Coles Group Ltd (ASX: COL) shares are up 1.3% in afternoon trade on Tuesday.
The Woolworths Group Ltd (ASX: WOW) share price is also climbing, up 1.1%.
When comparing Coles shares to Woolworths, income investors will note Coles pays a 3.8%, fully franked trailing dividend yield. That compares to a 2.7% yield paid by Woolworths, also fully franked.
So, which of the S&P/ASX 200 Index (ASX: XJO) retail giants is the better buy?
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Which ASX 200 retail share has the advantage?
For some greater insight into whether Woolworths or Coles shares are the better buy, we defer to UBS (courtesy of The Australian).
According to UBS, shoppers can expect to keep paying more for their food, especially fresh food, heading into 2023.
Overall, food inflation in the three months ending 30 September (Q1 FY23) increased by 8.2%. Fresh food prices rose an even steeper 9%.
And UBS analyst Shaun Cousins forecasts that the food inflation trend will stick around for some time yet.
"Food inflation is expected to reach 8.7% over the next 12 months," he said. "We expect food inflation to peak in [Q2 FY23] as cost pressures remain."
Cousins added that Woolies and Coles have taken a "divergent approach" to operating in a competitive market amid fast-rising prices.
According to Cousins:
COL is seeking to maintain promotional breadth & depth, arguably reflective of it seeking to differentiate on price as per its period of market share gains in the early to mid 2010s and following market share losses in recent years.
WOW has more sales drivers (for example, online, refurbished store network, fresh participation) and hence is taking a more nuanced approach to inflation, moderating breadth & depth of promotions, although this raises risks as cost of living pressures rise.
UBS predicts that volume weakness will hinder Woolworths shares more than Coles shares. That's due to Woolies' online sales outperformance in the first half. With a less developed online offer, Coles' like-for-like sales growth is forecast to outperform in H1 FY23, with Woolies retaking the lead in H2.
UBS has a neutral rating on both Woolworths and Coles shares.
Its price target for Woolworths is $32.91, 1.5% below the current share price.
UBS's price target for Coles is $16.23, 2.3% below the current share price.
How have Coles shares performed compared to Woolies longer-term?
Longer-term, the Woolworths share price has been the stronger performer.
Over the past five years, Woolies shares are up 54%. That compares to a 29.4% gain for Coles shares.
