The next supermarket price war will most likely be started by Woolworths

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Australia’s supermarkets, which for years enjoyed world-beating profit margins, are seeing their revenue growth slow and profits fall.

And the market share of the big players, Coles and Woolworths, is under threat by discount chains including the German group Aldi which is aggressively opening stores and pushing its way into the eastern states market.

Coles is managing acceptable sales growth of better than 5% but Woolworths, with a just-appointed CEO and in the middle of a restructure to build better prices and service, is flatlining.

In the latest half-year results, Australian food and liquor sales at Woolworths were flat at $22.34 billion, up just 0.7%.

Its shares are trading at $21.49 today, down from almost $30 a year ago.

The market is now waiting to see if Woolworths will break and start a price war.

Analysts at UBS believe this is increasingly likely if Woolworths can’t get traction with its new strategy.

“No retailer wants a price war,” UBS says in a note to clients.

“If one occurred it would likely be initiated by WOW (Woolworths), the result of the current strategy proving ineffective.

“With the above in mind, we expect the competitive backdrop to remain intense, characterised by ongoing structural change.”

UBS has cut forecasts for the listed supermarkets — Wesfarmers (Coles), IGA’s Metcash and Woolworths — by 1% to 7%.

However, Australian supermarkets are still enjoying better than world class margins, as this chart shows:

Source: UBS.

UBS has been speaking to industry players, analysed global grocery trends and surveyed suppliers and consumers to draw conclusions on the likely direction the Australian market will go over the next few years.

The Australian market has been slowing and is expected to, according to UBS, hit a low this year before recovering:

Source: UBS

But Woolworths will be losing market share:

Source: UBS

“WOW (Woolworths) has by its own admission lost its way and needs to regain top-line momentum,” the UBS analysts write.

“If the current plan does not work, we believe WOW will need to be more aggressive, with the obvious lever being price — initiator of price war.”