The Supermarket War is on Is it only between Woolworths and Coles or new entrants will split it wide open?

On 16^th Mar’18, Wesfarmers had for the first time announced its intention to demerge its Coles division to reposition both businesses for the next decade. It is anticipated the proposed demerger would create a new top 30 company listed on the ASX, with leading positions in supermarkets, liquor and convenience. The proposal is now close to being cast in stone during the 15^th Nov’18 at the conglomerate’s general meeting.

Wesfarmers recently released the Coles retail sales results for Q1, FY2019. Coles Supermarket headline sales for the quarter stood at $7.7 billion, up 5.8% for the quarter. Coles’ Little Shop campaign surely helped the chain’s supermarket sales jump during the first quarter and offset a significant drop in the amount of fuel sold. Coles’ comparable supermarket sales were up 5.1% in Q1 until 23^rd Sep’18 as its parent company Wesfarmers prepared to spin-off the chain. The food sales increase was 0.3% higher than the corresponding period last year, and up on the previous quarter’s 1.8% lift. The Company’s Managing Director Rob Scott stated that the growth showed the supermarket chain had continued to focus on in-store execution as shareholders prepared to vote on a proposed $20 billion demerger on 15^th Nov’18 at the conglomerate’s general meeting, with the anticipation that Coles shares will be listed on the ASX on 21^st Nov’18, subject to regulatory approval.

As the group prepared for a demerger, a recent development came earlier this month in the form of Coles suing the Australian Tax Office(ATO) in an attempt to claw back $40 million it paid in fuel excise, in what could prove a timely top-up for the supermarket's coffers during its first year as an independent company. As part of the litigation filed with the Federal Court in Victoria, Coles stated that between 2014 and 2017 it paid tax on about 107 million litres of fuel which was lost through evaporation or leakage before it could be sold to customers at its chain of Coles Express service stations and the company argued that because the fuel was never sold, it shouldn’t be considered to have been acquired. And, therefore the company was eligible for fuel tax credits worth about $40 million. 

In parallel, Woolworths highlighted that its sales accelerated in the later part of the quarter, and some analysts believe Woolworths will regain leadership over Coles in the coming year.

But is the war only between Coles and Woolworths? Coles has been a significant cash generator for Wesfarmers over the past decade but during the last few years it has begun to stagnate, losing market share to Woolworths. So, Coles not only needs to regain lost ground but it also needs to prepare for new incoming threats in the name of AmazonFresh, Kaufland and how can we forget Aldi that has been growing its roots, deep into our shopping habits by becoming the greatest seller of snow gear in the country. 

The announcement surely had a positive impact on the share price of Wesfarmers with the stock touching an all-time high of $52.53 on 17^th Aug’18 as otherwise the stock remained range-bound between 2013 and 2018. But, the stock started slipping with the slump in the market, however, it has already started recovering. 

So, is it wise to hold the Wesfarmers stocks with the proposed Coles demerger just round the corner? Well the answer is pretty much yes because the demerger is expected to strengthen Wesfarmers position further and therefore it is very likely that the shareholders would vote in favour of the demerger. And even post the demerger, Wesfarmers would have a 15% stake in the company, so, any positive developments will favour Wesfarmers and at the same time any negative developments will not have a substantial impact in the group. But the company is likely to have a tough competition ahead with Woolworths and the new entrants. So, only time will decide who’s going to emerge as a true winner.