Supermarket wars!
Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) have long dominated the Australian supermarket industry in a sometimes-comfortable, sometimes-not duopoly.
Although this paradigm has shifted somewhat in recent years by the dogged persistence of Metcash Ltd (ASX: MTS)'s IGA stores as well as the entry of the privately-owned German kingpin Aldi – Coles and Woolies are still very much the 'big dogs' in the fight.
So which company is your best bet as an investment today?
Coles and Woolworths are of course, very similar. They both compete in the same market for the same customers by selling (pretty much) the same products.
Where there's a Coles store, there's usually a Woolies right down the road.
But Woolworths does have some additional firepower up its sleeve. The company owns a huge network of bottle shops, which include the BWS and Dan Murphy's brands – some of the most popular weekend destinations in the country. Backing this up, it can also brag about having the Big W discount chain in its portfolio (although that isn't much of a brag these days).
Woolies is also without question the more dominant supermarket. A 2019 Roy Morgan report found that Woolies had a 34% market share of the grocery market in Australia in 2018. Coles came in second place with 27.6%, while Aldi managed 11.4% and IGA 7.1%.
Even better for Woolies, in 2017 its share was 32.6%, while Coles was at 29.2%. So basically, Woolies is going in the right direction and Coles in the wrong one.
But let's look at the current share prices. From what we've discussed above, it seems fair that Woolworths deserves a higher market capitalisation and valuation that Coles.
Well, today, Woolworths has a market cap of $54.77 billion, while Coles is sitting on $21.4 billion. That's right, Woolies is more than double the size of Coles on current prices.
But what of the valuation? Right now, investors are willing to pay around $38 for each dollar of earnings from Woolworths (in other words, it has a P/E ratio of 38).
For Coles, it's just $18 for the same dollar.
Foolish takeaway
I do think Woolworths is a stronger business than Coles. It has a higher market share, brand power and a more diversified business. But on current prices, I'm not willing to pay the difference between what the market is valuing Woolies at compared with Coles. Coles shares today offer a cheaper price-to-earnings tag and a higher dividend yield. Thus, if I was on the hunt for a consumer staples dividend share today, Coles would win, hands down.
