Background
Coles and Woolworths recently announced their results for FY23. Both businesses have the same goal. Maximise profitable sales / share by exceeding shopper expectations.
This quick blog suggests the top line numbers are being driven by different approaches to managing a supermarket business. Should supermarkets develop internal capabilities and take everything in house or partner with 3rd parties?
The still niche segment of ‘digital’ shall be used to compare the different approaches. In this example digital includes click and collect, home delivery and retailer owned media companies. Generally speaking, this niche is now offering improving retailer margins, growing sales and the opportunity to differentiate the supermarket offer.
Coles Background
2006 Coles Myer (CML) sold Myer to Newbridge Capital and became Coles Group. Wesfarmers bought Coles Group in 2007. At this time Coles Group included Kmart, Target and Officeworks retail chains. Coles Group de-merged from Wesfarmers in 2018 but Wesfarmers maintained a 15% stake. Coles Group was now Coles supermarkets, Coles liquor and Flybuys (part ownership). Wesfarmers sold their last parcel of Coles shares in April 23 (AFR Wesfarmers checks out of Coles via $668m block, Barrenjoey on ticket, April 23).
Woolworths Background
2016 Woolworths group closed their last Masters hardware store. 2020 Woolworths purchased a 65% share of PFD Food Services (B2B). 2021 Woolworths de-merged their alcohol / hotel business (Endeavour Group) which is now a separate entity on the ASX.
Coles Financials
Source: Coles Group , Supermarkets
The topline numbers suggest a successful de-merger from Wesfarmers. Top line $ sales growth, increasing gross margin and consistent EBIT %.
Source: Coles Group , Supermarkets
What is interesting is that recent $ sales growth is being driven by price inflation not increasing volumes. This is common in many markets now. Historically $ sales growth was driven by lower prices, e.g. down, down pricing, increasing $ sales, sales volume and share.
During COVID Coles and Woolworths had a strong online offer (although temporarily suspended early 2020) vs other supermarkets including Aldi, Costco and independents. During this time (e.g FY20, 21) Coles $ sales growth was driven more by volume than price inflation. Post COVID the biggest challenge to Coles (and others) has been driving volume sales. During the current cost of living crisis (FY23) volumes appear to be declining. Coles continues to offer value to shoppers. For example, hundreds of SKUs had ‘dropped and locked’ pricing in FY23. Simply put, shoppers are purchasing less volume due to cost of living pressures. My blog Does EDLP, including P/L (private label), improve business results? provides more information.
The following industry numbers highlight declining volume in the Australian grocery market.
Source: NielsenIQ Homescan 52 w/e 25/03/23
Coles CODB
Coles has achieved a cumulative reduction in CODB (Cost of Doing Business) of $1B since FY19. This is due to their ‘Smarter Selling’ program. Interestingly their CODB % of sales has increased since FY19. This is due to general increases in CODB – not COVID related costs. Coles has had general increases in CODB, such as wages like other businesses. Plus, Coles had additional costs due to increasing investments in digital (including Coles 360, eCommerce) plus logistics and store renewals etc to better serve shoppers.
The following CAPEX (capital expenditure) tables highlights Coles Group (supermarkets plus liquor) have significantly increased their CAPEX spend during the last 5 FYs. This CAPEX figure includes new ADCs and CFCs. FY24 plan is CAPEX in $1.2 – $1.4B range.
Source: Coles Group , NB Supermarkets plus Liquor
Woolworths Financials
Source: Woolworths Group , Australian Food
Numbers presented above are for Australian Food. This includes Woolworths supermarkets, metro and eCom.
Woolworths topline numbers suggest a successful de-merger from Endeavour. Top line $ sales growth, consistent gross margin and growing EBIT %. Interestingly Woolworths EBIT % growth is being driven by controlling CODB post COVID. This has been achieved by an on-going investment in operations. For example, FY20 launch Smart Store 2.0 technology and FY22 RT3, new rostering tool roll out commenced. Removing costs from the supply chain is not a new concept to Woolworths. In 1999 Project Refresh was launched with the first phase focusing on operational efficiency. In comparison Coles (like many other businesses) is experiencing increasing CODB pressures.
Topline Numbers Summation
The topline numbers for Coles and Woolworths highlight both businesses are performing well in a difficult trading environment. Increasing $ sales, $ EBIT etc highlight the success of their different approaches.
Online Sales
The above table highlights the change in shopper behaviours. Obviously during COVID shoppers had increased demand for online orders. Coles and Woolworths had to temporarily suspend online orders in early 2020 as they were unable to meet the significant increase in demand. Now, post COVID, shoppers are returning to shopping in stores. This has led to declining sales growth rate in 2023. Once factoring in price inflation sales volume in FY23 probably declined.
