Woolworths and Coles discounts: Supermarkets try to win back shoppers but take a hit to profits

Increasing competition and more discounting is increasingly squeezing supermarket profits as Woolworths and Coles try to win back disgruntled customers after allegations of price gouging.

The grocery duopolists both revealed weaker sales growth for the first quarter of the financial year this week, driven by generous sales offerings.

This is partly borne out of a need to attract savvy shoppers who are increasingly trading down as a means of managing cost of living pressures.

After allegedly dodgy discounting schemes and gouging shoppers with supersized profit margins (compared to the UK or Europe), Coles and Woolworths are eager to show customers they aren’t taking advantage of them.

“Cost of living remains a challenge for many of our customers, and we are focused on helping them find value in our stores through weekly specials, value campaigns, Flybuys and exclusive brands,” Coles chief executive Leah Weckert said as the company provided its quarterly trading update on Thursday.

The supermarkets have been accused of abusing their market power in a series of inquiries into the sector, which Coles and Woolworths account for about two thirds of.

But Woolworths chairman Scott Perkins said the sector had never been more competitive and Woolworths had what it takes to compete “vigorously and sustainably”.

“However, we know that customer trust in our brand has been impacted and we have work to do to restore this trust,” he told the company’s annual meeting.

Mr Perkins told shareholders Woolworths didn’t just accept price rises from suppliers “willy-nilly” and all increases were tested and validated before making their way onto shelves.

One shareholder questioned whether Woolworths had any influence on the apparent shrinkflation of Tim Tam packages, with the amount of biscuits in each packet seemingly declining over time.

“We work with our suppliers on all sorts of packaging formations but we don’t control the price of Tim Tams, no,” Mr Perkins said.

Woolworths downgraded its first half profit forecast in its earnings update on Wednesday, with CEO Amanda Bardwell revealing increased promotional activity had led to a lower margin sales mix.

Australian supermarkets do have higher profit margins than international peers, but Coles and Woolworths argue their return on investment is a more relevant gauge of profitability.

Woolworths’ previous CEO, Brad Banducci, made the point at a Senate grilling earlier this year before being pressured out of the role.

Kmart, Bunnings and Officeworks parent company Wesfarmers has also been in politicians’ sights for alleged price gouging, with the federal coalition threatening to introduce powers to break them up, along with Coles and Woolworths.

Its chair Michael Chaney said politicians were treating profit as a dirty word, but argued it was essential for a vibrant economy and future prosperity.

The pre-eminent businessman said the company had pumped 29 per cent of its profits before tax into government coffers, with another 61 per cent landing in shareholders’ pockets, leaving it with about 10 per cent.

“Almost all the profit ended up outside the company, supporting the economy and community in different ways,” Mr Chaney said at Thursday’s general meeting.