Woolworths Limited (ASX: WOW) has racked up the 27th quarter of being beaten by arch-rival Coles when it comes to same store sales growth in its key Food and Liquor division.

Same store sales growth dropped 0.9% in the quarter to April 3, 2016, as the supermarket retailer continues to feel the pressure of lowering its margins, lower average prices and aggressive competition on price.

Woolworths says it has invested more than $400 million in lowering prices for customers – with the average price down 2.4% compared to the same quarter last year, excluding tobacco, average prices were down 3.5%.

Coles – owned by Wesfarmers Ltd (ASX: WES) – recently reported same store sales growth of 4.4% (adjusted for Easter) with price deflation of 2% – almost double that from the December 2015 quarter.

Woolworths SSS vs Coles Apr 2016

Source: Company reports

 

Woolworths still leads the market in terms of total dollars – with sales of $10.7 billion, compared to Coles with $7.5 billion – but it’s fairly clear that Coles is catching up. The difference in same store sales between the two companies’ respective food and liquor divisions is accelerating.

Coles SSS growth over Woolies Apr 2016

Source: Company reports.  Note SSS = Same-store sales)

 

The problem Woolworths faces is that several years of growing its earnings margins means it needs to slash margins to get customers back into its stores, as its supermarkets are perceived to be more expensive than its closest competition, and much more expensive than Aldi.

That is going to take time, as new CEO Brad Banducci pointed out, “The sales performance in Australian supermarkets continues to be impacted by high levels of deflation predominantly from our price investment. However, we are encouraged that customers are starting to notice the improvements we are making. It will be a three to five-year journey to rebuild Woolworths Supermarkets, but we are confident we are on the right track.” [Emphasis mine]

Big W also remains a headache for management with same store sales growth sinking 4.5%, and it will also take time for new General Merchandise boss Sally Macdonald to turn the ship around. Ms Macdonald was previously the CEO of OrotonGroup Limited (ASX: ORL), and if anyone should be able to turn Big W around, it’s Ms Macdonald.

Foolish takeaway

A strategic review is now underway across the whole Woolworths Group, which could see dramatic changes to the structure of the company and the likelihood of a number of one-off expenses.

Investors should note that Woolworths is a company in transition, but still retains a very strong position in the key supermarket and liquor sectors in Australia.

Forget Woolworths when there are better opportunities out there ..

Discover The Motley Fool's top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the very real prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.