Analysts and shareholders have warned Coles could be losing material market share to Woolworths, with the incumbent pulling ahead thanks to its larger store network and more evolved online offering. However, behind the scenes, both could be losing ground to independents, which have quietly grown through the pandemic into a force to be reckoned with.
At Coles and Woolworths’ half-year results released this month, the difference could not have been more stark. Woolworths reported a bullish 7 per cent growth in sales for the start of the new year, twice the rate of Coles’ weaker 3.3 per cent rise.
But beyond the raw numbers, the companies’ respective chief executives shared vastly different views on the outlook for supermarkets. Coles’ Steven Cain was notably pessimistic in his outlook, pointing to macro factors such as weaker immigration growth and a reduction in stimulus as potential fires fuelling a decline in sales across the year.
Banducci, however, was far more sanguine. While the executive did warn a sales decline was in progress, to him it appeared “sensible” and “consistent”. “It’s not like it’s jumping off a cliff,” he said.
Ever-reticent to speak about the performance of his competitors, Banducci attributed Woolworths’ comfortable outperformance to a range of benefits, including the Woolies team having a bit more pep in their step coming in to the new year.
“Our team just got off to a good start in the second half. We got back to work really early,” the executive says. “Often we fall into a bit of a slump in the first two weeks of January, but we just didn’t this year.”
“E-commerce has also continued to be pleasingly strong and has been very consistent for us, so there’s a number of factors coming together there.”
In the eyes of Jim Power, an analyst at $24 billion fund management giant Martin Currie, the strength of Woolworths’ online strategy is a far more important factor than its staff’s exuberance. Power oversees the fund’s sizeable investments in both Coles and Woolworths and says Banducci’s early start in e-commerce has helped the company claim and maintain market share.
“Online is one of the main battlegrounds, and Woolworths is ahead. They started early, they’ve done a good job, so Coles will look to close that gap,” he says.
Last year, Woolworths rolled out the first of four trial automated ‘micro fulfilment’ centres and also announced three of its New South Wales distribution centres would be replaced with two automated ones.
Coles has instead partnered with UK tech company Ocado to build two centralised automated fulfilment centres at the cost of $150 million. However, these won’t be completed until 2023.
Again, the difference between the two was laid bare in last week’s numbers. Woolworths’ online sales almost doubled to $1.8 billion, where Coles’ increased a more muted 48 per cent to $1 billion.
Power believes these new warehouses will play a key role in Coles’ ability to claw back market share from its main rival, though Woolworths will maintain a natural hedge as its store count (1052) is well above Coles’ (824).
“In the current environment, more stores is an advantage, just not an advantage anyone would have talked about pre-COVID,” he says. “The longer it takes for shopper habits to normalise, the longer things look better for Woolworths over Coles.”
Coles boss Cain noted as much last week, admitting his company had been outshone due to an over-indexing of stores in shopping centre locations which were avoided by shoppers during the pandemic.
“People seem to have quite a short memory, as we were gaining market share going into COVID,” Cain says. “But each time there was a lockdown, people shopped locally, and because we’ve got fewer stores than our main competitors, they benefited more from that than we have.”
Jarden analyst Ben Gilbert agrees that online sales and a smaller store network are both key battlegrounds for Coles in its supermarket war. However, the seasoned market-watcher also believes the business’ controversial choice to ditch its paper catalogue in August may have had a larger impact than anticipated.
“Quite a high portion of Australians each week look to the catalogue in their letterbox to plan shopping trips and understand promotions,” he says. “So I think that’s certainly impacted some of the sales that have come through.”
Independents on the up
However, an often untold story in Australia’s supermarket saga is the ever-present impact of independents, along with smaller competitors such as Aldi and Costco. Gilbert, along with a number of other analysts, believes the independent sector has gained significantly on both Coles and Woolworths during the pandemic and may have retained a decent chunk of those shoppers.
“There’s definitely a clear trend out there of consumers wanting to shop more local and shopping closer to home,” he says. “And that’s benefiting players that have more stores, such as Woolworths, and the independents, in particular, are performing very strongly at the moment.”
Following Woolworths’ result on Thursday a number of analysts reiterated their belief the independent sector could be entering a purple patch. “The local thematic continues to be dominant, boosting growth for the Metcash supplied independents, with Coles poorly positioned in local and online,” JP Morgan’s Shaun Cousins wrote.
Data from market analysis firm IBISWorld shows independents, which are largely supplied by ASX-listed wholesaler Metcash, gained market share over 2020 along with Aldi. Investment bank Morgan Stanley is also bullish on Metcash, stating earlier this month an influx in regional tourism could drive significant sales growth across the independent sector.
Let’s just hope we don’t see anyone pull the price lever.
Jarden analyst Ben Gilbert
Despite this grim outlook for Coles, analysts and investors still believe the business is in a good spot over the long term, pointing to its strong profits, eventual integration of Ocado, and good process on its $1 billion in cost savings plan as positive moves.
But it wouldn’t be a true supermarket battle without a price war, and Gilbert believes any move by either chain to relive the steep discounts of years prior could see the whole sector deteriorate.
“What everyone’s watching is if we start to see more aggressive discounting in a market where consumers have become a bit more price agnostic,” he says. “If we see one discount, everyone follows and it becomes a race to the bottom which puts pressure on profitability.
“So let’s just hope we don’t see anyone pull the price lever.”
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Dominic Powell writes about the retail industry for the Sydney Morning Herald and The Age.