Woolworths vs Coles: The Australian Supermarket Duopoly

Woolworths vs Coles: The Australian Supermarket Duopoly

These two giants have been going at it for years now and we can learn a lot from how this particular duopoly unfolded. In this strategy study, we’ll do exactly that.

At the engine of our modern capitalism is competition. Companies fight for market share, customer loyalty, and survival – at the end of the day. And it’s through these epic battles, that we as consumers get better products at better prices over the long term. A great example of this sort of hard-fought competition is the rivalry between Woolworths and Coles in the Australian supermarket space. 

Woolworths Coles
995 stores 800+ stores
210,067 employees 112,269 employees
$44.44 AUD billions in revenue FY21 (Australian Food) $33.85 AUD billions in revenue FY21 (Supermarkets)
On average 27.8 million customers served per week N/D
 

From Humble Beginnings

Woolworths opened their doors back in 1924 with a single store in Sydney, and a dream to make it big[1]. 3 years later, they opened a second store on the back of the early momentum and officially became a chain. The offering was successful from the beginning because of the perfect match with the consumer requirements at the time. The middle class was growing and as purchasing power increased, so did the demand for supermarkets. Woolworths rode this trend and rapidly scaled across the country, bringing their unique ethos and way of doing business to people the nation over.

woolworths-store-brisbane-1927Source

By 1959, they had 300 stores in operation, and they had established themselves as a key player in the industry, one that had significant bargaining power when it came to dealing with vendors and suppliers of all kinds. They began to launch their own white-label brands, acquire smaller players, and quickly became a corporation that wielded immense influence in every consumer vertical that you can imagine. Everything from clothing, to food, to drinks, to household items – they worked their way into each, eventually delivering a supermarket experience that was extremely hard to beat.

In 1993, Woolworths listed on the public markets in what was Australia’s largest ever share float at the time. Once again this accelerated the growth of the company and if you fast forward to today, you can see that they haven’t slowed down since.

Coles got started ten years earlier than Woolworths (1914) with much less fanfare[2]. It was a different time economically and founder GJ Coles opened his store in Victoria with a goal of creating a simple and honest store experience for his customers. As they rode the waves of the Great Depression and the aftermath of World War II, they slowly pivoted their offering to target the married women who had now joined the workforce and were looking for a much more convenient and efficient shopping experience, due to the new time constraints.

coles-store-1920sSource

Under this mandate, they launched themselves headfirst into a range of different industries including foodstuffs, appliances, cosmetics, and so much more. There was no limit to what they would consider and the only thing that mattered was finding out what customers wanted.

One of the key pillars of Coles' philosophy was to be altruistic wherever possible. GF Coles really wanted his creations to do good in society and he was constantly looking to find ways to donate portions of his profits to hospitals, nursing homes, relief funds, and anywhere else where there was a desperate need. He believed that businesses had a social responsibility to the communities that they operated in, and that ethos carried forward into everything they did. It felt like a safe, warm space for customers to get what they needed, while also knowing that a small piece of their shopping would go to support people in more difficult circumstances than they were.

As the years rolled on, Coles expanded their empire, transforming their early success into a national phenomenon. With every new store came better options for customers, more variety in terms of items, and a more streamlined experience all around. If you look at them today, it’s clear that they’ve come a long way from very humble beginnings, and they represent the quintessential modern supermarket chain. It’s been one hell of a ride.

Finding Their Lane

It’s easy to look at how supermarkets like Woolworths and Coles are set up today and assume that it’s always been that way. But that’s simply not the case. The supermarket industry has ebbed and flowed over the years, disrupting itself time and again, while adjusting to the changing consumer needs at every step along the journey.

Small innovations like an in-built car-park, or self-service shopping might be second nature to us now, but it was these titans of industry that brought them to us. The story of the modern supermarket is one that has constantly followed the macro-economic trends of their customers, trying their best to deliver a shopping experience that was not only one of utility but one that would keep you coming back.

At the start, both Woolworths and Coles had a pretty simple objective. In their native Sydney and Victoria respectively, they wanted to understand the local context and provide the exact goods that the locals needed. The target market was extremely narrow and because your customer base was small, you could be very specific with what you did, because of the constant feedback that you would receive on a day-to-day basis.

