The battle for market share in the $90 billion grocery sector could turn into a full-blown price war next year if Woolworths' attempts to restore sales growth in supermarkets fail to gain traction, UBS says.

All four major grocery retailers are keen to avoid, and have played down the risk of, a price war, having seen the damage to profits incurred in price wars in Europe and the UK. But if market leader Woolworths fails to restore sales growth after investing $700 million into reducing prices and improving service in stores this year, it could become more aggressive and initiate a price war in 2017, a report by broker UBS said.

UBS defines a price war as irrational promotional intensity aimed at winning market share and countering the growth of rivals, where price investment is matched or exceeded by rivals, driving down industry profits at an accelerating rate.

Although price competition has become increasingly aggressive in the past few years, Australia is in the midst of a "marketing war" rather than a full-scale price war, and pricing and promotions so far have been rational and disciplined.