Shoppers can expect some hip-pocket reprieve this year, with Australia’s dominant supermarket chains Woolworths and Coles flagging price cuts in the $88 billion food and grocery market.

After reporting “subdued” food and liquor trade in December and January and market-share loss in groceries, No.1 supermarket Woolworths plans to invest more than half a billion dollars on cutting prices and improving its stores.

“We want to make sure that we remain the market-leading food offer in Australia and to do that we’ve got to have the best prices, we’ve got have the best in-store service and we’ve got to have the best stores,” Woolworths chief executive Grant O’Brien said.

"We've got to have the best prices": Woolworths CEO Grant O'Brien.“We’ve got to have the best prices”: Woolworths CEO Grant O’Brien.  Photo: Wayne Taylor

“I think that’s absolutely consistent with customers at the moment, and I think if we get that alignment right, then it’s natural that more customers will come to our stores.”

The investment will include more staff. “The sort of labour you have in stores is always a balance between costs and your sales line. I think we could have invested more and the plan is to invest more,” Mr O’Brien said.

Woolworths is among the highest-margin listed supermarkets worldwide, despite years of price deflation and pressure from an improved Coles and discounter Aldi.

Woolworths on Friday admitted its new promotional campaign – the “Cheap Cheap” campaign – was “not as successful as we expected” and had failed to shift perceptions it was much more expensive than its rivals.

Coles last week said it was prepared to curb profit growth by charging lower prices at the checkout.

“We think it’s incredibly important in Coles to position this business for the long term … and we’ll continue to invest in pricing to do that. And if that moderates our profit increases that’s fine as far as I’m concerned because we’ll build a strong business,” said Richard Goyder, the chief executive of Coles’ parent, Wesfarmers.

Between them, the supermarkets brought in food and liquor revenue of $37.5 billion during six months.

They say Australia has the right ingredients for consumer spending: low interest rates, relatively low unemployment, and declining petrol and grocery prices.

“There’s all of the things that make the household budget something that’s, I guess, more inclined to spend,” Mr O’Brien said. “What we’ve got to see over the coming months is that turn to fruition, but the elements are there which would make a retailer like us confident there’s more growth ahead.”

Mr Goyder last week said Australians shoppers “aren’t feeling too bad at the moment”.

“I talk to CEOs of retail businesses around the world and they’ll take Australia any day. And why? Because relatively – although it’s coming up a bit lately – employment is still pretty strong in this country, interest rates are relatively low, fuel prices are putting money back into people’s pockets.”

Russell Zimmerman, president of industry group the Australian Retailers Association, said he would not describe Woolworths’s $500 million investment – equating to just 1.2 per cent of its sales – as the start of a “supermarket price war”.

And he warned both supermarkets to be careful about their advertising claims and treatment of suppliers in their quest for higher sales.

Mr Zimmerman said after a solid festive period, the feedback from retailers was the market was “OK without being fantastic”.

“It’s fair to say that although it’s a bit tough at the moment, it’s probably no tougher than it is every February,” he said.

National Australia Bank’s survey of ASX 300 companies showed retail was one of only two sectors that reported stronger business conditions in the December quarter.

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