Supermarket giants Woolworths and Coles have poured big money into cutting prices to fend off challenger Aldi, but have not paid enough attention to service levels and the appearance of stores, a pricing expert says.
Woolworths has spent about $1 billion on reducing prices over the past two years, and Coles' owner Wesfarmers invested more into price last quarter than it ever had.
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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.
The price cuts were not enough to put their prices within a cooee of US chain Costco, according to investment bank Morgan Stanley.
But Christoph Petzoldt, partner and managing director at pricing consultancy Simon-Kucher, said price was not the be-all and end-all.
"A lot of consumers they decide [where to shop] based on price perception and not on actual dollars and cents," he said.
"While price levels and price promotions are important drivers of price perception – which ultimately will define where and what shoppers buy – non-price elements such as range, location, appearance of a store, service, opening hours all play a role in creating the price-value perception."
Mr Petzoldt said the big chains needed to focus on what they want to be in three to five years, instead of building market share or increase quarterly sales.
"Do you want to be the biggest who doesn't earn money?" he said.
His comments echo that of former Aldi executive Paul Foley, who said Woolworths and Coles needed to spruik their huge product range and focus on the things Aldi cannot offer, such as delicatessens, rather than try to compete on price.Â
While much of the market is focused on Aldi, Costco is 27 per cent cheaper than Coles and 24 per cent cheaper than Woolworths on a 27-product basket of basic household items, Morgan Stanley recently told clients.
But the gap is falling, from 37 per cent years ago, thanks to price cuts by Woolies and Coles, analyst Tom Kierath said.
"What we have noticed based on our own shopping trips is that: (i) Coles and Woolworths are increasingly offering larger pack sizes – to deliver more value to customers and to potentially negate the impact of [German discount supermarket] Aldi and Costco;
A lot of consumers they decide [where to shop] based on price perception and not on actual dollars and cents.
Christoph Petzoldt
(ii) the quality of private label ranges at Coles and Woolworths has improved and it is now debatable whether Costco's private label range, Kirkland, is superior in quality (as it was a few years ago); and
(iii) 'Specials' for the majors don't seem all that special as both often run exactly the same promoted price."
Costco generated $1.5 billion in sales in the 12 months to late August 2016, posting a $14.79 million profit. Morgan Stanley estimates it has 1 per cent of Australia's supermarket sales and operates on much thinner margins than the big two chains.
Costco  was launched in Australia with a store in Melbourne's Docklands in 2009. It has now has eight stores, with plans to increase the number to 16 by the 2020 financial year.
But ​Mr Petzoldt said Costco had failed to forge a strong identity in Australia, with people deterred by its membership structure and its small number of stores.Â
"It's not for everyone, but if you're extremely savvy and don't buy too many perishable things, it's a nice option."
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