How supermarket shoppers are winning as Woolworths shareholders feel the pain

Marianna Massey/Getty Images for Woolworths

The differences between the two big supermarkets in Australia are stark: sales are tanking at Woolworths, while at rival Coles they’re growing.

The Wesfarmers-owned Coles posted like-for-like sales growth of 3.6% for the September quarter. Using the same measure, Woolworths sales fell 1%.

Both are increasingly competing with new players including Aldi, the big German-based discount chain, which has been gradually taking a bigger market share in Australia.

However, the real winners are consumers buying the weekly groceries.

Both supermarkets have cut prices over three months to September: Coles by an average of 1.3%, Woolworths by 1.82%.

For Coles, it was the biggest cut in prices for two years. Woolworths needed a substantial cut in average prices to attract former customers who left for cheaper pastures.

Woolworths used up $100 million in just three months to bring down prices. And there’s more to come.

The supermarket expects profit to fall to between $900 million to $1 billion in the first half of 2016, a 28%-35% drop in profits when compared to the same six months last year.

“Woolworths is a business in transition,” Gareth James, senior equities analyst at Morningstar, told Business Insider.

“They’ve had a slowing in sales growth over the last year or so, which has caused the departure of the chairman (Ralph Waters) and the CEO (Grant O’Brien) to resign. The head of Big W has left recently as well, so there’s been a lot of change.”

James says Woolworths has started to address the core problems within its business – the decline in Australian food and liquor sales.

“And that is being done by being more competitive on price, so it’s not really surprising that they are expecting to see a fall in profits in the first half.

“They are cutting prices, but they haven’t seen the revenue kick up yet and that’s the whole purpose of the exercise, to reignite revenue growth.”

It will take a while for sales to catch up.

And when a new CEO is selected, probably within the next two months, serious decisions will need to be made, including whether to continue with the loss-making home improvement business, Masters, and whether to sell off Big W stores.

“They are taking the measures they need to take to rectify the business and position it correctly for the long ter,m which means in the short term there will be pain,” says James.

“There’s still quite a lot of change over the next 12 months. Obviously, they are going to be getting a new CEO, a new guy coming on board who will probably have some exciting plans and the market might get a little confidence in the stock.”

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.