Coles Navigates Cost-of-Living Pressures with Value-Driven Growth and E-Commerce Surge

Coles Group’s third-quarter fiscal 2025 results highlight a strategic pivot to affordability and digital innovation, as Australian consumers increasingly prioritize value amid persistent economic headwinds. The retailer reported a 3.4% year-on-year revenue rise to A$10.38 billion, driven by robust growth in its core supermarket division and accelerating e-commerce demand. Yet, the path to growth remains uneven, with Liquor division challenges underscoring the need for ongoing operational adjustments.

Value-Driven Retailing Powers Supermarkets Growth

The Supermarkets segment, which accounts for nearly 90% of Coles’ revenue, grew 3.7% to A$9.4 billion, with sales excluding tobacco rising a stronger 4.7%. Management attributes this to targeted promotions—such as the Summer Value campaign—and the enduring appeal of its Flybuys loyalty program, which now boasts 9.7 million active members (up 4.1% year-on-year). CEO Leah Weckert emphasized that affordability, fresh quality, and localized product offerings remain central to Coles’ strategy, aligning with RBA data showing household disposable income growth slowing to 0.5% in Q1 2025 amid lingering cost-of-living pressures.

The "Great value. Hands down" campaign, which combines everyday low prices, weekly specials, and personalized Flybuys offers, has become a cornerstone of Coles’ differentiation from rival Woolworths. Analysts note that this focus on value has helped Coles capture market share gains in essential categories, such as fresh produce and groceries, where price sensitivity is highest.

E-Commerce Accelerates, But Supply Chains Face Tests

Coles’ e-commerce sales surged 25.7% in Q3, with online grocery revenue surpassing A$1.1 billion—now representing 11.3% of total supermarket sales. This growth reflects improvements in Customer Fulfillment Centres (CFCs), which processed over 1.5 million orders during the quarter, and upgrades to its app and website. However, severe weather events—such as flooding in Queensland and Cyclone Alfred—disrupted fresh produce supply chains, contributing to localised price spikes. Management acknowledged these challenges but highlighted progress in its "Simplify and Save to Invest" initiative, which delivered A$157 million in cost savings to offset inflation and reinvest in technology and automation.

The completion of its second Automated Distribution Centre (ADC) in New South Wales marked a key milestone, with a third ADC in Victoria now under development. These projects aim to reduce supply chain costs by 15% over five years while improving delivery reliability—a critical factor as online grocery penetration in Australia approaches 20% of total sales (per industry estimates).

Liquor Division Struggles, But Strategic Rebranding Offers Hope

While the Liquor division reported a modest 3.4% sales increase to A$813 million, its profitability lagged due to cost inflation and IT system investments. EBITDA fell 8.8%, and EBIT dropped 20.2%, prompting Coles to accelerate its "Simply Liquorland" rebranding initiative. This strategy consolidates Vintage Cellars and First Choice stores under the Liquorland banner, aiming to simplify operations and improve brand consistency. Early results are mixed, but management remains confident that streamlining the portfolio and focusing on value-driven product ranges will restore margin discipline in this segment.

Outlook: Balancing Growth with Margin Pressures

Coles enters the fourth quarter with momentum in supermarkets but faces headwinds in Liquor and supply chain costs. The RBA’s first rate cut in four years (February 2025) may ease mortgage pressures, boosting consumer spending power. However, inflation—though slowing to 2.9% year-on-year in Q3—remains above Coles’ cost-saving targets, necessitating further operational efficiency gains.

Management’s focus on automation, data-driven inventory management, and localized product offerings positions Coles to capitalize on Australia’s A$140 billion grocery market, which is increasingly digital-first. The A$1.1 billion e-commerce run rate underscores the opportunity to deepen customer engagement through technology, while the ADC investments could lower long-term logistics costs by A$100 million annually.

Conclusion: A Resilient Play in Value Retailing

Coles’ Q3 results affirm its ability to navigate economic uncertainty by doubling down on affordability and digital innovation. With supermarkets revenue growth outpacing Woolworths’ 1.2% rise in the same period, and e-commerce penetration nearing 11.3%, Coles is well-positioned to benefit from shifting consumer behaviors. However, margin pressures in Liquor and supply chain volatility highlight execution risks.

Investors should monitor two key metrics:
1. E-commerce sales growth: A sustained 25%+ annual expansion would validate Coles’ digital strategy.
2. Liquor division EBIT recovery: A return to positive EBIT growth by FY2026 would reduce earnings drag.

With A$1.2 billion in net debt (comfortably below its A$2.5 billion facility) and a dividend yield of 3.8%, Coles offers a cautiously optimistic play on Australia’s value-driven retail landscape. While challenges remain, its focus on "Helping Australians eat and live better every day"—backed by automation and loyalty—makes it a resilient choice for investors eyeing the consumer sector.