This article was originally published on on August 23rd, 2023

There’s very little question that supermarkets tend to be defensive and resilient in tougher economic times. In fact, inflation could even be seen as a positive for purveyors of groceries.

According to Bruce Williams, co-founder and portfolio manager for Elston Asset Management, it’s been a positive earnings season for Australia’s two big supermarkets, though Coles has more challenges in place.

“The consumer has been more resilient than we though they’d be and it shows in Coles and Woolies good top-line revenue growth. Across the group level, Woolies did a better job with their expense lines, and they’re further ahead in the investment curve which reinforces their position,” he said.

In this wire, Williams discusses the difficulties facing the supermarkets in margin growth going forward, and some of the biggest surprises from the results.

Note: This interview took place on 23 August 2023. Elston Asset Management does not have holdings in Woolworths and Coles in its main portfolio.


Bruce Williams, co-founder and portfolio manager for Elston Asset Management

Woolworths (ASX: WOW) FY23 highlights

Woolworths 1 year performance. Source: Market Index, 23 August 2023

  • Group revenue +5.7% to $64.29 billion
  • EBITDA +12.7% to $5.69 billion
  • eCommerce sales penetration of 11%
  • Basic EPS (after significant items) of $1.33/share
  • NPAT from continuing operations +4.6% to $1.62 billion
  • Final dividend 58c/share (fully franked)



Company snapshot for Woolworths. Source: Market Index, 23 August 2023

Coles (ASX: COL) FY23 highlights


Coles 1 year performance. Source: Market Index, 23 August 2023

  • Sales revenue (from continuing operations) +5.9% to $40.48 billion
  • EBIT (continuing operations) +1.8% to $1.86 billion
  • NPAT (total operations) +4.8% to $1.10 billion
  • Basic EPS of 82.3c
  • Final dividend of 30c/share (fully franked)



Company snapshot for Coles. Source: Market Index, 23 August 2023

In one sentence, what was the key takeaway from these results?

Coles had resilient sales but their operational and expense controls are not at the same level as Woolworths yet. Woolies is seeing margin expansion. Margin expansion in this period is a very good effort from them.

What was the market’s reaction to this result? In your view was this an overreaction, an underreaction or appropriate?

Coles = overreaction

Coles has been sold off pretty heavily and it’s probably an overreaction. It will take them a while to recover that trust. They will have to invest to further improve their operational abilities. I was amazed by the sheer quantity of theft. It was interesting takeaway from the result but they should be able to close that gap over time.

Woolworths = appropriate

The result for Woolies was only this morning and it’s up about four and a half percent. I’d argue that’s an appropriate reaction. The price hasn’t done much for quite some time from memory, and it was a good result. This is the first set of results that are normalised post-COVID. Woolworths was helped by COVID expenses rolling off.

Were there any major surprises in this result that you think investors should be aware of?

Across the sector, the theme of more frequent shopping was interesting – so, small shops more often. Research from AusVeg’s Project Harvest has revealed the weekly grocery shop to be a thing of the past. The average Australian is now going to the supermarket almost three times a week or approximately 135 times a year. Only one third of Australians are shopping once a week. Whilst many shoppers do a main shop every week, many are using late trading hours to easily grab ‘top ups’ throughout the week.

The economics of Coles’ online delivery model isn’t known yet. They are investing into it but it’s unknown whether or not it will be a positive outcome.

I was amazed by the level of theft. If you think about how much Woolies and Coles in terms of how much they sell on a daily basis, and then you look at theft in the context of that, it’s massive. Technology will come up with a solution [for self-service], but in the meantime, they will suffer losses from it. If it still works out better for them than having people at the checkout, they’ve just got to try and minimise it.

Another surprise was the penetration of private label products. Private label continues to increase very nicely in both and it’s not just at the lower end, it’s at different price points as well.

Our view coming into this reporting season was that ultimately price inflation would support top line revenue growth for Woolworths. If you think about revenue growth, it’s either volume or price. We though the majority of growth would come from price but looking forward, that’s going to be more difficult. Goods inflation is starting to roll off.

We think companies will have to make a choice between lifting pricing and giving up volume to maintain margin or compete harder to take share by giving up a little bit at the margin level.

In this environment, both companies have had strong marginal performance.

Would you buy, hold or sell Coles and Woolworths on the back of these results?

Coles rating: HOLD

If you have Coles, I would still hold it. It has been sold off pretty strongly. They’ve got more investment to do. They’ve got more balls in the air than Woolworths in terms of improving the business. Certainly, we see them as the second place player behind Woolworths.

Woolworths rating: BUY

Off the back of this, I think Woolworths is a buy. They’ve invested very hard into their supply chain, not just for their own benefit but to broaden out industry supply. It’s very well managed.

The only thing that gives me pause for both of them is on a multiples basis. They’re not overly cheap, but they are resilient. I think the multiple is justified at this stage but when things start looking better down the track, they might not be exciting enough to justify that multiple.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 4

We think the expectations for earnings growth are probably higher than what they should be and that flows through to multiples as well.

That comes to the price versus margin trade-off that we think companies will have to make over the next 12 months.

We’re not overly negative, we’re slightly underweight in terms of holding a bit more cash than we usually have but there’s not a massive amount we are looking at. The other thing of interest is that there is massive divergence in valuations between sectors.

We still see opportunities out there, veering on the side of caution, and we’ve been very happy so far with this reporting season.

The 10 most recent director trades for Woolworths

Director trades. Source: Market Index, 23 August 2023

The 10 most recent director trades for Coles

Director trades. Source: Market Index, 23 August 2023

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