Coles Group Limited

The Business

Coles operates Australia's second-largest supermarket chain with roughly 28% grocery market share, behind Woolworths at approximately 37%. Supermarkets generate over 90% of group revenue, with liquor contributing around 8% through Liquorland, First Choice, and Vintage Cellars. The defining characteristic of this business is its place in a remarkably stable duopoly: Coles and Woolworths have collectively held about 65% of Australian grocery for over two decades. That concentration gives both players purchasing power and supplier leverage that new entrants cannot replicate at any reasonable cost. ALDI, the most credible challenger, has taken 20 years to reach roughly 11% share.

Recent Performance

The first half of FY26 delivered supermarkets comparable sales growth of 3.4%, off a base that itself grew only 2.0% in FY25, confirming genuine momentum rather than easy comparisons. Group EBITDA margin hit 9.3% in the half, the highest in the company's listed history. Liquor remains a weak spot, with comparable sales declining 3.6% as tobacco legislation removed a significant revenue line.

Outlook

We expect FY26 to mark peak margins at around 9.3%, driven by the full annualisation of benefits from Coles' automated distribution centres (ADCs). From FY27 onward, margins fade gradually toward 8.9% as competitive catch-up materialises and wage inflation absorbs some of the automation gains. Revenue growth settles into a 2.5-3.0% corridor, reflecting population growth and food inflation with minimal real volume gains. The Smarter Selling Initiative (SSI), which delivered $327 million in cost savings in FY25, provides a structural floor under profitability even as the headline margin compresses.

Key Risks

If Woolworths replicates Coles' automation advantage within three years rather than our assumed five to seven, EBITDA margins revert toward 8.3%. An ACCC penalty exceeding the $254 million already provisioned would create a further drag on earnings and could impose restrictions on pricing practices. ALDI accelerating beyond 13% market share would pressure both volumes and pricing power across the duopoly.

What to Watch

The thesis-defining event is the FY26 full-year result in August 2026, which will confirm whether the 9.3% first-half EBITDA margin can sustain through the second half or whether seasonal compression is sharper than expected.

• Next 12 months ACCC ruling resolution — removes the binary regulatory overhang; a penalty within provisions would be a modest positive.
• FY28 Victorian ADC3 completion — the final tranche of automation capex; on-time, on-budget delivery would validate the full program and unlock the last wave of cost savings.
• 1-3 years Woolworths automation announcement — any major capex commitment to match Coles' ADC program would signal competitive catch-up is accelerating.

Company Description

Coles Group operates three segments. Supermarkets, the dominant division at roughly $40 billion in annual revenue, runs 865 stores nationally plus a growing online business that reached 13.1% of supermarket sales in the first half of FY26. Liquor, at approximately $3.8 billion, operates around 930 outlets under the Liquorland, First Choice Liquor, and Vintage Cellars banners. The "Other" segment, now less than $300 million, includes Coles Financial Services and the Flybuys loyalty joint venture with Wesfarmers. The supermarket network spans metro and regional Australia, with store density highest in Victoria and New South Wales. Coles Express was divested to Viva Energy in 2023, simplifying the portfolio to its grocery core.

Where the Growth Is

The automated distribution centre program is the single most consequential investment in Coles' history. The company has deployed $1.9 billion across three ADCs (two operational in New South Wales and Queensland, a third under construction in Victoria for completion in FY28). These facilities contribute an estimated $300-400 million in annual EBITDA through reduced labour costs, lower product loss, and improved picking accuracy. The SSI program layered on top delivered $327 million in verified cost savings in FY25, with a cumulative $1 billion target by FY28. Together, these programs are structural rather than cyclical: they represent physical infrastructure with a 10-plus year operating life, not one-off efficiencies.

Competitive Position

Two companies control roughly 65% of Australian grocery, and this structure has persisted for over two decades. That stability is not accidental. The barriers are formidable: a national store network requires billions in capital and years in site acquisition, supplier relationships are entrenched through volume-based rebate structures, and planning approvals for new supermarket sites face increasing community opposition. ALDI, the most successful entrant, took 20 years to reach roughly 11% share, and its narrow-range, no-online model structurally limits further gains to perhaps 20-30 basis points per year. Coles' ADC program has closed what was historically a persistent margin gap with Woolworths, with Coles' supermarket EBIT margin leading Woolworths for the first time in 1H26. The competitive advantages require continuous investment to sustain, however. Woolworths has the scale and resources to replicate automation, and the timeline for that response is the central uncertainty in the investment case.

Management & Capital Discipline

CEO Leah Weckert's team has built credibility through consistent delivery on operational milestones. The ADC program, the most complex initiative in the company's history, was delivered on time and on budget. Annual capex of $1.2-1.3 billion is concentrated in automation and IT infrastructure, with no acquisitive ambitions creating M&A risk. The 83-85% payout ratio is maintained comfortably, supported by cash conversion above 100%. One honest observation: management consistently avoids quantifying ALDI's competitive share gains and has not disclosed unit economics for the online business, which likely remains margin-dilutive. The Liquor turnaround narrative has also underdelivered relative to management's framing, with comparable sales declining 3.6% despite price investment.

Financial Position

Coles carries $2.4 billion in interest-bearing debt alongside $8.2 billion in lease liabilities, which is standard for a grocery retailer that leases rather than owns most of its store footprint. Cash on hand sits at approximately $600 million. The balance sheet benefits from structurally negative working capital of around $1.4 billion, meaning suppliers effectively fund Coles' operations through extended payment terms. This is a grocery-sector feature, not a financial engineering trick. Interest coverage is comfortable, and the company could weather a material downturn without cutting dividends or raising capital. Financial health is adequate for the sector, not exceptional.