Mental Models 4 Life

Woolworths and Coles are the two largest grocery retailers in Australia. Between them, they command a large percentage of the market share, with the rest divided between Aldi, IGA, Costco, and smaller players.

The recent competitive history between Woolies and Coles is quite an interesting one. Up until Coles was acquired by Wesfarmers in 2007 and started investing heavily in customer experience, Woolies were by far the better retailer, with a superior distribution network and higher operating margin. Indeed, up until about 3-4 years ago, Woolies was widely considered one of the best businesses in Australia.

Of course history now tells us Woolies was in fact “over-earning” between the period 2008-13. Instead of responding to Coles’ investment in better customer experience, Woolies decided to milk its competitive advantages and more-or-less run down its stores. It was knowingly letting its competitive moat be eroded over time in the interest of maintaining a high operating margin! It’s hard to know this is going on when it was going on from Woolies’ financial statements, which year after year paints a business in rude health, but a visit to an Woolies supermarket during that period can provide good clues. One thing I noticed in that period is that almost every trolley in the Woolies supermarket I visited has mal-functioning wheels. Broken trolleys are incredibly annoying to use and can affect one’s whole shopping experience but it’s something that doesn’t show up in sales data. Unless management is out there actively doing field surveys, they won’t know about it. And, of course, in that same period, every trolley in the Coles supermarket I visited is in perfectly working condition.

Fast forward to 2016/17, Coles has been taking market share for Woolies for a few years now and Woolies is clearly on the ropes. Its share price is near its lowest point in many years and there’s still doubts on whether its investment in better prices for customers will work against Coles’ more sophisticated campaigns. But guess what, in my last few trips to Coles, I noticed more and more of their trolleys have mal-functioning wheels. The tide is, perhaps, turning.