Supermarket giant Coles came under pressure on two fronts yesterday, ultimately falling by -4.2%. We actually thought the market was kind to COL, almost halving its losses in afternoon trade following two very different pieces of news.
- Firstly, the ACCC blocked Coles’ proposed supermarket development in Kalgoorlie, arguing it would reduce competition by forcing an independent grocer to close and leave the town dominated by Coles and Woolworths – Coles strongly rejected the decision
This feels like the ACCC has drawn the line in the sand, putting a brake on Coles and Woolies store rollouts. With pricing already being monitored carefully, this is a definite blow for COL and WOW just as investors were weighing up the benefits that AI could deliver to margins. The ACCC argued that if COL opens this new site in the WA mining town, an independent operator would be forced to close, stating it would only approve sites where the market is growing enough to sustain a big new supermarket – this is going to curb growth for both COL and WOW in the short term via store roll-outs.
- Secondly, Coles announced it was in advanced talks to buy TPG’s $4bn Greencross pet care business, which owns Petbarn, City Farmers, and several vet clinics.
The deal will be CEO Weckert’s first deal since she took the helm three years ago. The move will put COL in direct competition with Wesfarmers, which, through Bunnings, has steadily expanded its pet offering over the past few years. Also, in the past few years, main rival WOW has expanded into the pet sector via a controlling stake in Petstock. We’re cautious around this expansion as COL has previously outperformed WOW by keeping its business model simple as a supermarket operator.
COL is still trading above its long-term average valuation, which we feel is no longer justified through 2026.
- We can see COL re-testing its $20 support into Christmas as the market digests this “one-two” of news.
