The link provides a presentation associated with a webinar we held. The recording is embedded in the presentation and details our revised forecasts for retail in the year head. Woolworths is undertaking a program called Customer Offer Reset (COR), which will reduce its branded range and shift more products to an every day low pricing (EDLP) proposition called Lower Shelf Price (LSP). The program will show up on shelf shortly and impact the next two years. COR and LSP should be positive for sales and earnings, but it does depend on the competitor response.

Woolworths is undertaking a program called Customer Offer Reset (COR), which will reduce its branded range and shift more products to an every day low pricing (EDLP) proposition called Lower Shelf Price (LSP). The program will show up on shelf shortly and impact the next two years. COR and LSP should be positive for sales and earnings, but it does depend on the competitor response. These programs demonstrate a sharper focus by Woolworths on execution and price trust. While not solely related to COR and LSP, we expect Woolworths to sustain above market (and Coles) growth over the next year and EBIT margin expansion.

Woolworths is having a challenging time in its core supermarket business. The recent distribution centre strike will impact sales and earnings in 2Q25e, but should dissipate. More fundamentally, the company’s price investment is unlikely to deliver a decent return and online sales are margin dilutive. Across the industry, the drop in supermarket inflation gives us cause for concern about the industry’s sales and margin outlook over the next two years. While a short-term winner from the strikes, broader industry sales weakness will make it hard for Coles to deliver decent sales growth in 2025.

Coles’ investor day last week kept the messages high level and consistent about its strategy with an emphasis on value, digital evolution and efficient execution. The focus was its online and distribution centre automated fulfillment. While Witron is clearly proven, for the Ocado CFCs, we expect the payback will be very long-dated. Coles recent capex projects will lift profit margins over the next two years. 

Coles will host an investor day on 14 November 2024. The company will showcase its major capital projects undertaken over the past five years. Witron distribution centres are impressive and Ocado may actually work. The debate in our mind is whether any competitive advantage has been built. We doubt it. Coles margins should “pop” in FY26e as the capital projects deliver and implementation costs drop. However, the medium-term growth is modest and risks remain around a higher intensity of competition along with challenges in growing market share.

Coles reported 1Q25 supermarket sales trends slightly ahead of Woolworths. The bigger debate is whether Coles has achieved the result with less price investment. The short answer is yes, but not in a way that will protect Coles sales or margins in future. Overall growth is weak for both retailers with broadening competition for groceries in Australia. Coles decision to build another Witron DC in Victoria is logical but the cost increase suggest the return on capital may be lower than the first two DCs it built.

The ACCC’s interim report into Australian supermarkets has not produced any alarming concerns for Coles and Woolworths yet. However, it is too early to draw conclusions either way. The interim report is a very preliminary summary of the issues the ACCC will explore.  The ACCC is yet to process much of its data and there will be further submissions and interrogation over the next two months. We expect the risk to Coles and Woolworths is largely around their ability to expand gross margins to offset cost pressures. Beyond that, we expect the ACCC to conclude that the supermarkets do hold market power but are still largely competitive.

Coles reported underlying EBIT up 5.7% for FY24 on a 52-week basis. EBIT growth in Supermarkets was much stronger in the second-half but Liquor earnings fell significantly. Coles had a step-down in sales trends in 2H24 and these are likely to continue. The gross margin gains from lower stock loss in FY25e should underpin a flat EPS year with better EPS growth in FY26e as the benefits of the Witron and Ocado capex projects comes to fruition.

Australian supermarket volumes are likely to drop by 2% in FY24e on a per capita basis, which is a continuation of declines seen since March 2022. While higher food prices may explain some of the softness in volumes, other factors are at play including channel leakage, lack of store refurbishments and less new product innovation. We forecast 3.0% comparable sales growth for the supermarket sector in FY25e, but a downside case of 2.3% is possible if volumes continue to decline. A low rate of comp sales growth would be very challenging given comp cost growth is unlikely to fade. Weaker comp sales will put downward pressure on Coles and Woolworths profit margins.

Coles reported 3Q24 comparable sales growth of 4.2% for its Supermarkets. It was a good quarter for Coles. However, we expect it is a peak in growth with some transitory factors and fading inflation leading us to forecast 2.5% comparable growth for 4Q24e. Liquor had a much weaker period and sales declines are likely to continue as the industry volumes reset lower and Coles unwinds some loss-leading sales.