It was only when both companies began to grow did they have to start thinking much more strategically about how they would position themselves on the national stage. All of a sudden, the things that helped them succeed as small family-owned stores in their respective neighborhoods weren’t relevant anymore. They had to find a lane for themselves that would resonate with a much wider client base, in a radically changing time.

The one key macroeconomic event that caused a dramatic shift was, of course, the impact of World War II. The post-war economy looked very different from what came before. The economic shift notwithstanding, there was a cultural shift in terms of how people went about their lives.

This coincided with the women’s movement which brought more and more women into the workforce, changing the dynamics of what it meant to run a family home. The supermarkets had to change their messaging, their product offering, and everything about them to adapt to the new normal. It required lower prices, bigger variety, and more convenience because with most adults now in the workforce, there wasn’t a lot of time left for grocery shopping.

This cultural shift meant that the supermarket became one focused on efficiency. Could they fit everything under one roof so that customers only had to go to one place? This value proposition alone would draw consumers in – so it became the holy grail.

How do you stock everything?

Of course, the nature of a one-stop shop is that you’re the only one in town. But as Woolworths and Coles were beginning to discover, that wasn’t the case. As their target markets began to overlap, they started to compete with one another for the same customers. Both companies were selling mostly the same products, and so it was about competing on price, in-store experience, and other less tangible features as they scaled across the country.

We’ll dive into this competition in more detail in a bit, once we’ve done some more work setting the foundation for the battle.

Key Takeaway: You must be constantly adjusting to the macro-economic and cultural shifts that are affecting your customers, or you risk becoming detached and eventually made irrelevant.

Innovations

Both Woolworths and Coles were considered significant innovators because they were constantly pushing themselves to improve the customer experience. Some of these were genuinely new and ground-breaking, while others borrowed inspiration from an idea that already existed and repackaged them for the market they were serving. In each case, there was always a sense that they were pioneers in the space, changing what it meant for the Australian middle class to buy their essentials.

Here are some of the key innovations that Woolworths and Coles pioneered:

  • Self-Service. This seems completely normal to us now but there was a time where self-service within stores wasn’t a thing. You would have to ask the shopkeeper to get the items that you needed, and the shop wasn’t really set up for browsing. In around 1955, Woolworths introduced the first self-service store where customers could walk up and down the aisles, collecting what they needed, and then they would pay for it at a cash register. This completely reshaped the retail experience, and it was very quickly copied by everyone in the industry because of what it did for efficiency.
  • Sales Catalogues. In the early ‘50s, GJ Coles revolutionized the one-stop shop by creating store catalogs that would show every item that was available at a Coles store. This became the key resource for any shoppers in the area and allowed them to browse the store’s offerings from home, plan their shop, and then come in to get whatever they needed. It seems simple to us but at the time it took an awful lot of effort to get it right and they were one of the first companies to do it at scale.
  • Freestanding Supermarkets. Both Woolworths and Coles pioneered the freestanding supermarket that wasn’t connected to other establishments and had a big car park for its customers. This points to how big the stores were starting to get and it made sense to get their own premises on which to build these gigantic operations. If you had told someone from the ‘20s that you’d have giant freestanding supermarkets, they would have told you that you were crazy.
  • Inventory Tracking. As these two companies moved into the digital age, starting in the 90s, they were both at the forefront of barcode-based inventory tracking which helped to manage the tremendous volume of items coming in and going out of each store. Instead of having to do things manually, a combination of software and barcode scanners helped to automate a lot of the tedious routine tasks and allow for much better data collection which helped to drive business decisions. Of course, we’ve come a long way since then, but these early technological leaps transformed how big retailers did things.
  • White Label Brands. Once Woolworths and Coles got to a certain scale, they had various opportunities to improve their margins by creating white-label house brands which they could sell alongside their vendor-supplied alternatives. They had built the trust in their consumer base and by using their negotiation power and good storytelling, both chains created brands that resonated with consumers across the country. Some of them still dominate the market today and while this was not a new idea, it was executed to perfection by both companies – changing the way that mass-market consumables were marketed and utilized.
  • Rewards Programs. As these companies started to gather more and more data on their customers, they realized that they could subtly encourage certain behaviors and reward their top customers by creating a customer loyalty program. The trick was to create enough value for consumers so that signing up would be a no-brainer, and then they could benefit from the improved data on the back end. All of this could then be used to improve the experience and create even more customer satisfaction. Today, every store tries to do this, with varying levels of success, but it was these two supermarket chains who really pushed this in the early days.

