Coles has ramped up how much money it pours into lowering food and grocery prices as it sacrifices profits in a bid to lure customers from Woolworths and Aldi.
Wesfarmers shares were a drag on the ASX on Wednesday after the owner of Coles supermarkets flagged an increase in its investment in lower prices – a move expected to hit its profit margins.
The company also warned that its hardware business in the UK and Ireland was likely to make a loss in the second half of 2017 and into the first half of 2018.
Shares in Wesfarmers closed 2.9 per cent lower at $40.23.
Coles managing director John Durkan told investors that the majority of Coles’ $64 million decline in earnings during the first-half of 2017 was due to investment in lowering prices.
And the rate of investment has increased notably in the third and fourth quarters, he said.
“It’s a high level of investment but cost savings will come out over time,” Mr Durkan said.
Coles’s focus on lower prices comes after a significant slowdown its third-quarter sales growth – 0.3 per cent compared to 4.9 per cent growth in the same period a year ago – in a sign it has lost customers and market share to Woolworths and Aldi.
Woolworths has spent more than $1 billion over 12 months on lowering prices while Aldi has been aggressively expanding beyond the east coast.
Mr Durkan said supermarket prices in Australia were high compared to overseas and Coles had room to go lower by expanding its private label range.
“It’s already an overpriced grocery market in my view and I’ve been saying that for nine years,” he said.
“I still look at products here that are made overseas and they are crazy prices.”
Mr Durkan’s comments come in the wake of consumer magazine CHOICE’s latest supermarket price survey which found consumers can save nearly $80 a shop by switching from leading brands to a basket of Aldi budget products.
Mr Durkan unveiled plans to expand Coles’s fresh bread offering, with moves underway to convert an additional 180 stores to include in-house bakeries.
The ultimate plan is for all of Coles’s 780-plus stores to have freshly baked bread.
Mr Durkan said Coles was focused on increasing its fresh produce and reducing the range of some products to make shopping simpler for customers.
Sales had risen after Coles recently shrank some product ranges, he said.
“We have moved eight lines out of our garbage bag category, which was 20 per cent of the items in that category, and in response, sales have increased by five per cent,” he said.
There was a similar lift in pasta sauce sales after Coles narrowed its range by about 17 per cent, Mr Durkan said.