Supermarket war expected to hurt profits

This earnings season, investors will be keen to see whether Woolworths’ job cuts and its bid to narrow the price gap with Aldi is turning around the struggling supermarket giant.


Woolworths’ share price has slipped more than 10 per cent in the past 12 months as its sales growth fell further behind archrival Coles.

“The gap between Woolworths and Coles’ sales growth has been accelerating in the past 12 months, with Coles clearly in front,” Morningstar analyst Gareth James said.

“The market is expecting Woolies to continue to struggle in sales in the fourth quarter.

“Woolies is also in limbo at the moment as they search for a new chief executive.”

Grant O’Brien announced in June that he will step down from Woolworths’ top job as soon as the company finds a replacement.

His announcement coincided with another downgrade in Woolworth’s profit forecast and news that it will axe 1,200 jobs.

German discounter Aldi has gained a fair slice of market share, mostly at the expense of smaller operator Metcash’s IGA supermarkets, since coming to Australia 14 years ago.

However, its cheap private labelled products aimed at price-conscious low to middle income families have shaken up Australia’s grocery market duopoly.

Moody’s Investors Service estimates the big two supermarkets control more than 60 per cent of the market, while Aldi’s market share on the populous east coast exceeds 11 per cent.

Aldi’s expansion into South Australia and Western Australia and department store chain David Jones’ foray into the premium grocery food market will put more pressure on the big two, Moody’s senior analyst Ian Chitterer said.

“We expect the market share and profit margins of the two incumbents, but Woolworths in particular, to remain under pressure over the next 24 months,” he said.

Woolworths and Coles are racing to narrow the price gap with Aldi and Metcash is trying to match the big supermarkets on price.

This price war is eating into their profit margins, Bell Direct analyst Julia Lee said.

“In the case of Woolies, which has been leaking market share, investors will be looking for any signs that the tide is turning,” she said.

“Same store sales growth and its profit margins are going to be very important.”

Loss-making home hardware chain Masters is also weighing on Woolworths as it struggles to compete with entrenched player Bunnings, owned by Coles’ parent company Wesfarmers.

Ms Lee said it remained to be seen if Masters will be sold off now that one of its major supporters, Mr O’Brien is leaving the company.

Wesfarmers will release its profit results on August 20, while Woolworths will unveil its earnings on August 28.

Metcash released its full year results in June.