Meet Australia’s grocery giants yielding around 4.6%-5.3% level

Remember the names: Woolworths and Coles

Australia’s supermarket sector is highly concentrated, with Woolworths and Coles holding the majority share. As of December 2024, Woolworths accounts for approximately 36% of national supermarket grocery sales, followed by Coles at 25%, and ALDI at 8%. The remaining 31% is shared among other various players.

Table 1: Australia’s grocery market share, by retailers

This market dominance is also reflected in store counts. Woolworths operates the largest network with 1,124 supermarkets across the country, while Coles and ALDI have 860 and 599 stores respectively. It is worth mentioning that there are no states and territories without Woolworths and Coles supermarkets in Australia.

Table 2: Number of supermarket locations by respective retailers

Bargaining power driven by market share and customer traffic

Woolworths’ dominance is reflected in its customer traffic, with its Australian division serving an average of 20.1 million customers per week as of 31 December 2024. This is equivalent to around 74% of Australia’s population, assuming no repeat visits. Coles, by comparison, serves approximately 18 million customers weekly, roughly 67% of the population under the same assumption.

The positioning of the two supermarket groups gives them significant bargaining power when dealing with suppliers, enabling them to obtain lower wholesale prices. In fresh produces in particular, the groups even have duopsony power (a market situation in which there are only two buyers for a product or service) with some of the suppliers, as they purchase in such a large quantity of a product that they can literally dictate the market price of a product.

Woolworths has businesses in Australia and New Zealand, Coles focuses exclusively in Australia

Woolworths and Coles have much in common. Both supermarkets have a wide reach in Australia, with fast deliveries, pickup orders features, loyalty programs, home brands, collectibles (Woolworths: Disney, Minecraft etc; Coles: Harry Potter, Fantastic Beasts etc) to attract patrons.

Table 3: Similarities between the two

The main difference between the two is that Woolworths has a presence in New Zealand as well, while Coles’ business is solely in Australia. However, Woolworths New Zealand’s division has been impacted negatively as customers turn value-conscious due to an uptick in grocery food inflation. For example, the price of 1 kg of beef mince has gone up by more than 8% YTD and 500g butter price has increased by more than 27% YTD.

The weaker consumer demand and challenging environment is reflected in the weaker EBIT margin of 1.32% for New Zealand food division in FY24, compared to 3.15% in FY23. Owing to these challenges, the group has logged a goodwill impairment of AUD1.5 billion in FY24 and a $13 million impairment loss relating to rebranding of stores.

Nonetheless, we believe the performance of New Zealand food division will normalise over time, given the limited competition in New Zealand grocery landscape (duopoly by Foodstuffs and Woolworths NZ, with a combined 80%-85% grocery market share).

Chart 1: New Zealand’s food inflation yoy

Chart 2: Weighted average price of beef mince and butter in New Zealand

Australians tend to cross-shop

Australians have the inclination to visit more than one supermarket (cross-shopping), as cost of living pressure drives them to seek better value. The financial strain is reflected in the real personal disposable income, where the numbers fell since 2022, prompting Australians to be more price sensitive in their spending habits.

Chart 3: Australia’s real personal disposable income (2005 = 100)

From the table below, what we see is that approximately half of the Australians shoppers are visiting at least two stores, with Aldi having the lowest shares of single store shopping among the three, due to its limited store reach and narrower product range (around 1,500-1,800 options vs Coles and Woolworths 20,000-25,000 options).

Table 4: Breakdown of shoppers’ trend

While cross-shopping weakens exclusive patronage, the extensive Woolworths and Coles store count make it convenient for shoppers to cross-shop, increasing its frequency and fortify their market shares. The oligopoly market structure also means that there is little incentive to compete aggressively on price or undercut each other (see the stable EBIT margins on the two supermarkets).

Ultimately, the weekly promotional pricing and its convenient locations are some of the key strategies that both companies use to retain dominance in a cross-shopping environment without compromising margin.

Tussle between Australia’s supermarket giants and the competition regulator (ACCC)

In September 2024, ACCC (Australian Competition and Consumer Commission) has commenced separate proceedings against Woolworths and Coles for allegedly misleading consumers through discount pricing claims on hundreds of supermarket products. Some products were allegedly subject to price rises of at least 15% for brief periods, before being placed in Woolworths’ Prices Dropped promotion and Coles’ Down Down promotion.

Based on the law, the maximum penalty is the greater of 1) AUD 50million or 2) three times the value of ‘reasonably attributable’ benefit obtained, if the court can determine the value or 3) 30% of corporation’s adjusted turnover during the breach turnover period, if the court cannot determine the value.

If found guilty (Australia courts may seek for hefty penalties as a deterrent), our view is that the fines would be at an amount where Woolworths and Coles can absorb without threatening their stability. Also, Australia courts have historically favour proportionality instead of imposing maximum penalty, as seen in the past enforcement cases related to ACCC.

