Supermarket wars: Coles now a Woolies landlord

Battle intensifies after Coles buys lease to one of Woolworths’ most profitable stores

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The ongoing battle between our two major supermarket owners appears to have taken a new turn, with news that Coles has become the landlord of Woolworths Limited’s (ASX: WOW) highly profitable Neutral bay store.

Coles – owned by Wesfarmers Limited (ASX: WES) is reported by The Sydney Morning Herald (SMH) to have bought the lease to the high volume, high sales stores, after finding it came with a short lease that expires in 2014, with a 10-year option to extend. Woolworths has been leasing the site for nearly 18 years and reaping more than $75 million in sales a year, according to the SMH.

Woolworths was apparently surprised to find out Coles was its new landlord, when informed by Fairfax media. A spokesperson for Wooolworths said, “this is a surprise, and it’s not common practice by any means”. Coles has remained silent about its intentions for the purchase, although it’s likely that Woolworths will take up the 10 year lease option, and pay rent to Coles. Coles executives have apparently conducted a risk analysis of its own supermarkets, should Woolworths attempt to counter-attack.

The SMH believes there is an element of revenge in the takeover of the Neutral Bay Woolworths, after Kmart, also owned by Wesfarmers, lost a prime location in Katoomba, after operating for 30 years in the Blue Mountains town. Woolworths bought the lease for the site in 2000, then waited 12 years for it to expire and kicked Kmart out, forcing Coles to buy a new site and spend millions on development, ending up with an inferior site with lower turnover.

Competition between the two for market share has intensified as they have both expanded into similar areas in petrol and convenience stores, hardware, pokies and hotels, and liquor. Struggling to compete against the two are the Metcash Limited (ASX: MTS) supplied IGA stores, Aldi and US giant Costco, which has recently opened a number of small stores in Australia.

Foolish takeaway

The Australian Competition and Consumer Commission (ACCC) is conducting an investigation into the supermarket owners’ practices after complaints by suppliers, as well as their aggressive property strategies. Media reports have also suggested a UK style code of conduct could be adopted in Australia, after the UK faced similar issues from its supermarket retailers.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woolworths.

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