The war no supermarket wants to have

IT’S a battle no supermarket really wants to have, but analysts say an all-out war is inevitable as big brands fight for market share.

War no supermarket wants to have

IT’S the war no supermarket wants to have, but Australian grocery shoppers could be the real winners.

As the battle for market share heats up in the $90 billion supermarket industry, analysts are warning an all-out price war could be looming.

It sounds scary, and that’s because for retailers, it is.

UBS defines a price war as an irrational promotional intensity by retailers in a bid to win market share and counter the growth of rivals, kicking off a rapidly accelerating battle where peers match or share lower prices, driving industry profitability down, fast.

In a new report, analysts at UBS have put the probability of a full-blown price war in the next two to three years at 25 per cent, and say if it were to happen, market leader Woolworths would be the brand to initiate it.

In their report, analysts Ben Gilbert and Craig Stafford acknowledged that while “no retailer wants a price war”, the struggling grocery giant’s failing strategy may push them towards initiating such a battle.

“If one occurred, it would likely be initiated by Woolworths — the growing risk of the current strategy proving ineffective,” the report said.

“Woolworths has by its own admission lost its way and needs to regain top-line momentum.”

Does more aggressive discounting really sound so bad?

A full-blown price war would see more signs like these.

A price war, Gilbert and Stafford say, would see the retailer’s food and liquor margins nearly halve to 2.7 per cent, while Coles’s margins would be expected to fall from 4.7 per cent to 3.2 per cent.

Wholesaler Metcash, which represents IGA supermarkets among other outlets, would be worst positioned to face a price war on face value with Supa-IGAs the hardest hit, the analysts write. However, Metcash’s brands’ unwillingness to engage would minimise the impact, the report says.

Aldi would be the only competitor to welcome a price war.

While the four major grocery retailers have been increasingly competitive in recent years, particularly with the disruption of Aldi’s arrival and expansion, they are yet to deploy price-war tactics.

Gilbert and Stafford say the supermarket industry is in a state of “marketing war”, where pricing has been rational and growth benign.

If the current plan doesn’t work ‘Woolworths will have to be more aggressive’. Picture: Adam Smith

“This is the state the market has been in for the past two to three years. Coles and Aldi are winning, Woolworths and Metcash are losing and price investment growing,” the report reads.

“The combination of the above has seen slowing top-line growth (deflation, share shift to Aldi) and profit growth across the industry.”

While the analysts say continuation of a marketing war is the most likely outlook for the industry’s future, they see a growing risk of a full blown price war.

“If the current plan does not work, we believe Woolworths will need to be more aggressive, with the obvious lever being price,” they say.

But as that means greater competition and aggressive discounting, it’s not all bad news for everyone.