Supermarket price war erupts: Coles fights back against Woolworths Limited

Credit: wikimedia

Less than a week after Woolworths Limited (ASX: WOW) new CEO Brad Banducci claimed Woolies groceries had been cheaper than Coles for more than six months, Coles has hit back with lower prices on rice, tissues and toothpaste.

According to Fairfax Media reports, Coles – owned by Wesfarmers Ltd (ASX: WES) – has slashed the price of its three-biggest selling grocery brands, Sunrice, Kleenex and Colgate.

Coles and Woolies cut the price of roast chicken in January, with both supermarket retailers battling to maintain and grow their market share, and stop customers from switching to discounter Aldi.

Woolworths has slashed its world-leading margins, after a number of surveys showed the retailer was more expensive than its rival Coles, and both were much more expensive than Aldi. Woolworths has also been struggling to grow sales, unlike Coles, with consumers obviously switching to lower-priced competitors.

Woolies has recorded negative same store sales over the past three-quarters, while Coles has averaged 4% growth each quarter. Mr Banducci says budget shoppers are returning to Woolworths, but the company still had plenty of work to do to lure back the big-spending, premium shoppers.

It might surprise some, but not everyone shops at supermarkets based on price alone. In fact, location and convenience is usually the biggest driver of where consumers shop, with price and value behind that, followed by shopping experience, service, and inspiration.

One factor that may have inadvertently played into Aldi’s hands is the rise of private label brands in Coles and Woolworths. Both retailers have been steadily cutting the brand name products in their stores and replacing them with mid-level and budget home branded products – where Aldi deals almost exclusively in home brand products. Consumers may find that rather than a selection of five or six brand name products in a category, they now have a choice of just two or three plus home brand labels.

When consumers are comparing home brand to home brand – the decision is more than likely to come down to price. The reduction in brand choices at Coles and Woolworths also means less reason to shop there.

Foolish takeaway

Increased competition is good news for consumers, with cheaper prices likely at either Coles or Woolworths, but will it be enough to drag shoppers back from Aldi? I highly doubt it, and Coles and Woolworths will need to concentrate on their strengths to maintain their market share.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

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 Financial Services Guide (FSG) for more information.