Australia's biggest supermarket chain, Woolworths, "won"Â Christmas and has bridged the gap with major rival Coles, suppliers say.
And if trends continue, Coles might need to cut product prices or increase spending on staffing, marketing or stores to regain momentum against Woolies and German discounter Aldi, investment bank UBS said.
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Supermarket results: Woolworths could win sales race
Fairfax's Catie Low explains predictions that Woolworths will shake off its 29-quarter losing streak to win the second quarter sales race.
"Should current trends continue, we believe Coles may need to react in the form of margin investment (staff, marketing, price) or CAPEX (store investment), particularly given both Aldi and Woolworths are accelerating refurbishment activity," analyst Ben Gilbert told clients.
"Our channel checks suggest [Coles] management are becoming nervous over slowing like-for-like [sales, excluding new stores], with the risk now being that Coles reacts irrationally (ie. a step-up in discounting)Â to minimise the sales loss."
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UBS interviewed 45 fast-moving consumer goods industry players – mostly suppliers – who rated Woolworths and Coles on 26 topics, on a scale of 0 to 10. Fast-moving consumer goods include processed foods and soft drinks.Â
The survey, which was conducted from January 9 to 17, found Woolworths had lifted its overall score by 0.6 points to 6.2 out of 10, and closed the gap to Coles by 0.9 points.
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Coles' rating fell 0.3 points to 6.8, a decline UBS attributed to a "lack of change in strategy to combat a better capitalised more customer-focused Woolworths and [a] step-up in intensity by Aldi in fresh".
"Coles still leads Woolworths in 25 of 26 sub-categories, but its lead has closed across pricing and value, execution, marketing and morale.
"This suggests Coles is ceding some of its lead to Woolworths, and may need to invest more to maintain its lead."
Furthermore, Coles recorded falls in 24 of the 26 sub-categories, and the other two categories were flat.
Woolies Christmas cheer
Mr Gilbert said suppliers were "clear in their view that Woolworths won Christmas".
Forty nine per cent of respondents said Woolworths had a better Christmas trading period, compared with 11 per cent for Coles and 40 per cent who responded "about equal".
Mr Gilbert said Woolworths' improvements in staff morale and key customer-facing areas such as pricing and on-shelf availability suggested its sales "continued to improve" this quarter.Â
Price cuts pay off for Woolies
Coles has outperformed Woolworths' same-store sales performance since 2009, and Woolworths has said its turnaround will take three to five years.
But Woolworths' $1 billion in price cuts has reaped dividends; it posted a long-awaited rise in same-store sales late last year, and Wesfarmers boss Richard Goyder recently ​"softened up" investors before Coles' half-year result in February.
Morgan Stanley analyst Tom Kierath has tipped Woolworths will report 1.5 per cent growth in same-store sales this quarter, while for Coles it will be just a 0.5 per cent increase.
Mr Gilbert said while the sunnier assessment of Woolworths was expected, given its $1 billion in price cuts, the trends "indicate Woolworths is closing the gap to Coles faster than anticipated".
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