Coles Group (ASX:COL) is a major Australian retailer operating through its Supermarkets and Liquor businesses, with a growing online grocery channel and significant Investment in automation, distribution infrastructure and technology. Its FY26 result showed that Earnings grew faster than sales, led by Supermarkets, while the Liquor division moved in the opposite direction. FY27 will place greater focus on whether higher Capital Expenditure continues to support productivity and whether the liquor repositioning can stabilise that part of the group.

Supermarkets Drive FY26 Earnings Growth

Group sales Revenue increased 2.8 per cent to approximately $45.6 billion during FY26.

EBIT excluding significant items rose 9.9 per cent to $2,322 million, while net profit after tax excluding significant items increased 13.7 per cent to $1,255 million.

The faster growth in earnings relative to sales indicates that operating efficiency and divisional mix played an important role in the result.

Supermarkets was the main contributor. Sales revenue in the division increased 3.7 per cent, while EBIT rose 12.2 per cent.

The supermarket EBIT Margin widened by 43 basis points. A basis point is one-hundredth of a percentage point, meaning the improvement represented a 0.43 percentage point increase in margin.

This suggests that Coles converted a larger proportion of supermarket revenue into operating profit during FY26.

eCommerce Continues to Expand

Supermarket eCommerce sales increased 26.4 per cent to $5.6 billion.

Online sales represented 13.6 per cent of supermarket sales during the year.

The rate of eCommerce growth was considerably faster than the growth recorded across the broader supermarket business, making digital fulfilment an increasingly important part of Coles Group's operating model.

The company has indicated that its online Business is scaling profitably.

This is relevant because online grocery can involve additional fulfilment, picking and delivery costs compared with traditional in-store sales. The ability to improve profitability while growing online volumes is therefore an important measure of whether technology and automation investments are translating into operating efficiencies.

Automation Spending Remains a Major FY27 Priority

For FY27, Coles expects operating capital expenditure of approximately $1.55 billion.

This includes around $300 million for the Victorian automated distribution centre and about $150 million for new supermarkets and store renewals.

Further spending is also planned across online operations and technology.

Automated distribution centres are designed to improve the movement of goods through the Supply chain by reducing manual handling and increasing processing efficiency.

However, these projects require substantial upfront capital and can take time to deliver their full financial benefit.

The FY26 increase in supermarket earnings provides evidence of improved operating performance, but the effectiveness of the wider automation programme will ultimately depend on whether future productivity savings offset depreciation, implementation costs and other operating expenses associated with the new infrastructure.

Higher Dividend Follows Earnings Growth

Coles declared a fully franked final dividend of 37.0 cents per share.

Together with the 41.0-cent interim dividend, this took the total FY26 dividend to 78.0 cents per share, compared with 69.0 cents in the previous year.

The final dividend had a Record Date of 4 September 2026 and was paid on 22 September 2026.

The higher full-year distribution accompanied the increase in underlying earnings and supermarket profitability.

Capital allocation remains important, however, because Coles is simultaneously funding a substantial investment programme across automation, stores, eCommerce and technology.

The balance between dividends and reinvestment will therefore remain relevant as the company moves through the next phase of its infrastructure programme.

Liquor Remains the Weakest Operating Area

The Liquor division recorded a markedly weaker FY26 performance.

Sales revenue declined 3.3 per cent, while EBIT fell 47.8 per cent.

The result reflected subdued consumer sentiment and elevated operating costs.

The decline in EBIT was substantially larger than the fall in sales, indicating significant pressure on profitability within the division.

Coles has begun repositioning the Liquor business and plans to close approximately 30 stores during FY27.

This strategy is intended to improve the quality and efficiency of the store network, but the financial benefit will depend on execution and the trading performance of the remaining portfolio.

Until the division shows clearer signs of stabilisation, Liquor is likely to remain a drag on group earnings relative to the stronger Supermarkets business.

FY27 Brings Higher Inflation and Cost Pressure

Coles expects higher inflation during FY27 and intends to offset part of that pressure through productivity initiatives.

Inflation can affect a supermarket operator through wages, utilities, logistics, supplier costs and store expenses.

The challenge is to manage these increases without undermining price competitiveness or customer demand.

This is particularly important in Australian grocery retail, where competition remains intense and pricing decisions can quickly affect customer traffic and market share.

Productivity savings from automation, distribution and technology therefore become more important as the cost environment tightens.

If these programmes deliver efficiencies as intended, they may help absorb part of the inflationary pressure. If savings develop more slowly, operating margins could face renewed pressure.

Retail Crime and Competition Remain Operational Risks

Retail crime remains another source of cost pressure.

Higher theft levels can increase inventory losses and require additional spending on security, store controls and technology.

Competitive conditions also remain significant because the supermarket sector is concentrated and customers are highly sensitive to price, promotions and value.

A sustained period of heavier discounting could affect margins even if sales volumes remain resilient.

For Coles Group (ASX:COL), the ability to preserve the FY26 improvement in supermarket profitability will therefore depend on a combination of pricing discipline, productivity gains, cost control and customer retention.

Capital Investment Carries Execution Risk

The automation programme is capital intensive and therefore carries project execution risk.

Large distribution centre projects can face delays, cost overruns or implementation issues as systems are integrated into existing supply chains.

The Victorian automated distribution centre is one of the major FY27 projects to monitor because of the scale of planned spending.

New store openings and renewals also require capital and can affect near-term Cash Flow before productivity or sales benefits are fully realised.

The broader question is whether the higher level of investment produces enough operational efficiency and sales support to justify the associated capital and Depreciation costs.

What to Watch in FY27

The Annual General Meeting scheduled for 6 November 2026 will provide the next formal opportunity for management to discuss trading conditions and execution priorities.

Quarterly sales updates will be useful for assessing supermarket growth, eCommerce penetration and the direction of the Liquor business.

Progress on the Victorian automated distribution centre will also remain important, alongside the pace of store renewals and new supermarket openings.

Investors can additionally monitor whether the planned closure of approximately 30 liquor stores improves divisional profitability and whether FY27 capital expenditure remains close to the approximately $1.55 billion guidance.

For Coles Group (ASX:COL), FY26 showed that stronger supermarket execution can support earnings growth even when group sales rise more moderately. FY27 will test whether that operating improvement can be sustained while the company absorbs higher investment, manages inflation and works to stabilise Liquor.