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Wesfarmers Ltd and Woolworths Limited set to battle over booze

In 2007 when blue chip giant Wesfarmers Ltd (ASX: WES) acquired the Coles Group for $22 billion the conglomerate was cheered by some investors for making a company-transforming move. At the same time it was derided by other investors for a multitude of reasons including paying too much, not acting in shareholders’ best interests, buying a bad business and moving outside of its core competencies.

Seven years later and investors are still well-and-truly divided on whether the Coles acquisition was in fact a clever move or not. One thing that’s certain is that its supermarket rival Woolworths Limited (ASX: WOW) has significantly outperformed Wesfarmers since the Coles purchase in November 2007. While Wesfarmers is down 3% over that time, Woolworths’ share price has gained 14%. Having said that, Wesfarmers has still managed to outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) which is languishing nearly 19% lower.

Despite this state of affairs there appears to be a number of opportunities and efficiency gains still at Coles’ disposal. This bodes well for shareholders as it means there should be further profit growth ahead for the retailer. The next battleground for Coles and Woolies looks set to be their liquor divisions – here’s how each side is positioned.

Wesfarmers

Coles’ liquor business includes the well-known brands of Liquorland and Vintage Cellars. According to a report in The Australian Financial Review (AFR), Coles’ liquor retailing outlets account for approximately 20% of Australia’s packaged alcohol sales. Up until now it appears that Coles’ management has been focussed largely on the grocery business at the expense of the liquor business, according to reports that is about to change.

Woolworths

The Woolworths’ liquor chains include BWS and market leader Dan Murphy’s. In total Woolworths has roughly double the market share of Coles. The AFR quotes the general manager (GM) of Dan Murphy’s superstores as stating that it will be at least six years before the Dan Murphy’s superstores expansion reaches capacity.

The strong market position of Woolworths, coupled with its own expansion plans suggest Coles will have its work cut out for it if it plans to boost its market share. Any increase in competition will be closely watched by Metcash Limited (ASX: MTS) which owns a number of banners including Cellarbrations, as its more likely Coles’ gains will come at Metcash’s expense than Woolworths.

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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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