I thought we were already in a 'supermkt 'price war' but apparently this is just sparring. Real thing just about to come according to UBS. Scariest bit (for me) is the survey at bottom. I voted WOW the cheapest but not many agree. Perception and fashion play a huge part in retail. Woolworths have a massive job ahead. Under $21 here we come. $20 quite possible imo.
From SMH BuisinessDay:
Woolworths woes spark talk of full-blown supermarket price war with Coles, Aldi
The battle for market share in the $90 billion grocery sector could turn into a full-blown price war next year if Woolworths' attempts to restore sales growth in supermarkets fail to gain traction, UBS says.
All four major grocery retailers are keen to avoid, and have played down the risk of, a price war, having seen the damage to profits incurred in price wars in Europe and the UK. But if market leader Woolworths fails to restore sales growth after investing $700 million into reducing prices and improving service in stores this year, it could become more aggressive and initiate a price war in 2017, a report by broker UBS said.
UBS defines a price war as irrational promotional intensity aimed at winning market share and countering the growth of rivals, where price investment is matched or exceeded by rivals, driving down industry profits at an accelerating rate.
The sector is at risk if Woolworths fails to restore growth. Although price competition has become increasingly aggressive in the past few years, Australia is in the midst of a "marketing war" rather than a full-scale price war, and pricing and promotions so far have been rational and disciplined.
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"No retailer wants to initiate a price war," said UBS analyst Ben Gilbert. "If Australia were to experience one it would be initiated by Woolworths, the result of the current strategy not being effective. We believe the chance of a price war increases the longer it takes Woolworths to turn the business around."
The broker puts the odds of a full-blown price war at 25 per cent.
"The key catalyst would in our view be a lack of traction gained at Woolworths, resulting in the need to invest more, driving a competitive response from peers and ultimately, lower industry returns," Mr Gilbert said.
In a worst-case outcome, Woolworths, Coles and Metcash could cut prices by an additional $2 billion or 10-20 per cent, leading to 2 per cent grocery price deflation and squeezing gross margins by 200 basis points.
Woolies' food and liquor margin at risk
Woolworths' food and liquor margins, which are expected to fall from almost 8 per cent in 2015 to 5 per cent this year, could fall as low as 2.7 per cent, decimating earnings.
Coles' food and liquor margins, which are lower than Woolworths', would fall from about 4.7 per cent to 3.2 per cent, depending on cost savings.
At face value, Metcash is worst positioned to withstand a price war. However, UBS believes the wholesaler would be reluctant to cut prices as aggressively as the larger chains. Wholesale sales could fall more than 2 per cent, squeezing margins by 100 basis points.
Mr Gilbert says it is more likely that the marketing war continues for another three years.
The major retailers are expected to continue to invest about $400 million a year into price for the next few years and the market is likely to grow about 3.4 per cent, leaving room for only two of the four major players to lift sales growth above inflation.
"This is the state the market has been in for the past two to three years," Mr Gilbert said. "Coles and Aldi are winning, Woolworths and Metcash are losing and price investment is growing."
Under this scenario, Coles and Metcash are expected to offset price investment with cost savings, maintaining existing margins, while Woolworths' margins are expected to slip to 4.5 per cent as it invests more to keep pace with Coles.
The least likely scenario is a return to food price inflation and rising EBIT margins, Mr Gilbert said, as this would require industry participants to collaborate and would be contrary to the stated strategies of all the major listed players.
Poll: Which supermarket do you find cheapest?
Coles: 12%
Woolworths: 7%
Aldi: 73%
IGA: 3%
Jones the Grocer: 5%
Total votes: 69087.Poll closes in 270 days.
Disclaimer: These polls are not scientific and reflect the opinion only of visitors who have chosen to participa
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