According to reports released by Fairfax media this morning, research from Deutsche Bank shows that Australian supermarkets owned by Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) continue to slash prices on their private-label products in order to win over consumers.
Deutsche Bank found that premium private-label prices plunged 9% at Woolworths and 7% at Coles (owned by Wesfarmers) in the three months to the end of September. Falling private label prices often place pressure on other brands to follow suit, lest their products become unappealing to price-conscious consumers.
'Home Brand' products have declined in price fairly consistently since March 2012, compared to 'Branded' products which have grown modestly in value. While Woolworths and Coles have made the news in recent times for pressuring suppliers to lower prices in order to maintain profit margins at lower prices, prices can only be cut so far.
Woolworths currently leads Coles with a profit margin of around ~7.2% compared to Coles ~4.7%, although management and analysts both expect Woolworths' margins to decline meaningfully in the coming year.
However, with Aldi and Costco both making waves with their substantially cheaper groceries, both Woolworths AND Coles could expect to see weaker margins over time if they cut prices to compete. This raises issues with regards to the growth outlook for both businesses, which is fairly anaemic.
While their dividends are sustainable, investors will want to do their research before buying stocks that face this kind of near-term headwind.
