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Macro Intelligence: Coles and Woolworths under pressure amid rising food prices

The ASX Consumer Staples sector sees a shaky start in 2024, with major players like Coles and Woolworths impacted by price-gouging claims and adverse weather conditions.

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Article written by Juliette Saly (ausbiz)

Unsteady start to 2024 for consumer staples

The S&P/ASX 200 Consumer Staples sector (XSJ) has had a shaky start to 2024, declining close to 3% versus a 2% gain in the broader ASX 200 Index (XJO).

Resilience in essential goods

Along with Coles (COL) and Woolworths (WOW), Treasury Wine Estates (TWE), Endeavour Group (EDV), and a2 Milk (A2M) are among the mid-large cap stocks in the index, which is rebalanced quarterly. Companies in the index tend to be resilient to economic cycles as food, beverages, and personal household goods are bought all year round.

Peer Analysis data show earnings growth in the sector has averaged 0.42% over the past three years

S&P/ASX 200 consumer staples year-to-date chart

Source: Google

Coles and Woolworths vs weather woes

Big supermarket giants Coles and Woolworths have been accused of using their duopoly to price-gouge consumers.

However, weather effects have also pushed up food prices, including cocoa, which is now more expensive than copper.

Cocoa prices are now trading above US 9,000 a tonne and have nearly doubled in 2024, even outpacing gains in bitcoin. The commodity is being affected by dry weather conditions or the El Niño impact, which is limiting supply. The supermarkets maintain that higher costs for basic foods are being caused by weather patterns, with their costs being passed onto consumers.

There are multiple inquiries running into the issue of supermarket pricing, including an inquiry by the competition watchdog, the ACCC, which is due to report its findings in 2025.

Cocoa price increase

Source: Refinitiv

Woolworths shares tumble: is it time to buy the dip?

Supermarket giant Woolworths has had a bad start to 2024, and its shares are down around 14% over the past 12 months.

Multiple indicators point to a long-term bearish trend with the 200-day moving average falling, suggesting demand for the stock is low. The 5-day moving average is beneath the 50-day moving average which is also a sign investors see little opportunity in buying the stock at this time.

Woolworths daily chart

Source: IG

Woolworths 20-, 50-, 100- moving average

Source: IG

Coles outperforms Woolworths in 2024

Looking at Coles, its share price has risen around 2% so far in 2024, in line with gains in the overall ASX 200. And over the past 12 months, its decline of around 8% is better than that of Woolworths, and just slightly better than the performance of the broader consumer staples index.

ASX Tradewatch data show shares are in a near-term uptrend with the 20-day moving average rising, implying that investors see an opportunity for profit.

Coles daily chart

Source: IG

Citi buys in, Morgan Stanley holds back

Macquarie recently upgraded Woolworths to “Outperform” from neutral, with a 12-month target price of AUD 35. That’s around an 8% upside from current trading levels.

Citi has a Buy rating, while Morgan Stanley is underweight on the stock, with a AUD 32 price target.

Goldman Sachs is very optimistic on Woolworths' fortunes, given the company’s recent earnings and leadership shakeup, which saw CEO Brad Banducci announce his resignation, effective from September.

Goldman labels Woolworths a “conviction buy” and has a 12-month price target of AUD 40.40, stating:

“We believe the business has among the highest consumer stickiness and loyalty among peers, and hence has a strong ability to drive market share gains via its omnichannel advantage, as well as its ability to pass through any cost inflation to protect its margins beyond market expectations.”

Analyst mean ratings and future projections

Source: Reuters

Analysts evaluate potential of major retailers

Meanwhile, Thomas Atkinson from FX Evolution told ausbiz that traders should look for momentum in the stock before buying the dip, suggesting a break above AUD 33.28 is the level to watch.

Macquarie also recently upgraded Coles to “Outperform,” with a price target of AUD 17.50, which implies a near 6% upside. Most analysts are positive on Coles, with Ord Minnett the least bullish, citing a price target of AUD 15 per share and a “Lighten” recommendation.

The average recommendation on Reuters data is a HOLD with a price target (PT) of AUD 17.24, a 4% upside from current trading levels.

Sentiment indicator chart

Source: FNArena

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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