Those are just a few of the innovations that came out of the rise to the top, and while most of them may seem obvious to us now – they represented leapfrog changes in their time. These innovations are what kept them at the top of the pile and why we’re writing about them right now, as opposed to the other competitors that have faded into the annals of time.

Key Takeaway: What seems obvious to us now represented a game-changing innovation in the past. What new concept can you bring to life today that will look obvious to us in the future? Is there low-hanging fruit that is right in front of you?

Expansion Beyond the Supermarket

It’s also worth noting that neither Woolworths nor Coles stopped at the supermarket. They realized, as many well-known consumer brands do, that their influence is only limited by their imagination. By the time that they were controlling the supermarket industry, they had built up a tremendous amount of brand equity in the minds of consumers that could be relatively easily translated into other endeavors.

We saw expansions into service and petrol stations which aimed to create highly convenient, bite-sized shopping experiences for those who were filling up their cars. Both companies made a range of different acquisitions that either kept running as they were or were integrated into the retail family to bring even more under one roof.

coles-express-service-stationSource

This is not to say that all of these moves succeeded, however. One notable failure that stains the history of Australian retail was an attempt by Woolworths to enter the home improvement space. In order to compete with Bunnings, the market leader, they created a brand called ‘Masters Home Improvement’ through a joint venture with Lowe’s. The idea was to create the same sort of ethos and customer experience that Woolworths customers had become accustomed to but focus it on the world of home improvement.

They couldn’t make it work though, and they proceeded to lose billions of dollars in the process. It was in 2016 when they declared it a failure and exited the market entirely. Interpret this as you will, but from where we’re seated – this looks like a story of a company biting off more than they can chew. While brand strength and operational know-how are powerful, you still have to have a deep understanding of the new industry you’re entering and how to best deliver the service that you need to compete. Woolworths got this one wrong and returned their efforts to the supermarket battle with Coles that rages to this day.

Key Takeaway: Venturing out of your vertical doesn’t always work, no matter how strong your brand is. Do so carefully and with the right research and risk mitigation behind you.

The Battle for Supremacy

If you look back on it now, these two companies seemed destined to come together eventually. Even though they were started in two different places, in different times, the similarities of what they were trying to accomplish, and the philosophy they were applying to get there, were remarkably similar. The moment they started to enter the same towns; they were bound to compete.

In some ways, the competition between Woolworths and Coles has been one that has typified Australian retail. It feels like it’s perfectly positioned for a management consulting case study because of how well-matched the competition has been and how we’ve seen them go toe to toe for years now[3].

In the 1950s, their combined market share was only 10%. But this quickly rose to 34% by the 1970s and up to 65% by 2008[4]. The growth seen by both dwarfed anything that the other players could match and so they become somewhat obsessed with one another. If you read any memoirs or stories from the early days, you get the sense that they were at each other’s throats from the very beginning.

Every time one of them developed a new concept or idea, it would cause a ripple effect on the other side, while the other company tried to copy it as quickly as they could. Back and forth they traded innovations in technology, customer experience, operational efficiency, messaging, and much more. Competitive advantages were short-lived because both companies employed teams whose sole job it was to monitor their peer and report back on how things were shifting on that side.

It’s rare that you get these sorts of competitions where both parties are equally strong. Typically you hear the story of a large company bullying a smaller one, or an agile company out-maneuvering a larger one. But here, you had two major corporations, operating at scale, embarking on a constant battle for the next consumer[5].

A lot of this battle revolved around real estate and foot traffic. As both companies were going after the same customers, they wanted to locate their new stores in the prime locations that would maximize awareness. This is a core part of retail strategy, of course, and both companies were trying to eke out whatever benefits they could from the land they could get their hands on. Shopping centres often welcomed this battle because they were considered anchor tenants and their brands could easily raise the status of any new complex.

However, the battle over real estate has calmed down in the modern era. The differences in plots became much less important, and with enough scale, customers would come directly to the stores intentionally. You didn’t need to capitalize on impulsive window shoppers anymore.

And so, as it often does, the competition came down to price.

The Race to the Bottom

In the world of the supermarket, there is only so much you can do in terms of product differentiation. As the global supply chain democratized access to the major distributors and suppliers, both Woolworths and Coles essentially housed the same items inside their stores. All that remained to compete on was price.

