The chatterazzi are indulging in hand wringing over Woolworths’ first profit downgrade since the company re-listed 19 years ago. “Strange days indeed” says one broker. “Myriad factors” are “laying siege to the fortunes and future of our major retailers” says The Age. Have to keep a watchful eye on those “myriad factors” at all times – you never know what they might do. If investing in Woolworths is an investment in the Australian economy, then it is increasingly becoming clear that it is an investment in the wrong side of Australia’s two speed economy – the slow lane. Lamentations aside, it is worth asking: who is likely to invest in the company, and why?

For local institutions, it tends to be a question of arbitrage. They will inevitably have a holding in the so-called “retailer” (it is really just a supply chain, one half of the world’s largest supermarket duopoly). That duopoly gets on average about $4,000 a year from each member of the population, so the question is not whether or not to hold the stock, but what weighting. With an investment in Coles obscured by its being part of the conglomerate Wesfarmers, Woolworths remains the best pure supermarket play. They are likely to hold or slightly sell off.

For retail investors Woolworths tends to be a yield play with capital growth. But the likely dividend yield is about 4.6%, not very different from bank deposits. And the capital growth story is not especially appealing. The forward earnings multiple is about the same as the wider market: 15 times. Brokers’ 12 month price targets are about $30, but considering the profit downgrade that has to be considered brave. They are not likely to be strong buyers.

For overseas investors Woolworths has been considered an excellent defensive investment, a logic that looks weaker with the Australian dollar so high. There is also less appetite for defensive stocks as some gloom lifts from global markets. That race may be run.

Woolworths’ advantage has been that it could run a barely competent supply chain, when Coles could not. That advantage now seems to be evaporating. Wesfarmers seems to know something about distribution networks. The duopoly is becoming homogenous. Woolworths is hard to avoid, but hard to get excited about, either.


  1. “The duopoly is becoming homogenous” – perhaps in behind the scenes distribution networks etc, but there is a very really point of difference for the shopper, and Woolies have got it wrong.

    Woolies decline from a shopper’s perspective:

    Local shopping centre, Woolies and Coles.

    Woolies: Awful lighting; energy sapping pale green uniforms; surly staff; feels gloomy and ‘old’ to customers; limited range; fresh food people…mmmm, I don’t think so.

    Coles: bright but not overwhelming lighting; lots of upbeat yellow and and red in signage and uniforms; staff generally cheerful, participate in special days wearing t-shirts, hats or some such thing; more variety (although this is declining), feels ‘lively’ (a touch of the JB Hi Fi’s).

    I know where I prefer to spend my $10000pa grocery shop.

  2. What short memories we have. WOW was canning the pants off Coles only a few years ago. Coles was bought (for a massively elevated price) by Wesfamers, whose investment is only now trning it around. They have highe rsales increases becuase they’re coming from a lower, less effective base.

    WOW has a rock solid ROE of 30% (even during the GFC) and peope will always need to buy food. I hope it goes down further – I’ll be buying more!

  3. Went to Woolies the other day and was shocked by how dated it all looks. I prefer Coles’ cleanliness.

    That said, both are incredibly expensive. 🙁

    I like to offer comparisons between Oz and my home country. Not to be a whinging migrant, but to offer Aussies insight into exactly how much they are being ripped off.

    average gross annual wage in Holland is just above €40.000 (so I guess Euro amount x 1.5 is about right). A kilo of kiwi’s for $2 anyone?

    • Agreed – I was shocked at the price of fruit/veg and general goods when I travelled through Europe mid-last year. From France to Italy, even Switzerland, the groceries were cheaper than Australia. And don’t get me started on the wine and beer – also a lot cheaper.

      And then there’s cars, motorbikes…..the list goes on. Anyone who believes we have a “strong” dollar and “low” inflation needs their head read.

  4. I prefer Aldi for the bulk staples (same stuff no branded box) and Victoria Market for our vege (yes they sell seconds and some primary vege but is is damn sight better than the multiples!) and Nino our local Italian butcher for premium quality meat (Australian at that!).

    Stock wise… the duopoly has worked for booth these companies… what else is afoot to be changing? Is Coles really grabbing huge market share off Woolies.

    This market is a zero sum game – it is all share of market + share of wallet. I think people are reducing their spend at both (totally subjective call no data) maybe slow food, grow some yourself and supporting local suppliers?!

    Still great article and worth a think.

    Now would I buy their shares… yep at around $18 a share.