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 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.
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.
