Why UBS is warning of more pain for the Coles (ASX:COL) share price

It’s been a rocky start to 2022 for the Coles Group Ltd (ASX: COL) share price. But a top broker believes that the supermarket chain will continue to languish.

The dour outlook for Coles stems from UBS’ latest supermarket supplier survey conducted between 13 January and 8 February.

The findings from the survey provide no relief for the Coles share price, which has fallen around 10% since the start of the calendar year. This compares to a 4.6% decline for the S&P/ASX 200 Index (ASX: XJO).

How the Coles share price compares to Woolworths share price

At least Coles shareholders are in good company. The Woolworths Group Ltd (ASX: WOW) share price and Metcash Limited (ASX: MTS) share price have also underperformed the ASX 200 this year.

UBS asked FMCG suppliers to rate Coles and Woolworths across 26 sub-categories on a scale of 1 to 10.

The broker noted that Woolies retained its leadership position in all 26 sub-categories compared to Coles.

Coles rated worse than Woolworths

It also noted that scores deteriorated in all 26 sub-categories for Coles when compared to the July 2021 survey. Having said that, Woolworths is not much better as it lost ground in 25 out of the 26 sub-categories. UBS believes this is due to the impact of the Omicron COVID-19 variant.

This could explain why supply chain and store operations, people and engagement, range and data and analytics were areas that declined most.

What could also pressure the Coles share price is that it may have lost Christmas to its archrival Woolworths.

Coles share price lost the Christmas battle

“Across survey respondents, 70% indicated Woolworths had the better Christmas, 9% Coles and 21% saying Coles & Woolworths were the same,” said UBS.

“Looking six months forward, market share gains are expected most from Woolworths (70%), then Aldi (9%), while MTS supplied IGA (52%) and Coles (42%) were most expected to lose market share.”

Inflation tailwind becomes a headwind

In further bad news, investors shouldn’t assume that supermarkets will benefit from rising inflation.

Higher prices are usually good news for the likes of Coles and Woolworths as food staples tend to be inelastic. This means consumers generally buy the same quantity even if prices rise and that will lift like-for-like sales at the supermarkets. But this may not be the case this time around.

“Yet volume and product mix is expected to be impacted, with the prospect of reduced volumes or trade down (e.g. smaller pack size, private label) expected by 79% of respondents, and only 21% expecting no impact to volumes or product mix,” added UBS.

The broker has a sell recommendation on the Coles share price. However, even though Woolies appears to be beating Coles, UBS also rates the Woolworths share price as a sell.

The post Why UBS is warning of more pain for the Coles (ASX:COL) share price appeared first on The Motley Fool Australia.

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• Price check: Woolworths (ASX:WOW) shares have already dropped 8% in 2022. Can they recover?
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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