Coles Group

The Business

Coles operates the second-largest supermarket network in Australia, generating 91% of group revenue from full-line grocery stores that anchor a two-player market alongside Woolworths. A smaller liquor division (Liquor Land, First Choice and Vintage Cellars) contributes most of the remainder, while a legacy property services arrangement is running off entirely through FY27. The supermarkets business differentiates itself through owned-brand penetration (Exclusive to Coles), a growing online delivery network, and two automated distribution centres that lower the cost of moving stock from warehouse to shelf, an advantage Woolworths has not yet replicated at scale.

Recent Performance

Coles delivered supermarkets comparable sales growth of 3.4% in FY26 (5.1% excluding declining tobacco volumes), alongside a record segment earnings margin of 5.7%. Group earnings margin, blending in the smaller liquor and property lines, was 5.1%. The stock has re-rated to reflect this strength, with the market pricing in a continuation of near-peak profitability. Earnings per share are set to dip slightly in FY27 as a one-off property revenue stream expires, before recovering over the following two years.

Outlook

Revenue growth slows in FY27 as the property services contract winds down, before reaccelerating in FY28 and FY29 once that drag passes. Group earnings margin is expected to compress modestly in FY27, reflecting the loss of high-margin property income and rising cost-of-doing-business, partly offset by cost-out programs targeting $1bn in cumulative savings by FY27 and a further $100m a year from a new capability centre by FY29.

Key Risks

The largest risk to the thesis is that the supermarkets earnings margin, currently at a record 5.7%, settles at a materially lower level than management's own recent guidance range implies, as Woolworths closes its automation gap faster than expected or new compliance costs erode Coles' cost advantage. A second risk sits with regulation: the ACCC's pending "Down Down" case, together with prospective excessive pricing laws and a mandatory Food and Grocery Code, could impose either a one-off penalty or a structural, industry-wide compliance cost. A third risk is Coles' $8.1bn lease liability, which is sensitive to long-term interest rates and can move fair value in either direction depending on the rate cycle. The liquor division adds a smaller but persistent drag, with comparable sales down 3.4% in FY26 and earnings roughly halved, and no guarantee that the ongoing strategic review restores prior profitability.

What to Watch

The thesis-defining event is the February 2027 half-year result, which will show whether the supermarkets earnings margin is settling within a normal range or fading faster than expected. An RBA rate-cutting cycle would work in Coles' favour, lowering funding costs and shrinking the present value of its lease liability. The ACCC's "Down Down" hearing, due December 2026, is a swing factor in the other direction, with the penalty outcome and any associated new pricing rules the key variables to track.

• Feb 2027 H1 FY27 result — confirms whether the supermarkets margin is settling within a normal range or compressing faster than expected.
• 6-18 months RBA rate-cutting cycle — would lower the discount rate applied to the business and shrink the lease liability.
• Dec 2026 ACCC "Down Down" hearing — penalty outcome and any new pricing regulation are the key variables.

Latest Developments

Coles' FY26 result showed $311m of in-year cost savings under its efficiency program, automated distribution centres running to schedule, and liquor comparable sales down 3.4% as management continues a strategic review of that division. No material developments have emerged since the result.

Company Description

Coles runs roughly 1,850 stores across two main formats, alongside a smaller portfolio of ancillary services. Supermarkets, trading as Coles and Coles Local, generate about 91% of group revenue and anchor a duopoly that has controlled close to two-thirds of the Australian grocery market for more than two decades. The liquor division, spanning Liquor Land, First Choice and Vintage Cellars, contributes most of the remainder but has been in structural decline, with comparable sales down 3.4% in FY26. A legacy property services agreement, once a modest earnings contributor, is running off entirely by FY27, removing roughly $327m of low-margin revenue but only a few million dollars of profit. The core of the business, and the focus of this report, is the supermarkets division.

Where the Growth Is

Supermarkets, at 91% of group revenue, is both the growth engine and the earnings base. Revenue is growing at roughly 3.0% a year near-term, tapering to 2.5% over the next decade as population growth and food inflation do the heavy lifting rather than new store openings or market share gains. The bigger swing factor is cost, not volume: a program is targeting $1bn of cumulative savings by FY27, and a newly established capability centre is expected to add a further $100m a year by FY29, both aimed at protecting margin as wage and compliance costs rise.

Competitive Position

Coles and Woolworths together control close to two-thirds of Australian grocery spending, a structure that has proven remarkably stable for more than 20 years despite the entry of Aldi and various online challengers. Neither incumbent has meaningfully lost share to a new entrant in the modern era, reflecting the scale required to negotiate supplier terms, run a national logistics network, and absorb the fixed cost of store networks in a market of Australia's size. Coles' specific edge within that duopoly is automation: more than $2bn invested in automated distribution centres gives it a structural cost advantage of an estimated 20 to 30 basis points over Woolworths, which is still three to five years from replicating that infrastructure at scale. That advantage is expected to persist through the end of the decade as a third automated centre in Victoria comes online, though it should be expected to narrow, not widen, as Woolworths catches up.

Management & Capital Discipline

Management has returned 83% of profit to shareholders as dividends while directing $1.55bn of capital expenditure toward high-return store refurbishments and the new Victorian distribution centre, generating a return on invested capital of 17.3% against a cost of capital of 7.9%. That spread indicates capital is being deployed well above its cost. On delivery, management has a strong record: cost-out targets, distribution centre builds, and new store rollouts have generally landed on time and on budget. The more candid observation is that management was slow to act on the liquor division's decline, only recently initiating a strategic review well after comparable sales had turned persistently negative, even as it was transparent in quantifying one-off tailwinds elsewhere in the business.

Financial Position

Coles carries a conservative balance sheet, with net debt (excluding lease liabilities) running at roughly 0.4 times EBITDA and credit ratings in the BBB+/Baa1 range, supported by roughly $2.5bn of undrawn bank facilities. The larger liability on the balance sheet is $8.1bn of lease obligations for its store network under current accounting rules, a function of the store-based business model rather than financial leverage in the traditional sense. Combined with free cash flow conversion above 100% of profit, the balance sheet leaves Coles well placed to fund its capital program and maintain its dividend through a period of softer consumer spending.