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Coles share price climbs higher after Sainsbury’s deal

The Coles Group Ltd (ASX: COL) share price gained 1.25% in yesterday’s trade after inking a new deal with UK retailer Sainsbury’s.

Coles was amongst the ASX 200 winners as the S&P/ASX 200 Index (INDEXASX: XJO) hit a 3-month high on Monday.

The Aussie index gained 48.40 points (0.72%) to close at 6,772.50 points – a level not seen since early August.

What was moving the Coles share price yesterday?

According to an article in the Australian Financial Review (AFR), Coles will source private label groceries from the UK outfit as part of the 3-year deal.

The Aussie supermarket is looking to boost its private label range under CEO Steven Cain as it looks to differentiate itself from Woolworths Group Ltd (ASX: WOW).

The new private label groceries from Sainsbury’s will hit shelves by the end of FY20 and will include packaged foods and household, health and beauty products.

It’s all part of Coles’ strategy to increase its own brand sales to 40% of its total sales in the coming years as it looks to boost earnings (and its share price). Own brand sales totalled roughly 30% of last year’s sales at $10 billion in FY19.

Both Coles and Woolworths are wary of increased competition from international competitors including Aldi and Kaufland.

German supermarket chain Kaufland recently announced plans to open at least 20 stores in Australia. Kaufland is backed by the fourth largest retailer in the world, Schwarz Gruppe, and is rolling out test stores in Victoria.

The latest Sainsbury’s deal is all part of the Aussie supermarket’s strategy to diversify and keep the Coles share price climbing higher in the face of increasingly heightened competition.

Is Coles good value on the ASX right now?

The Coles share price closed 1.25% higher at $15.44 per share on Monday afternoon. The company’s shares trade at 19.1x earnings, which is better value than Woolworths’ 33.4x multiple.

However, Woolworths offers a better dividend yield (2.68% vs. 1.55%) for income investors, with more than double Coles’ $20 billion market cap.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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