Supermarkets set to ditch ‘race to bottom’ on prices

SHARES in Woolworths and Wesfarmers could rise as much as 10 per cent as consumers become less price focused, investment bank UBS says.

Australia’s grocery market is likely to be re-rated by investors as the dissipation in the price war prompts increasing market rationality, the investment bank says.

“We are becoming more positive on the sector,” UBS analysts said in a report for investors.

“Key catalysts will be signs of easing deflation and signs Aldi will remain a rational competitor upon (fellow German supermarket titan) Kaufland’s entry.”

Kaufland, which specialises in giant “hypermarket” stores, has so far bought two sites in Australia. UBS analysts last week said “promotional fatigue” began to set in with grocery shoppers in February, based on its market research, with non-price factors becoming more prominent in their choice of supermarket.

It could foreshadow the end of a near decade-long “race to the bottom” on prices by Coles and Woolworths that has severely eroded supermarket profitability.

“Both Coles and Woolworths have noted while the market remains competitive, they are comfortable with relative pricing and do not see the need for a material incremental step-up in (discounting),” UBS said yesterday.

UBS said if Coles was demerged from Wesfarmers, as planned, it was likely to be a “rational” competitor in the market.

“As the Australian grocery market enters the ‘recovery’ phase we expect upward pressure on (share) valuations,” the analysts said.

“While relative valuations are unlikely to revert to historical ‘steady-state’ levels, our analysis suggests about 10 per cent valuation upside to current levels.”

UBS gave no timescale for the forecast share price rise.