Should I buy Woolworths or Coles shares in FY25?

Should I buy Woolworths or Coles shares? This is one of the top debates Australian investors can have. Obviously, this assumes it is worth investors’ while to look at supermarkets generally, which is another debate in and of itself, but we’ll leave that debate to one side for now. If you are judging simply by momentum, there’s no question that Coles is in a better position right now with secure leadership, slightly less political pressure and faster sales growth than Woolworths. But for how long will this situation last?

The Australian supermarket scene in mid-2024

At first glance, both these companies may appear to be safe investments given their:

• Large market capitalisations,
• Long operating histories,
• Track record of paying dividends, and
• Status as consumer ‘staple’ stocks. In other words, these businesses are an essential service for their customers.

But some of these can be a curse for the companies. Whilst this should theoretically prevent competition, it just limits competition…to only behemoths with the ability to take on Coles and Woolworths head-on. Aldi is the most notable competitor, along with IGA which is owned by Metcash (ASX:MTS). Add into the mix the cost of living crisis, not to mention the rise of home delivery services, and this makes the competition even more fierce.

And of course, there is intense scrutiny on supermarkets, particularly on Woolworths. After months of accusations of price gouging, a review was conducted run by former minister Craig Emerson. It stopped short of calling for the supermarkets to be broken up, but there were some recommendations. The most notable was that there should be a Code of Conduct with fines for supermarkets that fall afoul of the law. Others included an ACCC inquiry into supermarket pricing (which will report in February 2025) and that there should be an anonymous supplier and whistle-blower complaints pathway. If Peter Dutton wins the next election, things could get worse – he has publicly disclosed plans to forcibly break up the supermarket giants.

Coles looks better than Woolworths right now

But Woolworths has fared worse than its peers right now, albeit because of the circumstances that ultimately claimed the scalp of Brad Banducci. Long story short, he did not handle the scrutiny the company faced as well as he could’ve – most notably walking out of an interview with the ABC’s Four Corners in February. He was replaced by Amanda Bardwell, the head of loyalty and eCommerce, who started on September 2. For much of his near-decade tenure, he had been a popular figure, famously spending his weekends visiting stores. Of course, as Warren Buffett said, it is faster to destroy a reputation than to build one.

The FY24 results showed that Woolworths, despite being a larger company by market capitalisation than Coles, is ensuring more difficult times financially. For the second half of FY24, sales in Woolworths’ food division grew just 1.8%, and 3% in the first 8 weeks of FY25. For Coles, these figures were 5.2% and 3.7% respectively.

Coles’ profit grew 8.3% to $1.1bn, even not accounting for the sale of its convenience stores to Viva Energy, although this was only a 2.6% margin. Woolworths profit was $108m, down 93% from the year before. Granted, this included impairments on its New Zealand supermarkets, but its pre-impairment profit was 0.6% down too, at $1.7bn, representing a 2.5% margin. Also helping the cause of Coles was the actions it had taken against retail theft that had meant a lesser blow this year compared to the last.

There’s no denying that Coles appears in better shape right now. But will it last forever? Most certainly not. The performance in the first two months of FY25 suggests things are improving, although it remains to be seen if this is just because of the Stage 3 tax cuts, or people are coming back to Woolworths, seeing them as offering value for money once again.

One advantage Woolworths has over Coles is its diversification in revenue streams and income, owning stores in New Zealand that are being rebranded from the old ‘Countdown’ brand, as well as the Big W discount department store chain. Woolworths also has a stake in pet retailer Petstock, a logistics business called Primary Connect, and PFD Food Services. The latter two have arguably lessened the pain in the last couple of years.

But ultimately, the company has two choices. The first is sit back and wait until the cost of living crisis eases. The second is to engage with its peers in the discounting wars. This is seemingly a no-win situation because while lower prices may mean higher sales, it means lower margins. On the other hand, not engaging with the competition may mean higher margins, but lower sales.

Should I buy Woolworths or Coles shares?

Right now, Coles without a shadow of a doubt, at least until the cost of living crisis eases. Coles may be a less diversified business, but is growing its business without sacrificing margins, something that cannot be said with Woolworths right now.

What are the Best ASX Stocks to invest in?

Check our buy/sell tips