Woolworths is at risk of making “irrational” further price cuts in what will ultimately lead to a full blown supermarket price war, analysts warn.

A report by UBS analysts says the longer it takes Woolworths to turn around, the greater the risk there is of a price war with archrival Coles, which would benefit shoppers but hit profit margins.

A UBS survey of 58 supermarket suppliers found Woolworths’ investments in price and service have not translated into noticeable improvements.

“The current value message is not winning back shoppers and in-store execution remains poor and is deteriorating,” the report said.

“This suggests increased risk of Woolworths  making ‘irrational’ further investments to drive momentum, or Coles stepping up investment to maintain its like-for-like lead in a slowing market, is growing.”

It said the pace of Woolworths’ turnaround was slower than expected and the probability of a price war had increased to 35 per cent, up from its previous forecast of 30 per cent.

“The risk of a price war continues to grow with suppliers forecasting shelf-price deflation for the next 12 months,” it said.

“However, there are signs Woolworths is bottoming (fresh, marketing), which could trigger increased investment from Coles to ensure top-line momentum is maintained in a slowing market.”

UBS analysts said they believe Coles’ management will be seriously assessing the need to invest more earnings to maintain sales momentum.

AAP

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