Coles’ fully automated online fulfilment centers are ramping up. Its customers within the delivery catchments of these new warehouses in New South Wales and Victoria appreciate the improved selection and availability. Online supermarket sales are up 26% from a year ago.

Why it matters: The shift of grocery sales to online is weighing on in-store sales growth. We calculate in-store sales increased by only 1% in the March quarter 2025, while hourly wages are up 4% on last year. Without material operational efficiency gains, this is a headwind for store profitability.

  • We estimate Coles is maintaining its share of the Australian grocery market. If so, the strong online sales growth is coming at the expense of its own stores rather than of its key competitor Woolworths’ market share.
  • Further, Coles’ strong online channel growth is a drag on profits while the new fulfilment centers are ramping up and underutilized. We expect supermarket EBIT margins to decline slightly to 5.1% in fiscal 2025.

The bottom line: Group sales growth of 3.6% fiscal year-to-date is tracking in line with our unchanged full-year forecast, adjusted for an additional trading week in fiscal 2024. Our earnings estimates are unchanged and we maintain our fair value of $15.50. Shares screen as materially overvalued.

  • Australian supermarkets offer a relative safe haven from US tariffs. However, wide-moat Woolworths trades around fair value and offers relatively better value than no-moat Coles. On our fiscal 2026 earnings estimates, Woolworths trades at a price/earnings ratio of 21 compared with Coles at 25.

Between the lines: Faced with high mortgage rates and cost-of-living concerns, shoppers are more value-conscious and liquor demand is subdued. Like-for-like liquor sales, adjusted for the timing of Easter, were flat in the March quarter. Coles generates less than 10% of group profits from liquor sales.

Coles maintaining its market share

Coles Group’s businesses are defensive in nature, with its cash flow largely from consumer staples which are relatively stable across the economic cycle. Coles also profits from negative working capital, allowing it to release capital as the business scales. The quality of these cash flows is high and with cash generation averaging over 100% in the five years to June 2028, we expect the dividend payout ratio to average over 80%. Coles’ investment appeal as a defensive income stock is further underpinned by its strong balance sheet, manifested in investment-grade credit ratings from both Standard & Poor’s and Moody’s. Operating leases have an average lease expiry of around six years, providing the group with the flexibility to optimize its store network.

Coles operates the second-largest supermarket chain in Australia. The group gradually expanded its market share under Wesfarmers ownership, peaking in fiscal 2016. Since then, we estimate Coles lost some 230 basis points in market share, chiefly to Woolworths. However, over the past three years, the combined market share of the full-service supermarkets, Coles and Woolworths, has been steady at 65%. At the same time, Aldi gained 60 basis points, while the independent supermarkets and grocers were the losers and the IGA network’s market share shrank by some 50 basis points.

Coles supermarkets currently capture 28% of Australian food and grocery retailing, compared with market leader Woolworths at 36%, the IGA network at 12%, and Aldi at 9%. Costco operates membership-only warehouses and has a market share of under 2%. The US giant commenced trading in Australia in 2009 and currently operates 14 warehouses.

E-commerce penetration of Australian food retailing remains low, at around 3%, with Coles and Woolworths as the dominant online players. We expect in-store sales to continue to dominate total industry sales for at least another decade, accounting for over 90% of revenue. However, we estimate incremental sales growth is increasingly sourced from online. Therefore, we anticipate optimizing e-commerce economics and convenience to be key focus areas of supermarkets.

Coles bulls say

  • Coles’ market-leading position and difficult-to-replicate store network are competitive advantages over smaller existing competitors and any new entrants.
  • The significant market share of independent supermarkets and grocers with lesser bu ying power over suppliers due to their smaller scale provides an opportunity for Coles to further consolidate the markets and take share.
  • Coles is a leader in e-commerce food sales in Australia. Together with relatively low online penetration, the threat from online-centric competitors to Coles’ core supermarkets business is manageable.

Coles bears say

  • Coles could face significant loss of market share to Woolworths, new entrants like Amazon Fresh, or to existing competitors with higher sales growth rates like Aldi and Costco.
  • Coles’ strategies are easily replicable by arch rival Woolworths. The two market leaders have a history of mimicking each other’s initiatives. The limited potential for long-lasting operational advantages makes differentiation challenging beyond just pricing.
  • Despite the relatively low online penetration of Coles’ supermarket sales, the fast-growing e-commerce channel dilutes food EBIT margins.Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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