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Woolworths, Coles forecast to struggle as shoppers penny-pinch

Source: The New Daily

Woolworths’ terrible year has gone from bad to worse after a profit warning on Wednesday sparked a sell-off in the grocery giant’s shares, wiping hundreds of millions off its market value.

This came as experts warned supermarket duopoly rival Coles faced many of the same problems but the impact on its bottom line was not yet clear.

New Woolworths boss Amanda Bardwell blamed skint consumers for a downgrade in margins that will see Australian food earnings fall between $65 and $115 million in the second half of 2024.

“We expect customers to remain extremely value-conscious with cost-of-living pressures to continue for the remainder of F25 [financial year 2025],” Bardwell said in an investor update.

The disclosure helped shares in Woolworths slump 5.6 per cent to a six-month low of $30.90 by early afternoon trading, revealing investors are increasingly pessimistic about the chain’s prospects.

They aren’t the only ones; Bardwell also revealed on Wednesday that consumer feedback soured even further in the past three months amid lawsuits and probes over grocery prices.

Woolworths’ key customer attitude metric, called ‘voice of customer’ sank to 46 points, which is well below the highs of 57 out of 100 during the Covid-19 lockdowns in 2020-21.

That aligns with third-party data that has recently found both Coles and Woolworths have lost their places among Australia’s most trusted brands amid widespread anger about food prices.

University of Technology Sydney associate professor Sanjoy Paul said Woolworths is facing margin pressures from customers and its supply chain as its torrid year gets even worse.

He said Woolworths’ sales rose during the period, suggesting that the chain is sacrificing profits to entice shoppers.

“They’ve been more aggressive in their promotional discounts over the first quarter of this year,” Paul said.

“The pressure and media talk about allegations of price gouging has factored into their business strategy … that could be a reason they’re providing more discounts.”

Coles affected too

Coles faces many of the same economic and brand pressures, but it remains unclear if it will also deliver an earnings downgrade in the second half of 2024.

Coles has been in a relatively stronger financial position in the past year, with sales inching ahead of Woolworths amid a persistent – though unsubstantiated – view that it is cheaper.

Investor views on Coles did sour on Wednesday after Woolworths’ profit update though, with the chain suffering a 2.9 per cent decline.

Much of Woolworths’ latest earnings downgrade is also due to supply chain issues unique to Woolworths, with Paul explaining the chain is embarking on a fresh productivity program.

“They said their supply chain costs are increasing by around $40 million,” he said.

“They need to boost productivity to make sure they can deliver more value back to their customers … they shouldn’t target making more profits from that, they should return it to their customers.”

Woolworths chief pledges change

Bardwell is vowing to improve the financial position of Woolworths heading into next financial year, saying on Wednesday simplifying the business remains a “priority”.

“We are optimising our commercial program to offer compelling value to customers while improving promotional effectiveness as well as adopting prudent cost settings for Q2 [quarter two],” she said.

“We understand the need to prioritise the areas that can deliver the most impact and simplify the way we work to deliver strong long-term sustainable value for our shareholders.”

Analysts warn it could take years for Woolworths to repair the damage done to the company over the past year, with further scrutiny in the pipeline from regulators and the federal government.

Bardwell gave a hint on Wednesday that Woolworths is taking onboard some criticism, saying the supermarket has “made it easier to find the best unit prices” over the past quarter.

That comes after the Albanese government unveiled a crackdown on the industry code that governs unit pricing to increase transparency.

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