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Supermarket wars: Snags under fire

Coles has upped the supermarket price wars again, this time cutting the price of snags – pork sausages – by more than a third.

Coles, owned by Wesfarmers Limited (ASX:WES), has responded to competitor Woolworths Limited’s (ASX:WOW) 29% price cut to its most popular beef cut – rump steak.

From today, Coles’ pork sausages will fall by more than $3 per kilogram to $5.89/kg, according to News.com.au. The company expects to run the promotion for at least six months, in which time Coles expects to sell close to 10 million pork bangers.

Mince prices are also going through the grinder, with 3-star mince cut by $1 per kilogram to $5/kg, while 4 and 5-star are set to be cut by $2 per kilo each to $10/kg and $12/kg respectively. Australians consume around 57,000 tonnes of mince each year. Coles is wearing the price cuts itself, and not passing on the price fall to producers, and will need to increase its market share of mince or raise the price of other products to compensate.

Australian Pork Limited marketing development manager, Peter Smith, has told News.com.au that he didn’t believe that producers would be subsidising the price cuts, and that Coles will be taking the hit. Meat & Livestock Australia economist Tim McRae says the price reductions for mince did not reflect the price of cattle at saleyards, which were up 40 to 50 cents per kilogram from eight-year lows of $2.70 per kilogram reached in May.

With most of Australia’s beef exported, there’s not much of a link between saleyard and retail prices said Mr McRae.

Coles is justifying the price cuts by showing in a research report to be released today that Australian households are most concerned about cost of living expenses. Still, the Australian Competition and Consumer Commission (ACCC) will take notice of the price cuts, with the regulator investigating how Coles and Woolworths treat their suppliers.

Foolish takeaway

Since the beginning of this year, Woolworths’ share price has climbed 13.9%, while Wesfarmers is up 8.5%, closely matching the S&P / ASX 200 Index (Index:^AXJO) (ASX:XJO) gains of 8.3%. Woolworths recently upped its profit guidance suggesting the price wars are not having a major impact on the company’s profitability.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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