CHART: This is why shelf prices at Woolworths will have to come down

Marianna Massey/Getty Images for Woolworths

The big two supermarkets in Australia have about 60% of the market between them but are slowing losing their share to smaller players, mostly the German group Aldi.

But it’s Woolworths, seen as more expensive than Coles, which has been dropping customers the most.

The 8% margin Woolworths enjoys is nearly double the average of its international peers, which is around 4.2%.

According to analysis by ratings agency Moody’s, those fat margins are about to fade.

“Given its falling comparable-store sales and consumer perceptions of the company being more expensive than its peers, we expect Woolworths to lower its shelf prices, which will reduce its margins, as it defends its market share over the next 24 months,” says the Moody’s food and grocery sector report.

However, lower pricing and stronger comparable-store sales momentum at Coles should enable it to maintain or improve margins slightly.

Woolworths’ sales growth has been sliding for the last six quarters, while Coles has been able to maintain growth, as this chart shows:

Woolworths issued a profit warning in June after sales turned negative for the first time in 12 years.

The company now expects a flat full year profit for 2015 year when it had been expecting 1.8% growth. The previous result was $2.45 billion.

And it could be flat for a while. “Over the next two quarters, we expect Woolworths’ comparable-store sales will remain negative while Coles’ comparable-store sales will weaken marginally due to the increased competition,” says Moody’s.

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