Woolworths is closing in on Coles' family shoppers after transforming its billion-dollar investment in price into a record-breaking second quarter sales surge.
Australia's biggest supermarket chain claims super-sized family shoppers have not yet returned to Woolworths and it's determined to win them back, especially after spending more than $1 billion to buy its way back into Australia's $80 billion supermarket sector.
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Woolworths earnings report
Supermarket chain Woolworths has beaten rival Coles in sales growth for the first time in over 7 years.
Shoppers are no longer leaving Woolies or taking half their grocery list to Aldi but chief executive Brad Banducci said the supermarket giant was still "battling" to win back families.
"When you change things for the better people who shop in your store notice it but but if you've lost them all those changes go unseen," Mr Banducci said.
"It's really about us continuing to focus on these family segments and continuing to give them what they need, we've stopped the leakage but we haven't got them coming back yet."
Analyst JP Morgan estimates Woolworths spent about $275 million on promotions and reduced shelf prices in the first half but this level of investment won't continue into the second half.
"We had to make some material step functions in pricing, we now feel like the step function has been made," Mr Banducci said.
"On price we are making it part of our ongoing dialogue now, it's the way we frame up promotions.
![Woolworths CEO Brad Banducci is confident it has invested enough in price to get Australia's biggest supermarket chain ...](/web/20170224183731im_/http://www.smh.com.au/content/dam/images/g/u/i/6/n/x/image.related.articleLeadwide.620x349.guiqzn.png/1487748307393.jpg)
Improving trust a major issue
JP Morgan analyst Shaun Cousins said Woolworths had invested "significantly" in price but it still faced challenges particularly around trust.
"It still has a lot of work to do to improve price trust with customers," he said.
![Woolworths' comparable sales surged by 3.1 per cent in the second quarter.](/web/20170224183731im_/http://www.smh.com.au/content/dam/images/g/u/i/z/w/x/image.related.articleLeadwide.620x349.guiqzn.png/1487748307393.jpg)
Woolworths' comparable sales surged by 3.1 per cent in the second quarter, smashing Coles' 0.9 per cent, like-for-like sales growth and breaking a seven-and-a-half year losing streak with its arch-rival.
But the growth came with a big price tag, sending margins to a 12-year low of 4.3 per cent and shareholders were hit with a 22.7 per cent cut in the interim dividend to 34¢.
Net profit from continuing operations slumped by 16.7 per cent to $785.7 million as price cuts, $110 million worth of new staff bonuses and Big W weighed on its performance.
Mr Banducci said he was "very aware" of the impact on shareholders but he said doing the right thing by customers would ultimately deliver returns.
"We have been very clear for the last two years, that if we focus on doing the right thing by our customers we will ultimately get back to sales growth and ultimately that should improve returns to our shareholders," Mr Banducci said.
"We are just in the first stage of the journey but in retail you do need your same store-sales growth to go positive to make everything else work
"The headline I focus on is if you look at what we've done, we lowered prices in the order of 2.4 per cent on a comparative basis for our customers, if you bought the same basket of food year on year."
Woolworths has ploughed more than $1 billion into cutting prices at its Woolworths stores in the past 18 months as well as increasing staffing levels during key shopping periods such as Sunday and improvements stock losses and negotiating better deals with suppliers.
One shareholder noted the strong first half sales growth performance from Woolworths only put it back where it was about two years ago but he said the trajectory for the business was much better now than a year ago when its sales went backwards by 1.2 per cent.
"There's been a big turnaround in the sales numbers but the context for that is the final quarter of of 2015 was absolutely terrible," he said.
"Woolworths let its margins get way too high and now they're back to more normal levels.
"They've taken margins down from embarrassingly high levels to globally high levels, so they are probably back to where they should be."
Pushing ahead of Coles on a like-for-like sales growth basis for the first time in 30 quarters also put the price war genie back in the bottle with one market watcher suggesting price had been "neutralised" for now.
And while there is no expectations Coles boss John Durkan will give up one cent of market share without a fight, insiders suggest both bosses are too "sensible" to slide into an irrational war.
The outlook for Woolworths' troubled discount department store Big W is much more clouded after it sunk to a $27.2 million half-year loss, including a $35.3 million provision for onerous leases.
Still committed to Big W
Woolworths claims it remains committed to the chain, which is valued at $359 million but senior management has left the door open to further adjustments following its latest strategic review.
The business is expected to post a second half loss before interest and tax of $88 million.
Former chief Sally Macdonald's shock departure last November sparked talk the turnaround of the business could be longer and more costly than anticipated but chairman Gordon Cairns said Woolworths would build on the work Ms Mcdonald had done.
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