Finance Finance News Supermarkets shift discount war to groceries

Supermarkets shift discount war to groceries

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A leading retail analyst says the major supermarkets are shifting discounts to groceries after a deal with the competition regulator limited petrol discounting.

Under a deal reached between Coles, Woolworths and the Australian Competition and Consumer Commission (ACCC) late last year, the major supermarkets agreed to limit their fuel discounting to a maximum of 4 cents per litre from January 1 2014 to prevent cross-subsidisation of their petrol businesses by their grocery sales.

Before the cap, Commonwealth Bank retail analyst Andrew McLennan estimates that the major supermarkets were spending more than $500 million a year on fuel subsidies – around $300 million of this was on subsidies greater than 4 cents a litre, which are now banned.

Mr McLennan’s analysis shows the cap on discounting could free-up as much as $300 million for the two major retailers to spend on other promotional activities.

He says this shift is already taking place, with one of the majors offering around 20 per cent in value back on spending via store vouchers, although this is a conditional offer.

Mr McLennan says this discount costs the supermarket about the same amount as offering fuel vouchers of between 20-40 cents per litre.

“Based on the trends in New Zealand, we considered that store vouchers were the next best alternative, and that is exactly what we are now seeing,” he wrote in his analysis of the sector.

“It only took a matter of weeks before the majors shifted their focus to store vouchers as a tool to drive loyalty.”

Mr McLennan says the shift in promotional spending will mean that there is no decline in the competitive pressure on independent grocers, even if competing service stations see some relief from the shift away from fuel dockets.

“Store vouchers redirect the discounting pressure back to the stores,” he observed.

“We believe this will continue to drive value-oriented behaviour by consumers and maintain a tough trading environment for independents.”

Mr McLennan rates Wesfarmers (which owns Coles) positively, Woolworths neutrally and has a sell recommendation on Metcash (which supplies IGA supermarkets).