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Highlights
Online sales growth is offsetting higher-margin in-store performance for Coles
Labour costs continue to rise while in-store sales remain subdued
Liquor revenue remains under pressure amid cautious consumer spending
The consumer staples segment of the S&P/ASX 200 and the S&P/ASX Consumer Staples Index has seen significant activity with Coles Group Limited (ASX:COL) expanding its online footprint. The company’s investment in automated fulfilment infrastructure has supported strong digital sales within its delivery regions in New South Wales and Victoria. Customers have responded positively to enhanced product availability and improved fulfilment standards.
In-store sales lag amid rising wages
While Coles’ online grocery channel has grown at a strong pace, the same cannot be said for in-store performance. Sales from physical outlets saw marginal growth, even as average hourly wages moved higher. This development creates a mismatch between store revenue growth and operating costs, with store-level profitability facing downward pressure. Without gains in labour efficiency or cost control, maintaining margins remains difficult under these conditions.
Online growth cannibalising core retail offering
Current data points indicate Coles is sustaining its presence in the national grocery market, but the rapid expansion of its digital business appears to be drawing demand away from traditional retail operations rather than affecting competitors. This dynamic suggests that total market share has remained relatively stable, but internal channel shifts are reducing the profit contribution of higher-margin in-store sales.
Fulfilment centres remain underutilised
The company’s automated fulfilment centres are still ramping up operations, which impacts the cost structure of its online division. While these centres are expected to support longer-term efficiencies, their current underutilisation contributes to weaker margins at the group level. This effect is expected to moderate as volumes increase over time, but current financials reflect the transitional costs associated with scaling these facilities.
Flat liquor demand amid cautious consumer spending
Coles’ liquor division experienced minimal growth during the March quarter. After adjusting for seasonal impacts, sales remained largely flat. Liquor contributes a relatively small share to total earnings, and current economic conditions, including elevated mortgage repayments and broad cost-of-living pressures, have led shoppers to adopt a more cautious approach to discretionary purchases.
Market valuation metrics remain elevated
Based on forecast earnings for the upcoming financial year, Coles trades at a valuation multiple above its larger sector peer. While both companies operate in a stable segment of the economy, differences in profitability metrics and margin pressures are reflected in these relative figures. Wide-moat operators appear to be managing near-term challenges with more stable outcomes in terms of pricing and operational leverage.
Competitive positioning unchanged
Despite the internal challenges caused by digital channel growth, Coles has retained its position in the domestic grocery market. The broader competitive environment remains consistent, with no significant shifts in consumer loyalty or volume migration across major supermarket brands. As a result, while internal sales channel dynamics are evolving, external competition has not intensified meaningfully in recent quarters.