Who could deliver the goods at the lowest price to their customers?

Neither company was doing their own manufacturing, so there were only ever two ways that they could bring down the cost of their goods in any significant way. They could either cut overhead costs or negotiate lower prices from their suppliers.

Both companies were determined to maintain the high quality of their in-store experience and so were very hesitant to touch any of the overhead costs. Not to mention the importance of good people across the organization, which meant that they were not looking to reduce salaries by any stretch of the imagination. Sure, there were some technological advancements that helped, but at the end of the day – they needed to tackle the input costs.

So, that began the race to the bottom.

Woolworths and Coles would go back and forth with suppliers fighting to squeeze margins as best as they could – so that they could pass those savings on to the consumers. Every time that Coles won a slight discount from a supplier, Woolworths would have to fight to match it. Every time Woolworths negotiated better payment terms with a distributor, Coles would scramble to do the same.

The enduring pressure on price started to place a lot of strain on the suppliers that were selling their goods into these chains. But they didn’t really have any bargaining power in these situations because the order volumes were so large that they represented a substantial portion of their overall sales. Having your goods in Woolworths or Coles was not an opportunity that you could easily turn away. And so, piece by piece, these corporations chipped away at the prices and used each other as leverage points along the way.

The War on Milk

The most vivid example of this race to the bottom was the Milk Price Wars. Starting in January of 2011, there began intense competition on milk prices, one of the key staples that any supermarket must be competitive on. Both companies were getting their milk supplies from local Australian farmers, and they continued to push the prices down as far as they could go. At the very bottom, they got all the way to $1 per litre, a price so low that there was barely any money being made at all.

This was great for the consumer, of course, because they didn’t really have any connection with where the milk was coming from – they were just happy to be saving a little bit on their shopping. The farmers were the ones that were hurting.

coles-woolworths-milk-price-warSource

It wasn’t until the drought in 2019 where we discovered, as a nation, how fragile that industry actually was. The lack of rain placed an immediate strain on many of these farms and because the margins had been so tight for so long, there was no cushion in the system. A substantial number of farmers had been living on the edge and any economic shock was going to topple them over.

This caused an immediate shortage of milk, and it highlighted the potential externalities of these price wars. When you are so determined to lower short-term prices, you trade that off against the long-term stability of the system you’re relying on. And all of a sudden, your supply disappears.

This was the straw that broke the camel’s back[6] and it caused an uproar within Australia. Regulators and advocates for fair competition started to raise their voices and it kickstarted a conversation about the duopoly that continues to this day.

Key Takeaway: Short-term price wars can often have negative long-term effects that you don’t see straight away. Wherever possible, compete on value rather than price – because the incentives are much more productive for you and all your stakeholders.

The Duopoly

The Woolworths – Coles duopoly has caused a lot of controversy in the Australian market because of what it’s done to other players who have tried to enter the space and failed. As we discussed above, both companies used their substantial scale and stature to bring prices down to a level where it is very difficult to compete with, if you don’t have the same infrastructure in place.

A new chain that is just getting started simply can’t get to the same low prices that the two giants can because it is not placing big enough orders and it doesn’t have the brand cache that Woolworths and Coles do. As a result, there is a significant barrier to entry that is impossible to dismantle while Woolworths and Coles control the market[7].

Now, of course, there are debates on both sides of this and some will say that those complaining are simply not good enough to compete and that this is the nature of the free market. They will back that up by saying that the low prices are benefitting consumers and isn’t that all we’re doing this for anyway?

This line of thinking misses an important nuance though. The reason that we regulate competition as a society is that we want to enable a diversity of choice so that power isn’t centralized in the hands of one or two market players[8]. The moment that corporations get so big that they completely dominate a market, we lose something in terms of being able to inspire the next generation of players to enter that space. And the overall market becomes less robust than we would like it to be.

It’s the milk situation all over again. Are we willing to accept an unstable economic system for the benefit of low prices in the short term? Many say no, but it’s difficult to know how these sorts of things should be regulated, if at all.

What’s clear to see though is that the duopoly may have stunted the growth of the supermarket industry in Australia, not allowing the space for new entrants and further entrenching the existing incumbents in a way that is difficult to turn around.

