Woolworths expected to increase promotions in bid to increase sales growth and claw back Coles’ lead

Woolworths will step up its promotions in a bid to address slower sales growth to arch-rival Coles, analysts believe, as the sector grapples with public perceptions of value amid political investigations.

Fresh analysis from JP Morgan showed the price differential between the big two grocery retailers was now at its lowest in a year, while Woolworths had this month narrowed the gap between its own brand price premium and Aldi’s to 7.8 per cent.

Woolworths lagged Coles on sales growth in the second quarter of the financial year, and with both reporting third quarter results next week — Coles on Tuesday, Woolworths on Thursday — investors and shareholders alike will be closely watching that metric.

The Senate committee investigating supermarket prices — which last week saw Woolworths chief Brad Banducci and Coles boss Leah Weckert appear for hours of questions in Canberra — is due to hand down its final report a week later, on May 7.

In the interim, the Queensland Parliament is holding an inquiry into supermarket prices, with hearings kicking off earlier this week ahead of a final report on May 31. Separately, the SA Parliament is also investigating grocery prices, with the committee now taking submissions.

The Australian Competition and Consumer Commission is also in the middle of its inquiry into supermarkets, with an interim report due in August. A final report from the review of the Food and Grocery Code by former Competition Minister Craig Emerson is also due to the Federal Government by June 30.

It is the first time in the past year, according to JP Morgan’s analysis, that Woolworths and Coles have had a price premium compared to Aldi of less than 8 per cent. From March to April, Woolworths’ premium fell from 9.4 per cent to 7.8 per cent, while for Coles it fell from 7.9 per cent to 7.7 per cent.

“(This reflects) the need to address price perception as political and media scrutiny intensifies amidst the Senate inquiry into supermarket pricing,” analyst Bryan Raymond said in a note to clients.

He said much of the change in Woolies’ price premium to Aldi was driven by protein products — lamb, chicken, beef, pork and deli — as well as cheese and bakery goods, the latter also driving Coles’ premium lower.

Mr Raymond added there had been consistent industry feedback that Coles’ promotions strength was driving sales growth lead, and was also to “offset negative value perception”.

In the second quarter, Coles sales growth was 5.8 per cent compared to 1.5 per cent at Woolworths. Aldi is not listed on the ASX so does not have the same reporting requirements as its larger rivals.

Mr Raymond said this sales growth gap was “yet to close” despite several contributors, such as Coles running a Pokemon collectables program, being considered temporary.

“We expect a promotional response from Woolworths to this sales underperformance, which may be occurring based on our survey, and is likely to weigh on gross margins,” he said.

Supermarket sales growth overall was moderating, Mr Raymond noted, despite population growth as people looked for better affordability even as inflation lost pace.

The supermarket giants have been keen to point to fresh fruit and vegetables now being in deflation, meaning lower prices compared to a year ago, while retail prices for red meat are also lower.

The latest official price results are due on Wednesday as the Australian Bureau of Statistics reports March quarter inflation numbers. Bank economic analysts expect food inflation to remain high except for fresh items like fruit and vegetables.

Coles and Woolworths have also beefed up their season promotional offerings and boosted the number of own brand products on low price guarantees, while both chief executives last week said driving value for customers was a key priority.