With the dust finally settling after the scathing ACCC enquiry in the supermarket sector, shares in Coles (ASX: COL) and Woolworths (ASX: WOW) were both up over 3% in the last week, signalling that the worst is now behind them.
Last week Azzet reported on recent Macquarie research, which suggests that share prices materially improve, after the release of the regulator’s conclusions into any sector.
Macquarie also felt that the re-rating opportunity was greatest for Woolworths given its five-year low relative valuation compared to Coles Group.
Damp lettuce censure
Apart from a few near-term material implications, fallout from ACCC’s report has been compared to a wrist slap with a damp lettuce.
For example, while there are a few implications for the fresh food segment, there were no forced divestitures, land-banking, or pricing rules recommended.
Meanwhile, on the fresh food front, there’s a push for greater transparency about weekly tendering, supply forecasts, and market reporting obligations.
For example, recommendation 15 of the ACCC report suggests Aldi, Coles and Woolworths shouldn’t be able to unilaterally reduce wholesale fresh produce prices or volumes agreed with suppliers in their weekly tendering processes.
ACCC recommendations
Admittedly, everyday low pricing (EDLP)/Hi-Lo conclusions remain on hold, subject to an ongoing court case. However, that said, the report pulls short of recommending regulating grocery pricing or restricting promotional strategies.
Out of the 20 recommendations contained in the report, supply chain and trading arrangements accounted for 11, while consumer experiences and outcomes and retail competition with six and three, respectively.
Overall, the ACCC is recommending more transparent pricing practices, communication of shrinkflation, and greater disclosure to suppliers (particularly in fresh categories).
Then there are reforms to planning and zoning laws to enable greater competition.
But having conceded that consumers currently benefit from a relatively efficient food supply system, the ACCC has no plans to bring down pro-competitive changes any time soon.
More fierce competition
Given that Aldi isn’t planning to materially expand its network any time soon, Coles and Woolworths, the industry's two largest players – with 38% and 29% market share respectively - have been left to slug it out for market share growth.
Jarden believes the ACCC report will reset the starting gun for Coles and Woolworths to chase market share growth, especially within the EDLP segment, where they have 16% and 19% of sales, respectively.
Coles has been the first of the two big supermarkets to throw down the gauntlet in the competition stakes.
In an attempt to go head to head with the Endeavour Group (ASX: EDV), which owns both the Dan Murphy and BWS liquor chains, Coles is embarking on a unification strategy for its 984-store three liquor store operations that have struggled for more than a decade.
While Coles supermarkets outperformed Woolworths during 1H FY25, the liquor segment was down 8.8%.
Starting in April, Coles will start to unify its Liquorland, Liquorland Cellars and Liquorland Warehouse stores under one banner, Liquorland.
Around 160 First Choice and Vintage Cellars will also cease to exist.
The national rollout is expected to be finished by the end of this year.
Even though Liquorland’s footprint will increase by 25%, Cole’s Liquor CEO Michael Courtney is the first to admit that store unification alone isn’t a magic pudding.
Homework
He recently told the market that store unification will be accompanied by price matching to ensure it can go head to head with Dan Murphy.
The homework Coles has already done suggests they’re onto a winner, with a 16-week pilot with 14 stores in SA, Vic and Qld resulting in increased brand awareness and customer engagement.
“This is the biggest transformation in the history of Coles Liquor Group and we believe it will have a meaningful impact on how we serve customers the drinks they want, when they want them, and how we partner with suppliers to deliver value,” Courtney said.
“The market’s much broader than just Dan Murphy’s, and we want to make sure that we’re best placed to compete against all the offers in the market, which I think this certainly helps us with.”
Capex in technology
Far from taking the Coles onslaught lying down, Endeavour’s new executive chairman, Ari Mervis has embarked on a major review to simplify the company’s 1400 sites across its two chain stores.
While Endeavour managed to post a resilient FY24 result, lingering technology costs are expected to make FY25 another challenging year.
Within its 1Q FY25 outlook, Endeavour guided to capital expenditure within the range of $450 million to $500 million, including the One Endeavour program.
Meanwhile, Coles has invested over $6 billion in capital expenditure to modernise its supply chain with the rollout of automated distribution centres (ADCs) and customer fulfillment centres (CFCs).
According to fund manager Contact Asset Management, it’s Coles strategic, long-term investment in technology-driven innovation which could underscore growing sales, higher profits, and a bigger dividend.
It’s understood that Coles' capex in technology has already seen the company achieve a 99% fulfillment rate and expand the product range by 25% compared to a typical Coles store.
Within its 1H FY25 result, Coles' e-commerce division reported sales growth of 22.6%.
Due in part to supply chain improvements, UBS expects Coles to achieve an earnings margin of 4.8% in FY25, which could potentially grow to 5.1% in FY26 and 5.4% in FY27.
This improvement in the earnings margin, adds UBS, could help the net profit after tax grow by 30.8% between FY25 and FY27, reaching a bottom line of $1.41 billion.
Coles' market cap is $25.8 billion, which makes it the 22nd largest company on the ASX; the share price is up 16% over one year and up 2% year to date.
Endeavour Group's market cap is $6.9 billion, which makes it the 81st largest stock on the ASX; the share price is down 28% over one year and down 8% year to date.
Woolworths' market cap is $35.9 billion, making it the 16th largest stock on the ASX; the share price is down 9% over one year and down 3% year to date.
