Supermarket war: Woolworths, Coles up the ante against Costco

COLES and Woolworths are upping the ante in the supermarket war in a bid to stem the flow of customers to US interloper Costco.

Coles and Woolworths are increasingly offering larger sized goods in order to take the fight to Costco.

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SIZE matters in the supermarket wars, with Coles and Woolworths bulking up packet sizes in order to stem the flow of customers to Costco.

A new analysis of the nation’s supermarket sector has found Coles and Woolworths are closing the price gap on the US discount titan and larger packs of non-food essentials are playing a key role.

The analysis by investment bank Morgan Stanley found Costco remains about 25 per cent cheaper than Coles and Woolworths when shopping for basic household items.

But the price gap has narrowed from 37 per cent at the start of 2015.

Analyst Thomas Kierath said Coles and Woolworths were increasingly offering larger sized goods in order to take the fight to Costco.

In early 2015, the largest pack of washing powder at Woolworths was 1.8kg while today, 4kg packs are on offer.

“The shift to larger pack sizes (in part to combat Costco) … enables the retailer to reduce the cost per unit,” Mr Kierath said in a note to investors.

The shopping basket that Morgan Stanley uses for the research covers 27 items.

Its heavily weighted to non-food goods but does include some fresh items such as eggs and ground beef.

Costco charges a $60 annual membership fee to shop at its stores.

The US interloper accounts for about 1 per cent of Australia’s $100 billion grocery market but is tipped to grab 1.8 per cent by 2020, according to Morgan Stanley.

Coles’ and Woolworths’ combined market share has dropped from 65.5 per cent in 2011 to 63.5 per cent last year, the analysis found.

Coles says it has long offered customers better value through larger packet sizes. Pictures: AAP Image/Joel Carrett

Both Coles and Woolworths have been sacrificing profit to lower prices in order to maintain market share and defend themselves against the advances of new entrants such as Aldi and Costco.

Costco opened its first outlet at Melbourne’s Docklands in 2009 and now has eight stores across Australia.

Coles chief customer officer Simon McDowell said Coles had long offered customers better value through larger packet sizes.

He also rejected the suitability of the Morgan Stanley basket used in the comparison, saying it did not represent a full shop and Coles offered 2500 individual items.

“You can’t live off Peri Peri sauce and ginger beer alone,” Mr McDowell said.

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