Coles’ share price has fallen more than 8% since 18 September, when it approached an all-time high above A$19. Regulatory issues have been a key factor in triggering this sell-off, with Australia’s second-largest supermarket chain coming under scrutiny from lawmakers over allegedly misleading consumers with fake discounts. However, Coles’ shares have stabilised somewhat since the company reported better-than-expected sales for the first quarter of the 2025 fiscal year at the end of October. Could this provide a potential buying opportunity, making its stock a bargain?
The Regulatory Woes
On 23 September, the Australian Competition and Consumer Commission (ACCC) sued the nation’s two grocery retail giants—Woolworths and Coles—alleging they had misled shoppers with fake discounts during a period of significant pressure on household budgets, owing to high living costs driven by substantial inflation and rising interest rates. Both supermarkets were accused of holding prices stable for two years on certain products before hiking them briefly, ostensibly to create “illusory” discounts soon after. Regulators are also investigating whether the two largest Australian supermarket chains engaged in “land banking,” purchasing land to prevent competitors from entering the market. The allegations could result in penalties of tens of millions of Australian dollars, which could significantly impact profit margins for both retailers.
Stronger-than-Expected Sales in Q1 FY25 Amid Cost-of-Living Pressures
Despite these regulatory challenges, Coles reported first-quarter revenue for fiscal year 2025 that exceeded market expectations, with total group sales rising 2.9% year-on-year to A$10.55 billion. Supermarket sales, the largest revenue contributor, rose by 3.5%, though Liquor sales showed flat growth. The Melbourne-headquartered grocery chain attributed this growth to promotional campaigns, exclusive Coles products, and increased Flybuys memberships.
A key highlight for Coles was its e-commerce Supermarket sales, which surged by 22.4% year-on-year, compared to a 9.4% growth rate in fiscal year 2024. The company noted that progress in its automated Customer Fulfilment Centres (CFCs) significantly boosted online orders. Additionally, Coles introduced new features to its shopping app and website to further enhance its digital services. A partnership with Nielsen, an American media research firm, is also expected to improve Coles’ media planning and brand management capabilities.
However, in response to regulatory scrutiny and public criticism, Coles has been forced to cut shelf prices, impacting its profit growth. Comparable sales grew by 2.4% for the 13 weeks to 29 September, down from 3.6% in the previous year. This trend was also observed in its larger competitor, Woolworths, which warned that its profits had been affected by Australia’s cost-of-living crisis. This suggests a challenging fiscal year ahead, as shoppers increasingly gravitate towards more affordable products.
A New Automated Distribution Centre (ADC)
On the day of its earnings report, Coles announced plans to invest A$880 million to establish a new ambient Automated Distribution Centre (ADC) in Truganina, Victoria, in partnership with logistics service provider WITRON. The new ADC will have roughly 15% more capacity than its existing facilities in NSW and Queensland. The project is set to commence in fiscal year 2025 and may take up to five years to complete. Consequently, Coles has revised its capital expenditure for FY25 upwards, from A$1.2 billion to approximately A$1.3 billion.
While these digitalisation efforts could enhance Coles’ long-term efficiency in distributing goods and services, the increased spending could further squeeze profit margins, particularly against a backdrop of dampened consumer demand.
Opportunities and Risks
In comparison to its competitor Woolworths, Coles’ first-quarter sales performance has been more robust, likely due to its advancements in automation technology. With ongoing investment in its ADCs, Australia’s second-largest supermarket chain could see continued growth in e-commerce sales. Once the regulatory lawsuits are resolved, the company’s stocks could experience a relief rally—although this would need to be bolstered by positive earnings results.
Nonetheless, the Reserve Bank of Australia (RBA) remains hawkish, amid persistently high inflation in the country. The RBA has lagged behind other central banks in commencing an easing cycle and is expected to begin cutting interest rates only in early 2025. This means that cost-of-living pressures may continue to weigh on Coles over the next 12 months.
Disclaimer: This is not investment advice and should be read as general information.
Tina was a Market Analyst at CMC Markets from 2015 to 2024, providing client education, market commentary, and media presentations. She specializes in technical analysis and market fundamentals. Tina believes financial markets comprise a vast area reflecting economies, politics, history, psychology, and philosophy. As a result, her analysis is based on her interpretation of a specific country’s economic and historical background, alongside investor sentiment and behaviour.
Tina’s expertise has garnered recognition, with her commentary frequently quoted by reputable sources like Bloomberg, CNBC, Routers, WSJ, and AFR. Her insights span a diverse spectrum, covering various financial domains, including stock markets, foreign exchange, commodities, and cryptocurrencies. Previously, she also spent significant time with China Central Television. This experience allowed her to develop a deep understanding and insight into China’s economics and business.