With that being said, there are some green shoots that point to a potentially positive outcome. Firstly, the public conversation that has developed around the topic will no doubt cause both Woolworths and Coles to carefully consider any new acquisitions that they seek to make. It’s unlikely that they’ll be able to buy smaller players in the way that they’ve done over the years and hopefully, that gives those independent grocers the chance to breathe and grow.

Another aspect is the continued push towards online shopping. The COVID-19 pandemic has accelerated a trend that was happening anyway, and more consumers are buying their groceries online than ever before. This is a brand new business model that allows for new players to compete in ways that they haven’t before. You don’t require huge retail stores or an established brand to capture new customers. The digitization of this process opens up new opportunities that should excite new entrepreneurs and force the incumbents to adapt.

Only time will tell if the duopoly will ever be toppled, but it’s safe to say that the competition between Woolworths and Coles will continue unabated, regardless of what happens on the macro level.

Key Takeaway: Growing too big comes with its own problems and challenges. Be wary of creating monopolies or duopolies which draw the attention of the regulator. Strategic acquisitions should be carefully considered with the wider societal impacts in mind.

The Sentiment of the Australian Public

If you were to poll the average Australian on the street, they probably wouldn’t have any strong feelings on the duopoly because there isn’t a nuanced understanding of exactly how influential these companies are in the general public. Most people simply don’t know how many different brands and companies are owned by Woolworths and Coles.

From a consumer perspective, they are mostly happy because they can get the goods they want, at inexpensive prices, at a place that is convenient for them. This is one of the pernicious aspects of these public goods – no one is aware of the externalities that come with a duopoly like this. And as a result, it can be very difficult to do something about it.

When it comes to comparing the two, this is difficult to get any real data on. Both brands have a loyal base of customers, and they continue to push home their advantage in any way that they can. Currently, Woolworths seems to be a bit stronger than Coles, but this has changed hands numerous times over the years and so it’s not something that we should hang our hat on.

At the end of the day, the Australian retail experience owes a lot to what Woolworths and Coles have done, and they are here to stay – whether we like it or not. By ingratiating themselves into Australian culture and obsessing about delivering a world-class customer experience, they’ve won the battle to become a household supermarket chain.

Key Takeaway: Consumers only really care about themselves. Rational self-interest is something that holds true across most markets and so if you can focus on them – you’ll build a loyal audience.

Conclusion

That brings us to the end of our deep dive into the competition between Woolworths and Coles. This is a story that is not yet over because they continue to battle and innovate against each other to this day, but by looking at where it’s come from you can get a decent sense as to the sorts of strategic moves that are required to grow a company like this.

Let’s recap some of the main takeaways that we discussed:

  • You must be constantly adjusting to the macro-economic and cultural shifts that are affecting your customers, or you risk becoming detached and eventually made irrelevant.
  • What seems obvious to us now represented a game-changing innovation in the past. What new concept can you bring to life today that will look obvious to us in the future? Is there low-hanging fruit that is right in front of you?
  • Venturing out of your vertical doesn’t always work, no matter how strong your brand is. Do so carefully and with the right research and risk mitigation behind you.
  • Short-term price wars can often have negative long-term effects that you don’t see straight away. Wherever possible, compete on value rather than price – because the incentives are much more productive for you and all your stakeholders.
  • Growing too big comes with its own problems and challenges. Be wary of creating monopolies or duopolies which draw the attention of the regulator. Strategic acquisitions should be carefully considered with the wider societal impacts in mind.
  • Consumers only really care about themselves. Rational self-interest is something that holds true across most markets and so if you can focus on them – you’ll build a loyal audience.

Strategically, the way that these two companies have intertwined is fascinating, and it shows just how competition can act as a catalyst for powerful innovation. Having a peer to compare yourself to keeps you honest and keeps you working hard every day to try and outperform.

This is one of the major reasons why duopolies are more interesting than monopolies. When you have one company that dominates a space, they tend to get complacent and they start to take their customers for granted, which opens space for new entrants and disruptors. But when you have two companies battling over time, there is natural accountability that makes for fascinating business outcomes.

We hope that you’ve been able to get some value from this strategy study that you can apply in your own business. The lessons that we can learn from Woolworths and Coles are transferable across all industries and they’re a perfect microcosm of what happens when two heavyweights are going at it in the marketplace.

We wait patiently for the disruptor that will change the game once more, but for now – you’ll have to stick with Woolworths or with Coles.

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