The following chart highlights Woolworths sales growth from $1.4B in FY19 to $5B in FY23. During the same period Coles sales grew from $1.1B in FY19 to $2.8B in FY23. eCom sales includes Woolworths B2C plus Woolworths at Work (B2B).
Coles Ocado
Some shall suggest Coles agreement with Ocado has limited their online sales growth in the short term. The initial agreement, signed in 2019, had a goal of opening 2 CFCs in FY23. Updated opening date is now FY24. Also the cost has increased from $150M to $330M. (AFR, Coles’ Ocado project in the spotlight as customers get impatient, May 23).
As outlined by Sue Mitchell (AFR, Coles’ Ocado project in the spotlight as customers get impatient, May 23) there is also a debate whether CFC (delivery next day/s) is what shoppers now demand. Recent research from Macquarie Group suggests that 40% shoppers prefer click and collect, 35% delivery ASAP and 27% with delivery at a later date. To meet demand for q commerce (quick commerce) Coles has Rapid Click & Collect (60 minutes) and Rapid Delivery (90 minutes). Woolworths similarly has Metro60 (60 mins) and Delivery Now (two hours).
A difference between Coles and Woolworths is that Woolworths has 9 smaller suburban CFCs (plus Auburn being built) vs Coles 2 existing suburban CFCs. Coles does plan to have more suburban CFCs in the future.
Retail Data / Media
Historically supermarkets would normally outsource data sales, e.g. Aztec, Nielsen, and advertising to agencies. Even loyalty cards, such as Flybuys, could be outsourced. For example, Flybuys launched as a JV (joint venture) between Shell, Coles Myer and NAB. More recently supermarkets in general, have taken data (scan, loyalty card) and advertising (in-store, digital) in house.
2020 Coles decided to partner with Circana (old name IRI) to sell data/ insights to suppliers. Coles Synergy, a new data analytics tool, was offered to the Coles team and suppliers. The advantage to Coles was they could use the existing Circana Liquid Data Platform to analyse data internally and share with suppliers.
2022 Coles Media was relaunched as Coles 360. Coles 360 partnered with Redworks, a Retail Media Specialist agency. Coles 360 is able to use the Coles Synergy data to offer the Coles team and suppliers access to a one-stop media solution. FY23 Coles Media income increased by 27%.
2013 Woolworths initially invested in Quantium to be a part-owner. 2021 Woolworths increased their shareholding to be the major shareholder (75%) (Woolworths). In addition to Quantium Woolworths launched Cartology, their media agency, in 2019. 2022 Cartology purchased Shopper Media to offer Woolworths and its suppliers more media advertising options.
Woolworths FY23 Digital & Media (idX/Cartology plus Everyday X) generated $1.35B gross sales for $92M EBIT, +71%. For comparison eComX (B2C & Woolworths at Work online sales) generated $5.1B gross sales for $89M DAP (directly attributable profit), -4.9%. These numbers highlight the potential financial returns in retail data / media.
In house or partnerships?
This very brief overview of digital has highlighted a major difference in Coles and Woolworths business approach. Coles is partnering with numerous 3rd parties to improve their business performance. For example, Ocado for CFCs, Circana for data and Redworks for advertising. Generally speaking, Woolworths is building capabilities in house to improve their business performance.
IMHO (in my humble opinion), Coles were in a difficult position after de-merging from Wesfarmers. The level of competition in the market was increasing. 2016 Aldi Australia opened their first stores in SA and WA. Amazon Australia opened their first warehouse in Australia in 2017. 2016 Woolworths closed their Masters hardware chain and could increase investments in their supermarket business. At the same time Coles had declining profit / ROI when they de-merged from Wesfarmers. My blog, Did the GFC, Aldi or Woolworths hurt Coles?, provides more details. Partnering with 3rd parties allowed Coles to improve their business performance easier, faster and with a minimal up-front investment.
Post Masters Woolworths has been building a broader business to serve shoppers (B2C, B2B). Previously this was described as an ‘ecosystem’. More recently it has been about ‘adjacencies’. IMHO it is a similar model to Amazon. Woolworths are building the infrastructure to ‘sell anything (food and grocery) to anybody’ with an initial focus on logistics / supply chain. The next phase is to focus on technology (e.g. Quantium) to better serve shoppers. Like Amazon, to achieve this outcome Woolworths has been building their business capabilities in house.
Summation
Coles and Woolworths are large public companies in Australia so their financial results will always be analysed. This year the focus has been on Woolworths large % increase in EBIT whilst shoppers are facing a cost of living crisis. IMHO the results this year are due to long term investments Coles and Woolworths have been making. The difference is that Coles is partnering with more 3rd parties and Woolworths are focusing on building capabilities in house.
The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation. Contact Details .
