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Coles beats Woolies

Wesfarmers (ASX: WES) the owner of Coles Supermarkets held its Strategy Briefing Day yesterday and it was a feast of information on all divisions of the company. Ian McLeod, the Managing Director of Coles, began his presentation by reminding investors of the poor state the Coles supermarket chain was in when Wesfarmers purchased it. Volume growth had flat lined at only 1%, profit margins were declining and stores had been underinvested in and were looking tired and old.

After this reminder of where the Coles brand had been, McLeod proceeded to highlight where Coles was headed. He explained that Coles has a reinvigorated business with team members who are customer focussed and customers who are increasingly loyal. Perhaps the most eye-catching slide in the presentation was that “Coles’ everyday prices consistently cheaper than Woolworths on the same $100 basket since Down Down launched”. The slide suggests that it has held this position since late 2010 and no doubt would be of concern to Woolworths (ASX: WOW) and their ‘everyday value’ claim.

The briefing also discussed Coles’ expanding ‘multi-channel’ offering, which now includes home delivery and click & collect options for purchasing groceries. The competition between the supermarkets is certainly fierce as a resurgent Coles goes head-to-head with the dominant Woolworths. This competition is also evident in the broader stable of Wesfarmers-owned Bunnings, Kmart and Target stores which compete with the Woolies-owned Masters and Big W stores.

Meanwhile, the third largest supermarket group, Metcash (ASX: MTS), which is the wholesaler to and banner owner of IGA stores, has cleverly positioned itself in the convenience space. Metcash has also diversified in to hardware and auto parts supplies, most recently through the purchase of national car and truck parts business Australian Truck and Auto Parts Group.

Foolish takeaway

They say the only two things in life that are certain are death and taxes. Food could be a third, which makes a trip to your local supermarket pretty much a certainty as well. That doesn’t mean investing in supermarkets at any price will be a profitable, however the entrenched position and defensive nature of their earnings and dividends does make them worthy long-term holdings if purchased at the right price.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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