

Supermarkets are, however, the primary driver of earnings for both. The average shopper could walk into one of either and be forgiven for asking: what’s the difference? The average shopper is struggling as much with the cost of living as the next person.

Before comparing FY25 results it should be acknowledged Woolworths suffered a tough March quarter, copping costs 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.

This came on top of the costly hit Woolworths took from industrial action in Victoria in the December quarter.

There was also the case of the battle of the promotions – insidious giveaways (based on amount spent) of items targeted at exploiting the pester-power of children.

Woolworths did not have such a promotion in FY24, but in FY25 its Minecraft giveaways were a big hit. Coles’ Pokemon promotion proved a winner in FY24, but Harry Potter flopped in FY25.

The Numbers

Coles’ FY25 group sales rose 3.6%, earnings 6.8% and profit 3.7% year on year. Woolworths’ group sales rose 3.6%, while earnings fell -12.6% and profit fell -17.1%.

Coles’ supermarket sales rose 3.7% in the March quarter, 4.8% in June and 4.9% in the first eight weeks of FY26. Woolworths’ (Australian) sales rose 3.6% in March, 3.4% in June and 2.1% in the first eight weeks.

Both supermarket chains are suffering from a -30% fall in tobacco sales due to the abundance of illegal tobacco retailers. Ex tobacco, Woolworths’ sales rose 4% in the first eight weeks of FY26, while Coles’ rose 7%.

The FY25 results for each were roughly in line with consensus forecasts. It was these first-eight-week numbers, and respective FY26 outlooks, that saw Coles shares ramping on the one hand, and Woolworths crashing.

What Coles Did Right

A solid uplift in Coles’ Supermarkets margins (up 23bp to 5.3%) was a key highlight for Morgans, driven by an improved loss (shoplifting) performance, strategic sourcing benefits, $327m in “Simplify & Save to Invest” cost savings, greater efficiency from the automated distribution centres (ADCs), and growth in Coles 360 retail media income.

Since you asked, Coles defines Coles 360 on its website thusly: Coles 360 combines the power of customer connections, media connections and partner connections to offer your brand a one-stop media solution.

These gains more than offset higher wage costs, increased D&A, and new expenses associated with operating the customer fulfilment centres (CFCs), allowing Coles to continue to invest in the customer offer.

Lower costs than expected from the implementation of the Witron (distribution centres) and Ocado (fulfilment centres) platforms were a positive, notes Ord Minnett, and company commentary suggests these major projects are driving strong improvements to its operational performance. There are likely further gains to come from these initiatives when their implementation is complete.

Coles’ NSW and Queensland ADCs are delivering improved availability, Macquarie notes (20% more so than Victoria, where an ADC is to be commissioned by 2030), which has flow-on effects on product quality in-store, and customer NPS.

Since you asked, Net Promoter Score (NPS) is a market research metric that is based on a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague.

In addition, the Ocado CFCs continue to be scaled up, to support eCommerce growth. Macquarie suggests if capacity continues to be filled, there is material upside to Supermarket earnings.

What Woolies Did Wrong

There was limited insight into Woolworths’ FY25 performance, Macquarie notes, nor a short-term strategy to fix the performance issues. Management suggested customers "love Woolworths” based on improving NPS scores but this isn’t translating into profitable sales.

Grocery is the most contestable retail segment, Macquarie suggests, with grocers needing to win every day. Their frequency of purchase means performance can turn quickly. It’s not clear if Woolworths made mistakes and/or competition was the most disruptive factor.

Macquarie notes cross-shopping is “huge” in grocery retail (seeking best deals), particularly between Woolworths and Coles because both are omnipresent. Data suggest 31% of Woolworths customers also shop at Coles and 11% also shop at Aldi. And 38% of Coles shoppers shop at Woolworths.

Macquarie suspects Woolworths is missing this aspect of customer behaviour. Their customers are still in-store and claim they “love” Woolworths, but “cross-shopping is growing”. Equally, Macquarie suspects the percentage of Coles shoppers also shopping at Woolworths is dropping. These are subtle behavioural changes, notes Macquarie, but with material impact.

While there are no specific comparisons, all brokers suspect Woolworths lost market share to Coles in FY25.

Despite a price investment campaign launched in mid-May, Woolworths’ Australian Food comparable sales decelerated sequentially in the June quarter and in the trading update, suggesting to Morgan Stanley an ongoing customer perception problem.

Morgans notes Woolworths’ earnings were impacted by cost inflation (wage increases and higher livestock prices not fully passed through), price investment, stock loss (shoplifting) increases, and a negative sales mix from customers trading down into own brand and shopping more on promotions. Industrial action and incremental supply chain costs were also headwinds, with the earnings margin falling -80bp to 5.4%.

In an increasingly competitive retail environment, customers are prioritising value, Morgans notes, especially in non-food categories such as Pet and Baby. While sentiment appears to have stabilised, shoppers remain focused on specials and promotions.

While Woolworths’ improving NPS is encouraging, Citi suggests it’s likely to take at least another three to four quarters to get back to where it was prior to the issues in 2024 (industrial action). Earlier reports show when Woolworths’ customer satisfaction previously bottomed in 2015, it didn’t retake the lead on Coles again until the December quarter of FY17.

Woolworths has a great brand, business and opportunity, Jarden declares. However, this broker believes the business needs to get back to basics, adopting a true customer-led approach. Jarden thinks this can be done via a focus on right price, right product and right time, to re-engage the customer to drive sales and leverage its market-leading supply chain, format and data capabilities.

The FY25 result highlighted this need, Jarden laments, with little evidence of return on large capital investment, with sales weaker and June quarter items per basket down at a time the company had invested in price to drive volume - and when Coles and Chemist Warehouse ((SIG)) sales growth lifted.

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