Australia-Supermarket War.

Coles supermarkets are ugly ducklings ripe for transformation into swans - with a bit of work from their new owners - according to a Citi retail analyst, Craig Woolford.

He says his review of the 700 Coles and 65 Bi-Lo stores had shown that it was only Coles’ lack of good management that had been holding it back from challenging the dominance of the industry leader, Woolworths.

The news will be welcomed by the boss of Coles supermarkets, Ian McLeod, who has the formidable task of chipping away at Woolworths’ dominance over Coles, owned by Wesfarmers.

"Our findings show that Coles’ problems are not structural, they are management challenges centred around staff service, store format, produce range and the pricing strategy," Mr Woolford said in a note to clients.

He suggests Mr McLeod would not need to resort to the costly exercise of closing struggling Coles stores to turn around the company’s fortunes.

Instead he could boost sales through relatively simple cultural and management changes, such as promoting its competitive pricing.

Coles and Bi Lo had missed out on $6.1 billion worth of sales, or $350 million in pre-tax earnings, in 2007-08 alone, Mr Woolford said.

This implied a 22pc gap between Coles’ and Woolworths’ sales per square metre - plenty of room for improvement.

If Coles could claw back those lost sales, it could add $2.45 a share in company value to Wesfarmers, a figure which is 14pc above its current value, Mr Woolford said.

"Coles could generate sales of $33 million per store, but only generates $25 million … [Woolworths] trades above its potential, generating $33 million in sales versus a potential of $31 million," he said.

Coles could be wiping the floor with Woolworths if it used its "more lucrative" store network to its advantage, Mr Woolford argued.

Its stores were in more affluent areas and had 6pc more potential shoppers to target within their mostly metropolitan catchment areas.

But instead sales were lagging Woolworths by 22pc as shoppers defected to other banners, and those who remained were spending less on each visit.