Deutsche Bank's latest supermarket inflation survey shows private label grocery prices dropped 6.1 per cent in the June quarter. It was the sharpest falls in more than 18 months, as Woolworths and Coles sought to narrow a 30 per cent price gap with Aldi, which sells mainly private label goods.
Prices for branded groceries rose 1.3 per cent in the June quarter, despite escalating competition between the large supermarket chains and independent retailers, although the rate of growth was less than half that in the March quarter (2.8 per cent).
"If you think about where the overlap is with Aldi, they have to make sure their pricing is reasonably sharp," Deutsche Bank analyst Michael Simotas said.
"The shopper going into Aldi is a shopper who cares mostly about price – what brings them through the door is a focus on value. By sharpening their private label pricing, Coles and Woolworths are hoping to stem that loss of customers," Mr Simotas said.
Woolworths cut prices aggressively in the June quarter to win back lost market share and reinvigorate weak same-store sales growth, with the price of a basket of branded groceries falling 2.6 per cent in the June quarter, Deutsche Bank said.
However, a basket of national brand groceries at Coles rose 5.1 per cent, as the retailer generally ignored Woolworths's Red Spot specials and Cheap Cheap promotion and maintained its everyday low prices strategy.
While lower food prices are good for consumers, food price deflation makes it harder for retailers to cover rising costs unless volume increases offset the impact on margins.