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.

Woolworths hosted a tour of its Melbourne South Regional Distribution Centre (MSRDC). This highly automated DC opened 2019 but COVID-19 delayed any inspection of the site. Woolworths spent over $560 million, including capitalised lease costs, and we estimate the return on investment at 7%-9%. While Woolworths has a different partner to Coles, we expect a similar outcome in terms of cost per case in the automated DC and a similar return on investment. The shift to automation comes at an important time for the supermarkets given escalating wage cost growth. While these DCs are impressive, they are more likely to offset to wage pressures than lift profit margins.

Amazon has made some noteworthy decisions in Australia. It now has a massive 200,000 sqm distribution centre (DC) operating in Western Sydney and has held back on raising the price of Prime, unlike the US. Is this a sign of more aggressive customer acquisition in Australia? Why is Prime so much cheaper here than in the US? In our view, Amazon is simply in its infancy. It will need to expand its same day delivery service before lifting the price of Prime. In order to offer same day delivery, Amazon probably needs 3-4x the DC capacity that it has today.