• Wesfarmers plans to demerge its Coles supermarket division after acquiring it a little over a decade ago.
• The new entity will be a top 30 ASX company with $39.2 billion in revenue and 109,000 staff.
• Australian food sales and retail food price inflation has slowed substantially in the post-GFC era.

More than a decade after being absorbed into the Wesfarmers empire, Australian supermarket chain Coles is about to relist as a separate entity on the ASX.

For a company rivaling the likes of Vegemite, VB and its major supermarket rival, Woolworths, in terms of brand recognition in Australia, it’s fairly big corporate news.

However, after being acquired back in 2007 by Wesfarmers, the new retail world Coles is entering in as a separate entity is a very different one to that it departed.

Back then, the Australian economy was in overdrive, powered by a once in a generation commodity price boom, record levels of population growth and hot labour market conditions, leading to strong growth in worker wages.

Fast forward a decade and things are looking a little different.

While population is still growing at a decent clip, and labour market conditions are strong, household spending levels have been weak despite a significant decrease in borrowing costs.

Caution as a result of the global financial crisis, along with increased household indebtedness and persistent weakness in Australian wage growth, has all acted to gradually reduce household spending, especially on retail goods.

The chart below shows the decelerating trend in nominal retail sales over the past decade.

While the chart above measures total sales in nominal terms, food sales – Coles’ bread and butter – have not been immune to the slowdown seen across the entire retail sector.

From the depths of the global financial crisis, average quarterly food sales in dollar terms have averaged just 0.9%, according to data from the ABS, well below the 1.6% average seen between 1997 to 2009.

And retail food price inflation has also slowed substantially, averaging 0.5% per quarter in the post-crisis era, below the 0.8% average seen in the preceding period.

Sales growth is trending lower, as is food price inflation, coinciding with a similar deceleration in wage growth over the same period.

While weak growth in household incomes has been a factor, increased competition has been another.

Back in 2007 before it was acquired, Coles’ competition was largely limited to Woolworths and independent grocers.

That’s changed over the past decade with the arrival of large multinationals such as Amazon, Aldi, Costco and Kaufland, creating additional competition for both of Australia’s major supermarket chains.

This has undoubtedly contributed to recent downward pressure on food prices, and as a consequence supermarket margins, as rivals compete to increase their market share.

And given the prospect of other multinational chains also entering the Australian market, coming at a time when others are already fighting to establish market share, it’s difficult to see margin pressures dissipating any time soon.

If anything, the risks are they become even more acute.

While Coles has the advantage of brand recognition and fighting for market share in what is predominantly non-discretionary spending areas, the consumer and competition landscape now appears far more challenging than in the past.

It’s a brave new world out there for retailers, and the competition revolution in Australia looks like it’s only just beginning.

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