Coles vs Woolworths: Retail rumble goes down to the wire
Coles and Woolworths are on the cusp of a seismic shift and this time, the winner really does stand to take it all.
As everyone was watching the Reserve Bank’s rate call earlier this week, a bigger drama was quietly unfolding in the aisles of corporate Australia. Coles and Woolworths came tantalising close to trading places.
A gap of around $800m in market capitalisation between the two is the narrowest it’s ever been. This might sound like serious money, but in the context of this decades-long duopoly, it’s within a whisker.
These two have historically been separated by tens of billions, with Woolies always on top, making the recent convergence even more remarkable.
By Friday afternoon, the spread had drifted back to a more comfortable $1.3bn (Woolies at $32.4bn, Coles at $31.1bn), but the trend is there.
The current path suggests Australia’s grocery crown could soon change hands, with Coles boss Leah Weckert looking to grab it from Woolies’ newish boss Amanda Bardwell. If the switch happens, that will be a seismic moment in retailing.
It’s a finely balanced equation: Woolies is just one disappointing sales update from slipping to the No.2 spot, while Coles needs to keep its current momentum. All this adds more spice leading into the Woolworths quarterly update on October 29. Coles is scheduled to follow a day later.
The dramatic narrowing of the market cap is more about Woolies losing its way, but this can’t take away the fact that Coles, forever in its rival’s shadow, has seriously found its mojo since Wesfarmers set it free seven years ago. Although the transformation didn’t happen overnight.
For context, Woolies has always been the retail gorilla. At its peak in the middle 2021, it was worth more than $55bn versus Coles at $22bn.
The spin-out of Woolworths’ Dan Murphy’s liquor chain and pubs and pokies business Endeavour cut $12bn from the retailer’s value in June that year. However, Woolies recovered most of that back in the months following the demerger, as then boss Brad Banducci promised to focus on Woolies’ core supermarkets business. A string of missteps and intense regulatory scrutiny since then saw it start going backwards. This time last year, Woolies was valued at $40.3bn, with Coles at $24bn.
While its smaller rival was investing billions in supply-chain upgrades to move stock cheaper and faster, Woolworths was wrestling with pricing perception problems that turned toxic as inflation peaked. A major pricing “reset” last year has so far failed to resonate with shoppers.
The decline accelerated from December last year, when crippling warehouse strikes handed market share directly to Coles.
The market has responded accordingly. Woolworths shares have plummeted 19 per cent over the past year while Coles has surged 30 per cent. Sales growth since the start of July tells the same story: Woolworths managed just 2.1 per cent compared to Coles’ 4.9 per cent. This is despite Woolworths’ superior scale – $69bn in revenue against $44bn, and 1300 Australian stores for Woolies versus Coles’ 860.
Operationally, Coles is running rings around its larger rival. Better returns on assets, superior earnings margins, and laser focus on core operations have created competitive advantages that scale alone cannot overcome. The market has essentially written off Woolworths’ struggling Big W discount chain and placed minimal value on its 190 New Zealand supermarkets – a damning assessment of diversification gone wrong.
But apart from the sales wobbles, at its core Woolies’ size means it has the potential to generate better margins – if it wants. Everything else it is doing beyond its core supermarkets and e-commerce operations is weighing it down, but it’s not yet ready to let go.
Bardwell faces the classic conglomerate curse. Beyond supermarkets, Woolworths juggles Pet Stock, food distribution, Big W, New Zealand operations, and digital ventures demanding heavy investment. Its $2bn-plus annual capital expenditure is spread too thin, and most of the cash is coming out of its supermarkets, while Weckert’s $1.2bn is more focused. It goes entirely into renovating supermarkets, upgrading supermarket IT and building warehouses.
Reset vs selldown
In August, Bardwell outlined another reset plan for her Big W business where sales and returns have gone nowhere. But this one had the kicker – she’s putting the retailer on a separate IT platform. She painted the move as offering more flexibility with the general merchandise needed to run its own race from the supermarkets. However, it was widely seen as the last chance for Big W to shape up or be sold off. In other areas, Bardwell has closed the MyDeal website which struggled to compete against the likes of eBay and Amazon.
Both retailers have committed $100m to sharper pricing, but Woolworths may need deeper pockets to regain ground rather than merely hold position.
Bardwell’s $400m cost-cutting program and three new distribution centres, including a smart warehouse in western Sydney, represent her main turnaround levers. But the single biggest – execution – has been lacking at Woolies for several years.
Coles is already seeing the benefits of heavy spending on warehouses, with two mega warehouses switched on this year. Meanwhile, it is ramping up its joint venture Ocado robotic warehouse for e-commerce in western Sydney. This is an expensive gamble, with the prize potentially in the hundreds of millions in additional earnings. Coles is paying up though to get access to the Ocado IP.
For Woolies, the loss of its No.1 spot could come with an added headache. Its shares have long commanded a premium, given the crowding out of index funds. Active managers like Insignia, Norges, and super funds Aware and Hesta hold a much bigger slice of Coles than they do Woolies.
Woolies is now the smallest member of the mega-cap index, the S&P/ASX 20 and names like QBE, REA and even Coles are knocking on the door of this elite member club. If Woolies finds itself booted out, it will trigger some index selling pressure with the switch into Coles. Although a very big safety net for index funds remains the ASX 100 and the benchmark ASX 200.
Coles faces its own vulnerabilities. Trading at nearly 25 times earnings against Woolworths’ 22 times, any momentum loss would trigger sharp corrections. The third biggest player Aldi keeps gaining market share ground – although this is mostly at the expense of IGA. Coles too appears way under provisioned for an upcoming underpayments legal action that Woolies is also facing. This could be a significant, but one-off earnings hit for Coles.
Weckert has also struggled with Coles’ liquor operations in the face of a structural shift in shoppers’ drinking habits. Ironically, this is sector a Woolworths has since abandoned.
Ultimately, this corporate drama may prove a winner for Australian shoppers.
If Bardwell can separate Big W and refocus purely on supermarkets, Woolworths retains the scale and the e-commerce edge to reassert its dominance and returns.
The alternative – a full-blown pricing war – would devastate margins but delight shoppers. Either way, Australia’s retail landscape is undergoing one of its most significant upheaval in decades.
johnstone@theaustralian.com.au
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