Woolworths faces a potential squeeze on its profit margins as it takes action to compete with its smaller rival, Coles. Coles has recently been outpacing Woolworths in terms of sales and market share growth, marking a shift in the competitive landscape. Despite this, Coles still trails behind Woolworths regarding food division profits.
Analysts have noted that both retailers are focusing on essential products, particularly their own branded items, in a bid to stay competitive. Coles made the first move in this strategy, prompting Woolworths to follow suit and invest more in lowering prices. This move is expected to help Woolworths narrow the gap in sales growth between the two giants. Additionally, the possibility of Aldi, another major player in the market, lowering prices further adds pressure.
A recent survey conducted by investment bank JPMorgan revealed that Woolworths has reduced its price premium to Aldi, a discount supermarket, by about 160 basis points. Coles also saw a decrease in its premium compared to Aldi. Price cuts on various items such as lamb, sausages, deli products, chicken, beef, pork, cheese, and baked goods largely drove these reductions in price premiums.
The competition between Coles and Woolworths has intensified, with Coles reporting a 4.9% increase in supermarket sales compared to Woolworths’ 1.5% growth in Australian food sales. This growth gap is the widest it has been since 2018, indicating a significant shift in the market dynamics.
Both Coles and Woolworths are closely monitoring competitors’ prices and have made keeping prices down a top priority. This focus on pricing reflects the robust competitive environment in the Australian grocery space. Additionally, both retailers are under scrutiny from regulatory bodies such as the Australian Competition and Consumer Commission, which is investigating how supermarkets set prices.
Despite Coles’ current lead, analysts believe Woolworths will respond with promotional strategies to address its sales underperformance. However, such strategies may pressure Woolworths’ gross margins in the short term.
In summary, Woolworths is facing challenges in maintaining its profit margins as it competes with Coles in a dynamic and competitive market. Both retailers are actively adjusting their strategies to stay competitive, focusing on pricing and promotional activities.
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