Retail sales sprint may have a surprise winner

OPINION: Despite some widely publicised problems in the past year, Woolworths is emerging stronger in the supermarket face-off with major rival, Coles. 

Retailing is not a competitive sport, but if you follow what research analysts are saying about competition between Woolworths and the Coles, it has become just that – with the finish line approaching and Woolworths shaping as the surprise winner.

Until recently, there was no doubt in the minds of investors and shoppers which of the big two of Australian food and liquor retailing was top dog – Coles by a country mile.

It wasn’t always that way. A decade ago, before Coles was acquired by Wesfarmers and smartened up with a multi-billion dollar investment drive that improved old shops and opened new ones, Woolworths was leading the way.

Times change, and they certainly appear to be changing in the traditional Coles versus Woolworths drag race, with the first whiff of a switch in leader coming in a couple of ways.

• Share price comparisons, which reveal a recovery by Woolworths after several bad years, including its ill-fated adventure in hardware.

• An assessment by several analysts as to which retailer did best during the important selling season – the Christmas/New Year period.

The stock market view offers a clear difference between Wesfarmers and Woolworths over a five-year period and a three-month period, with Wesfarmers the long-distance winner and Woolworths the sprinter.

Between February 2012, and early February this year, Wesfarmers shares rose by $10.80, a reasonable 36 per cent increase. Over the same time, Woolworths rose by $1, up 4 per cent, though even that rise is a surprise given the company’s hardware blooper when it tried to introduce US-style retailing to a market dominated by Wesfarmers’ star performer – Bunnings.

The worm started to turn in the middle of last year, a time that coincides with Wesfarmers management launching a hardware adventure of their own by acquiring a troubled British chain, Homebase, and starting a rebranding exercise with the launch of Bunnings UK.

During the past three months, and despite a windfall gain for Wesfarmers from higher coal prices (which have boosted its coal-mining operations), Woolworths shares rose by 9 per cent while Wesfarmers shares today are roughly the same price as early November.

Macquarie Bank made an early assessment of the competition between the two retailing giants in a January 18 research report headed: ‘Woolworths & Wesfarmers, resources fund supermarket scuffle’.

Macquarie’s view, after noting industry feedback suggesting Woolworths bettered Coles over Christmas, was that Wesfarmers remains a better investment than Woolworths, though both companies enjoyed strong liquor sales from their respective liquor divisions – Liquorland and First Choice (Coles), and BWS and Dan Murphy’s (Woolworths).

Investment bank UBS also favoured Wesfarmers over Woolworths (neutral versus sell) in a report also dated January 18, but produced perhaps the most interesting research into a fascinating two-horse race using a privately developed survey of suppliers to both retailers.

Based on response from 45 suppliers, the end result was a win, as it has been for several years, to Coles; but the trend was more important than the outcome because the lead held by Coles was seen to be shrinking.

On a scale of zero to 10, based on questions relating to 26 measures ranging from store presentation to marketing and staff morale, Coles’ aggregate score was 6.8, down 0.3. Woolworths aggregate score was 6.2, up 0.6.

Late last month, (January 31) UBS changed its mind on Woolworths, swapping a ‘sell’ tip to to a ‘buy’ based on its supplier survey and an expectation that supermarket sales growth is outpacing that of Coles.

More will be known about the Coles versus Woolworths battle in the next few days.

Wesfarmers is scheduled to file its half-year financial report on February 15, with most interest in the trading result of Coles.

Woolworths follows on February 22 with its half-year report, which investment bank Deutsche believes will confirm that Woolworths is winning the current version of supermarket wars and deserves a ‘buy’ tip as opposed to Wesfarmers ‘sell’ rating.

“Our industry feedback suggested Woolworths won Christmas,” Deutsche said. “Industry checks suggest Christmas was highly competitive for food retailers but Woolworths traded well, recouping some of the market share it lost in recent times.”

The test of those views from the banks will come in the financial results; and while Woolworths might have outsold Coles, that does not mean it was more profitable, and also does not mean that Coles will take a shopping loss lying down.

Diamond days

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