The past three trading days have seen more than $8 billion wiped off the market value of food and grocery retailers, and it’s sparking fears of a UK-style price war.

Analysts and investors are biting their fingernails and nervously awaiting an aggressive response from Coles, Metcash and Aldi after Woolworths accelerated its investment into grocery prices.

Woolies has the highest food and liquor margins in the world, but they’re expected to fall from 7.9 per cent to as low as 5.5 per cent this year, as the supermarket giant funnels more than $600 million into reducing grocery prices and upping service in stores.

According to Fairfax, Deutsche Bank analyst Michael Simotas said, “The deep earnings reset raises the prospect of a price war, given that Woolworths has less to lose.”

But the supermarket’s outgoing chief executive Grant O’Brien has downplayed the risk of a price war, saying the Aussie grocery landscape has traditionally kept things balanced.

Woolworths has indicated it “will not be beaten on price” and is not planning to go to great lengths to undercut rival Coles, because price isn’t the only thing shoppers look for in a supermarket.

“The way Woolworths has presented it, they’ve realised their prices need to be competitive but they’re not going out of their way to distance themselves a lot from Coles,” Nikko Asset Management fund manager Craig Young told Fairfax.
But analysts say Coles won’t let Woolworths out of its sights, and it won’t be relinquishing its price leadership any time soon.

Following Woolworth’s lead, Coles has doubled its investment in price to around $400 million annually, but may have to spend even more to protect its price leadership and re-establish the previous price gap.

“If an aggressive price war does erupt, we expect independents will be the biggest losers given the relatively thin margin which is shared between the retailers and Metcash,” Simotas added.