The supermarket chain Coles is the kind of “boring” business that may have been overlooked as an investment opportunity. Although it was divested from Wesfarmers in 2018, Coles’ heritage traces back to 1914 — giving it over 110 years of history.
According to a quick search, Coles commands approximately 30% of the Australian supermarket sector. Woolworths holds around 37%, making Coles’ share impressive considering Aldi, IGA, and other smaller retailers are left to compete over the remaining 30%.
Coles is a very defensive business. If it were to fail, Australians would have much bigger concerns than the state of their share portfolios. Regardless of economic conditions, people will continue to buy food and essentials. Should the business ever face serious trouble, it would likely be considered “too large to fail” from a government perspective.
Coles is an iconic brand with over 800 supermarkets and 900 liquor outlets, and it maintains an ongoing relationship with Shell-branded petrol stations through co-branded sites. Having reached near saturation in the Australian market, Coles benefits significantly from economies of scale, particularly in logistics, and holds strong bargaining power with its suppliers — a power it has, at times, been accused of exploiting.
The company is focused on improving efficiency through supply chain enhancements and other cost-cutting initiatives aimed at widening its margins. Post-COVID, Coles has actively pursued growth in online grocery sales and home delivery.
Despite its defensive characteristics, strong brand moat, and stable earnings, Coles appears relatively inexpensive as an investment. Its forward PE ratio is around 21 times, and it offers a dividend yield of approximately 4%. While this might seem expensive for a small pharmaceutical company or a gold miner, for a business controlling 30% of Australia’s non-discretionary spending on food and essential goods, it seems quite reasonable. In comparison, Woolworths trades at a PE ratio of around 25 times with a 3% dividend yield. Both businesses operate with similar efficiency, as reflected in Coles’ return on equity (ROE) of 32% versus Woolworths’ 33%.
Of course, Coles is not a high-growth company. Its growth will largely mirror Australia’s population growth, or come from gaining market share from Woolworths or smaller competitors. As for international expansion, Coles Group New Zealand Holdings Limited exists, but its presence in New Zealand is limited to licensing and Kmart merchandise. Coles has made some ventures into New Zealand’s supermarket duopoly, dominated by Woolworths NZ and Foodstuffs (which together hold a 90% market share), but breaking into this market will be extremely challenging — even though New Zealand consumers may welcome the competition. For now, Coles remains entirely focused on the Australian market, although it’s reasonable to think they may eventually look for overseas opportunities.
The company has faced negative press in areas such as supplier relationships, wage underpayments, and environmental sustainability practices. There could be regulatory changes ahead, but given the essential nature of the services Coles provides, it’s unlikely these issues will significantly damage the company’s long-term earnings.
In summary, Coles is an excellent company for both new and experienced investors. For those starting their investment journey, Coles represents a stable, blue-chip company with solid earnings — a good cornerstone for a portfolio. For retirees or less hands-on investors, it offers a reliable, steady yield with minimal drama.
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Disclaimer
The user Robbo holds no position in ASX:COL. Simply Wall St has no position in any of the companies mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The author of this narrative is not affiliated with, nor authorised by Simply Wall St as a sub-authorised representative. This narrative is general in nature and explores scenarios and estimates created by the author. The narrative does not reflect the opinions of Simply Wall St, and the views expressed are the opinion of the author alone, acting on their own behalf. These scenarios are not indicative of the company's future performance and are exploratory in the ideas they cover. The fair value estimates are estimations only, and does not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that the author's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