Table 5: Enforcement examples by ACCC

Additionally, both supermarkets are too embedded in Australia’s grocery ecosystem. This is not to forget that Woolworths and Coles Group are the largest and the third largest institution employers in Australia, employing over 201,413 and 115,000 workforces respectively.

In addition, Woolworths and Coles have one of the largest EBIT margin among its national peers. Hence, there is room for margin adjustment, should ACCC demands for lower retail prices among its products.

Table 6: EBIT margin comparison with national peers

Woolworths and Coles Group are deeply rooted in Australia grocery sector

We foresee the oligopoly structure (a small number of firms dominate the market) in Australia grocery sector to continue, with Woolworths and Coles continuing its leading positions. This is because the landscape of Australia itself render it a tough continent to provide service.

Looking from a density (km²) angle, Australia’s population density is about 4 people per square kilometre, making it one of the most sparsely populated country in the world. This is unlike countries like Singapore (8,177 ppl per km²), United Kingdom (287 ppl per km²) or even Malaysia (110 ppl per km²) that are more densely populated.

Table 7: Countries’ population density

Hence, a lot of investments and capital expenditure are needed to service the whole of Australia. With Woolworths first store opening in 1924 and Coles in 1914, coupled with the ever -increasing supermarkets and distribution centres, it is tough for a competitor to undermine their positioning. Historically speaking, it took Aldi over a decade to reach 10% market share in Australia grocery sector. 

Table 8: Estimated number of distribution centres, by retailers

Therefore, Woolworths and Coles are expected to maintain their market dominancy, especially in the more rural areas.

Like brother and sister; Coles is slightly ahead in some ratios

Woolworths and Coles closely mirror each other in terms of credit fundamentals. Both consistently deliver gross profit margins in the 26%–28% range, while net profit margins hover around 3%. The main deviation occurred in FY24, when Woolworths recorded a goodwill impairment of AUD 1.5 billion related to its New Zealand Food business, due to a challenging operating environment. The non-cash write-down drove its net profit margin down to just 0.17% for the year.

Table 9: Profit trend

Looking at cash conversion cycle (CCC), both supermarkets have a negative CCC, a hallmark of strong retail operations (they get paid by customers before they need to pay suppliers). They effectively enjoy interest free credit that reduces reliance on short-term borrowings. Woolworths posted a slightly longer payable period at 57 days in 1H25, suggesting stronger supplier bargaining power, likely due to its scale.

Table 10: Cash conversion cycle

Coles Group prevails over Woolworths mildly from a gearing level perspective, demonstrating a more conservative capital structure. Its debt to EBIT ratio stood at 4.73 times, compared to 6.07 times for Woolworths. Likewise, Coles’ debt-to-equity ratio of 2.81 times is lower than Woolworths’ 3.37 times.

In terms of interest servicing ability, Coles also has a slightly stronger interest coverage ratio at 4.12 times. We believe one of the reasons to be the greater efficiency in capital deployment, as seen in its steadier return on capital employed (ROCE) of 16%. In contrast, Woolworths’ ROCE has been more volatile, largely due to the underperformance in its New Zealand operations.

Table 11: Gearing level and other credit ratios

In summary, both retailers maintain respectable profit margin and efficient working capital management (negative cash conversion cycle). However, Coles holds a relative edge in gearing level, interest coverage and capital efficiency.  

Risks

One of the key risks is the potential entry of competition. Both Woolworths and Coles are closely monitoring the infiltration of Amazon into Australia. Thus far, risk is limited as Amazon currently focus on parcel services in Australia. Any future push into Amazon Fresh (fresh food) will require physical stores presence to be competitive.

Additionally, the ACCC’s legal proceedings against both supermarkets pose a regulatory and financial risk. Should the groups be found guilty, the resulting penalties could impact their financial positions. However, we believe any such impact would likely be manageable for both companies.

Recommendation

With Woolworth and Coles’ deeply entrenched presence in Australia’s grocery landscape, alongside respectable profit margin and decent credit profile, we expect them to continue be relevant and resilient players in the Australian corporate bond space.

Given the size of their outstanding bonds, we believe both groups are well-positioned to meet their debt obligations, as the amounts are smaller than their annual dividend payouts. In the unlikely event that operational cash flows become constrained, the companies could opt to suspend dividends to prioritise debt servicing, although at the cost of shareholders.

With that said, we would recommend CGJAU 5.546% 07Oct2032 Corp (AUD) at 4.91% yield to next call for Coles’ slightly stronger credit quality. For investors seeking longer duration, the WOWAU 5.910% 29Nov2034 Corp (AUD) is also a compelling option, as Woolworths continue to deliver through its scale.

Table 12: Recommended bond lists