Australia’s biggest supermarket chain, Woolworths, has warned its profits have been hit as cost-of-living pressures weigh on buying decisions, prompting shoppers to opt for cheaper products.
The supermarket giant disclosed on Wednesday that sales growth had slowed in October after shoppers sought out items with “deeper specials”, sparking an immediate slide in its share price.
Woolworths is also grappling with significant damage to its reputation as it defends a court action, alongside rival Coles, over allegations they misled customers by offering “illusory” discounts on hundreds of common items.
The Woolworths chief executive, Amanda Bardwell, who declined to comment specifically on the court action pursued by the consumer regulator, said she understood the company had an “important job to do in rebuilding customer trust”.
She said the supermarket needed to respond to financial pressures faced by shoppers and noted that customers grappling with high living costs were “trading down” to cheaper items and seeking out discounts.
“We’ve certainly seen customers actually shift more into deeper specials,” Bardwell said. “That’s been a pattern that we’ve seen across a number of key categories for us, like in snacking, drinks, pets and baby for example.
“That is absolutely a factor which has an impact on our margins.”
The company update shows that sales growth in its supermarkets division slowed from 3.3% in the first quarter to 3% in October, prompting a cut to its earnings forecast. Woolworths told shareholders that earnings could now be as low as $1.48bn during the six-month reporting period, down from $1.6bn a year ago.
Investors reacted to the update by sending Woolworths shares more than 5% lower early on Wednesday.
The Woolworths-owned discount department chain, Big W, recorded falling sales in the last quarter, down 0.9% from a year earlier, as it struggled to keep up with rival Kmart.
The supermarket margin cut could mark a turning point for the big groceries retailer, which has previously been able to increase its profitability even in the face of rising cost-of-living pressures on its customers.
While supermarkets traditionally avoid giving up profit margins on discounted products by negotiating price decreases from their suppliers, they may be prompted to accept a margin cut if they’re at risk of losing customers to cheaper rivals.
Bardwell said that even when shoppers opted for Woolworths’ own brand, they were seeking out the cheapest items that are not as “margin rich as some of our other mid-price branded products”.
Average grocery prices during the last quarter fell by 0.3%, according to the update, with meat prices now priced below what they were a year ago. Prices for fruit and vegetables, which are volatile, have been increasing.
Coles is scheduled to provide its equivalent quarterly results on Thursday.
Representatives for Woolworths and Coles are due in court again in December for the case pursued by the Australian Competition and Consumer Commission.
The supermarkets have blamed supplier-requested price increases amid a “sudden outbreak of high inflation” in response to ACCC allegations they deceived customers with fake discounts.
