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Why the Coles Group Limited (ASX:COL) share price has fallen 8% since listing on the ASX

The Coles Group Limited (ASX: COL) share price has fallen 8% to $11.45 since last month’s highly publicized demerger from Wesfarmers Ltd (ASX: WES). Coles began trading on the ASX on November 21 with an opening price of $12.49.

The majority of the share price decline happened last Friday when Coles shares fell 5% on a record volume of 15 million shares. Friday’s sharp sell-off occurred after reports had emerged that Amazon has expanded its presence in the Australian groceries market. Shares of major rival Woolworths Group Ltd (ASX: WOW) were also down 3% on Friday following the news.

Amazon effect and growth moderation

The Australian Financial Review revealed that Amazon is selling some popular non-food pantry items at up to half the price that Coles and Woolworths are selling the identical item for. Furthermore, Amazon is selling some of these items below the cost Woolworths and Coles pay to acquire them.

Amazon appears to be using the scale of its operations to obtain large supplier discounts which they are passing on to consumers and undercutting the prices of the traditionally dominant supermarkets in Australia.

There have also been fears that growth in Coles will now moderate following the end of the highly successful ‘Coles Little Shop’ campaign. In the first quarter of FY19, the Little Shop campaign was a major catalyst alongside improved in-store execution and promotional campaigns from Flybuys in delivering supermarket sales growth of 5.8% to $7,657 million. The sales growth rate in the first quarter was significantly higher than any quarterly growth rate in FY18.

Foolish takeaway

Prior to its demerger, shares of Coles were expected to trade at a slight discount to Woolworths. At current prices, Woolworths is trading for around 21 times FY19 earnings. In contrast, Coles is currently trading for around 17 times the FY19 earnings per share consensus estimate of 69.15 cents.

The current valuation discount stands at approximately 21%, which is significantly larger than what investors and market commentators had expected before Coles commenced trading on the ASX. This is something for investors to monitor going forward as it appears the market has become more bearish on Coles than Woolworths.

The Australian groceries market has become increasingly competitive with Amazon’s entry and the success of international chains such as Aldi and Costco. Coles has still managed to hold on to significant market share with its well-known brands helping the company maintain the 2nd largest market share in the industry. However, the increased competition has impacted earnings as Coles saw earnings before interest and tax fall by 6.8% to $1,500 million in FY18.

Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool Australia has recommended Amazon. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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