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Australian supermarkets - Why are supermarket volumes declining?

The risk to supermarket revenue

24 May 2024

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 (COL) - 3Q24 sales insights

A hard act to follow

02 May 2024

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.

Australian supermarkets - Is ROE the key measure?

Reflections on return on equity

22 April 2024

The Senate Inquiry into Supermarket Prices has escalated into a debate about the merits of return on equity (ROE) as a measure of profitability. We certainly prefer ROE and other returns measures over percentage profit margins. However, in the case of Woolworths, the ROE of 27% (pre sig items) is influenced by historical cost accounting, buybacks and demergers. Care needs to be taken in looking at a single year.

Coles (COL) - 1H24 result insights

Coles has momentum for now

01 March 2024

Coles 1H24 results revealed a tight control on costs in its Supermarkets division and some easing of the headwind in stock loss. The retailer has started 2H24e strongly in its Supermarket business. While some of the momentum is likely to ease off, Coles should achieve market share gains in 2H24e. We also see further improvement in stock loss driving underlying EBIT higher in 2H24e.

Coles (COL) 1Q24 sales insights

Slowdown triggers cost focus

27 October 2023

Coles reported 1Q24 sales growth of 4.7% from its Supermarket division and 1.8% for Liquor. While Coles results were weaker than Woolworths, underlying trends remain quite similar and the growth gap is likely to remain small. The challenge for Coles is that sales growth is likely to be below underlying cost growth, putting an emphasis on cost savings to protect margins.

Stealing profits

Understanding the issue of retail theft in Australia

11 September 2023

Retail theft is reducing retail profits. Crime losses amount to 1.3%-1.4% of sales, or $4.5-$5.0 billion, across Australian retail. The issue has ramped up globally over the past year, with some of the increase year-on-year simply a return to normalisation post COVID-19. Reported Australian east-coast retail crime for FY23 is only up 2% on FY19 levels. The drive towards self-checkouts has exacerbated crime rates and retailers with challenges, like Coles, need to implement changes. As economic conditions tighten, crime rates may rise and prevent Coles from achieving any discernible margin recovery in FY24e in our view.

Coles Group (COL) FY23 result analysis

Profit margins pinched

24 August 2023

Coles reported underlying EBIT down 5% for 2H23 in its Supermarket division. The drop in profit margins was a function of both gross margin pressure from rising theft and higher operating cost growth. Unfortunately for the company, these trends will persist into FY24e leading to a drop in EBIT margins. FY24e should be a trough in earnings. However, margin expansion is largely contingent on its capex projects delivering a return and it may take 2-3 years to prove success on this front.

Coles Group (COL) Redbank site visit

Site visit to Redbank Automated DC

24 May 2023

Coles Redbank ADC will have 33% lower operating costs compared with the two DCs it is replacing. The physical footprint is also 50% smaller. Coles is consolidating all 18,000 ambient SKUs into the one site and the ADC will build pallets specific to each aisle of a store. The Redbank DC will ramp up to a typical 2.7 million cases per week and can manage up to 4.0 million in peak periods.

Once the NSW equivalent DC, Kemps Creek, is operational in the March quarter of 2024, Coles will have halved its ambient DC footprint in NSW and QLD but have twice the DC capacity

Coles (COL) 3Q23 sales result

Sales trends to moderate

29 April 2023

Coles reported 3Q23 comparable sales growth of 6.5% in Supermarkets and 1.5% in Liquor. Sales trends have slowed in Supermarkets on an underlying basis and as inflation unwinds, comparable sales are likely to slip back to 4% by 4Q23e. We expect Coles Liquor to continue growing sales slower than market growth.

Supermarket margins up

Shaping up as a good FY23e

04 August 2022

We expect a strong year of earnings growth for Australian supermarkets in FY23e. Higher food inflation is boosting sales and gross margins are also rising. We lift our FY23e EPS forecast for the major chains. Woolworths has the strongest sales growth, followed by Metcash, then Coles based on our feedback. In the full report, we address the cycle of price inflation and outlook over the next 12 months; and the outlook for Coles and Woolworths gross profit margins and EBIT margins.

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