Terry McCrann: The $80 billion battle between Coles and Woolworths

THE two big retailers Coles and Woolworths and Commonwealth Bank are the three companies that arguably have more impact on the lives of all 24 million Australians, writes Terry McCrann.

THE two big retailers Coles and Woolworths and Commonwealth Bank are the three companies that arguably have more impact on the lives of all 24 million Australians than any other individually or as a group.

They impact directly via the $80 billion we put through their supermarket and petrol station tills each year — that’s more than $3000 for every one of us — and the $30 billion or so we (currently) pay the CBA in interest, in very large part on owner-occupied and investment property loans.

But that’s only their direct impact. They also have a huge indirect impact because of their dominant positions in the retail and banking spaces. They drag or drive so many other players with them.

The shares of the three, adding to around $240 billion, are also a huge component of your superannuation and direct investment savings.

Coles has competed aggressively with Woolworths and the consumer is the winner.

Indeed, if you add in the other banks and all the other businesses — like retailers and shopping centres — that ride on their coat-tails, perhaps closing on half-a trillion dollars of investments turns on their business decisions and performance.

The two big retailers and their head-to-head supermarkets are now poised in a very interesting position — both in their direct battle with the other bricks-and-mortar retailers and the emerging online disrupters.

And, oh yes, they are competing vigorously head to head. We are a world away from the cosy duopoly of the pre-2008 era. That was a duopoly based on Woolies very comfortably making a globally high 7-8c margin on each dollar of sales with Coles lucky to make 3c.

We then had six to seven years of Coles aggressively chasing sales (and slowly, successively, building margin). Initially Woolies resisted; it refused to cut its margin and its sales growth evaporated. It ended up losing much of that margin advantage anyway.

Now the positions are almost, but not quite, reversed. Woolies is the price aggressor. It’s winning sales growth. Coles is responding, but is also defending its margin, which is now higher than Woolies — something totally unimaginable in 2008 and would have seemed improbable even just a couple of years ago.

But that sales growth — of both — is modest in the more restrained overall retail environment and the march of other retailers, both in food and the discretionary spend. The consumer — you — is the winner. Big time.

These dynamics and trends showed up in clearly in the 2016 results of Woolies and Coles (in the parent Wesfarmers numbers) and in the first-quarter sales for 2016-17.

We don’t have the Woolies first-half numbers yet, but we saw the impact in the Coles ones yesterday.

Last full year, Woolies made just 4.47c of operating margin in food, liquor and petrol. Coles made 4.7c, and despite its slightly lower sales ($39.2 billion to $39.4 billion) that left it with a higher operating profit of $1.86 billion to $1.76 billion.

In the first quarter of this year, Coles was still recording — slightly — stronger sales growth at 2.9 per cent to 1.7 per cent for Woolies (and comp stores sales were 1.8 per cent to 0.7 per cent). But both were very modest, albeit in a subdued overall retail market. And the Coles momentum — and growth margin — over Woolies was a lot thinner than recent years.

The clear driver was Woolies’s more aggressive price-cutting — it slashed prices across the aisles across the quarter by 1.9 per cent, Coles cut by only 1 per cent.

On yesterday’s numbers, the Coles advantage might have evaporated entirely in the second quarter. Coles lifted sales by just 1.6 per cent. Comparative stores sales were up just 0.9 per cent. After factoring in deflation of 0.8 per cent, real (volume) sales grew just 2.4 per cent. And margin for the half just slipped that fraction from 2016’s 4.7c to 4.6c.

First, the Woolies numbers will be very interesting. Even more so will be, second, how this dynamic unfolds over the rest of 2017 and into 2018.