Woolworths has had a rough FY25 for a range of reasons. However, looking forward, we are more interested in the company’s strategic direction under CEO Amanda Bardwell. We expect more details in coming months that may lead to further “simplification” or cost savings and decisive action on underperforming businesses like Big W, HealthyLife and Marketplus. Woolworths is also likely to double-down on its core proposition as “the fresh food people”. In this report, we assess the extent of any potential strategic shift by Woolworths and the implications for the broader industry. As Woolworths recovers, others will feel the impact.

Woolworths improving 3Q25 sales trends suggest the disruptions from distribution centre strikes and public scrutiny are settling. We expect sales trends to remain near prevailing levels and the differential in growth between Coles and Woolworths will be small. Big W’s losses are accelerating and the retailer’s plans for improvement will be difficult to execute given the competitive backdrop. Losses could grow and an exit or sale of Big W is increasingly likely in our view.

Coles reported 1H25 EBIT up 5% with a stronger lift in its Supermarkets division of 7%. The company had solid sales trends, which partly reflected a benefit from Woolworths DC strikes. Underlying sales and EBIT growth in the Supermarket business is closer to 3%-4%. Cost savings and DC efficiencies are offsetting natural cost inflation, not boosting margins. Over the next 18 months, Coles will benefit from the unwind of transition costs that will lead to double-digit EPS growth.

Woolworths reported sales up 4%, but EBIT down 14% in 1H25. We expect the company will have a challenging 2H25e as well. Management is starting to address its challenges. CEO, Amanda Bardwell, said that the company will assess the shape of its business portfolio. Each business unit must have reasonable prospects on a 3-5 year view. Overhead costs are being cut and there is a tougher stance on the low returning Big W and NZ divisions.

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.

Woolworths reported better 1Q25 sales trends compared with recent quarters. However, the company has increased its price investment to achieve the better sales result. This price investment is likely to continue and will weigh on profit margins in FY25e with a gradual recovery requiring a cost focus beyond that year in our view. There is a risk that the discounting incites a response. Big W and NZ have had better sales growth in 1Q25 as well, but margin recovery will be years away.

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.