Fears of new supermarket war could hit Coles (ASX:COL) and Woolworths (ASX:WOW)

The threat of a new round of a price war between the major supermarkets could haunt the Coles Group Ltd (ASX: COL) share price and Woolworths Group Ltd (ASX: WOW) share price.

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Coles Woolworths supermarket warA man and a woman line up to race through a supermaket, indicating rivalry between the mangorsupermarket shares

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The threat of a new round of a price war between the major supermarkets could haunt the Coles Group Ltd (ASX: COL) share price and Woolworths Group Ltd (ASX: WOW) share price.

Coles dropped prices on 250 products and it’s not done yet, reported the Australian Financial Review.

Is Coles about to start a supermarket price war?

The move is an attempt by Coles to claw back lost market share, particularly from archrival Woolies. Coles is also believed to have lost share to Metcash Limited (ASX: MTS) during the COVID-19 lockdown.

This triggers painful memories of the last bruising supermarket wars when the leading chains slashed prices as discount grocer Aldi entered the market.

Price cuts put pressure on supermarket margins

Coles reportedly lowered its prices on hundreds of private label and branded products by between 5% and 35%. These items include breakfast cereals, pasta, tinned tuna, convenience foods, healthcare, pet food – just to name a few.

The supermarket will be dropping prices on more products next week and the week after, according to the AFR.

Why Coles is falling behind

Coles has been losing ground to its rivals due in part to its larger store exposure to Victoria. This is the state with the worst track record in controlling the pandemic.

The supermarket is also squeezed on two other fronts. It failed to benefit as much from the shift to local shopping during the lockdown as Metcash did, while its online shopping system is inferior to Woolworths.

Some believe that the only lever Coles has to stem the slide is to cut prices, which will almost definitely illicit a response from rivals.

Coles-Woolworths supermarket war isn’t a done deal

But not all experts are convinced that another supermarket price war is looming. The AFR reported that JPMorgan’s analyst Shaun Cousins is one such optimist. He believes that Woolworths will simply price match Coles instead of going harder.

Woolworths will not want this to turn into a race to the bottom as it doesn’t need to. It has the upper hand and its best placed to capitalise on the structural shift to online grocery shopping.

Fortunately for Woolworths and Coles, Aldi is not moving into the online space – at least not yet.

What’s also notable is that Cole’s price cutting program comes at a time when the risk of inflation is growing.

Disruptions to supply chains from COVID and rising soft commodity prices are putting upward pressure on prices.

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Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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