Coles is obviously the operator of the national supermarket chain. It also has a major liquor business with Liquorland, First Choice Liquor and Vintage Cellars.
Many investors may consider Coles to be a defensive business that can be relied on in good times and bad times. After all, we need to eat. Buying stuff from the supermarket is one of the first things we make sure we pay for along with our dwelling costs.
Coles might be a reliable dividend payer in the years to come, particularly considering it’s likely to follow the Wesfarmers model of paying out a steadily growing dividend if profit allows. Wesfarmers said that the first year of dividends of the two separate companies will essentially be what the combined business would have paid.
The question is: Can Coles grow profit at a good pace for the long-term?
Some market commentators have said that Coles may need to cut prices to grow (or even just maintain) its market share. Australian supermarkets still have a higher profit margin than other Western nations.
Quite often when public-facing businesses make investments to lower their operating costs a lot of those savings get passed onto the customer. The duopoly with Woolworths Group Ltd (ASX: WOW) benefited both businesses in the past, but now Aldi, Costco and Amazon are competing with their low-cost business models. Falling profit margins isn’t a great business case.
I was pleased to read that Coles is investing significantly in two automated distribution centres in the next few years. Coles needs the best technology it can get its hands on to extract every dollar of efficiencies it can.
Coles’ supermarket chain is already spread across the country. The one big area of growth that it has identified is for smaller format stores where people can still do a full shop at in higher-density city locations. This is important with more customers likely to come from apartment buildings.
Whilst Coles may deliver cash-beating returns over the medium-term, I don’t think it’s a clear buy at today’s prices. I believe there are better ASX growth options out there.
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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.