Woolworths' world-leading food and liquor margins are expected to fall from around 8.2 per cent to 5.4 per cent, according to analysts, wiping about $600 million from earnings before interest and tax in the six month period. Analysts said full year profits could fall to around $1.8 billion or $1.9 billion, compared with consensus forecasts around $2.28 billion, raising doubt about Woolworths' ability to maintain its dividend payout. It was the third profit warning this year and the guidance was issued despite Woolworths declaring in June that it would no longer issue profit forecasts. Former chairman Ralph Waters said in June that management's attempt to maintain guidance had contributed to the problems in supermarkets, stopping the retailer from sacrificing margins to boost sales because "they were captive to their own guidance". Outgoing chief executive Grant O'Brien, who fell on his sword after the second profit downgrade, said the latest warning was necessary to keep the market informed and signal that Woolworths was accelerating the three-year turnaround plan.

Gains wiped out Woolworths shares fell 10 per cent to $24.70, wiping out gains over the last month and taking losses for the year to 19 per cent. Wesfarmers and Metcash shares also fell amid growing fears that Woolworths' accelerated investment could trigger an all-out price war, squeezing margins across the sector. "If Woolies are having these problems, maybe it's that those problems have stemmed from competition from Aldi and Costco and the pressure on margins will become significant," said Armytage Private portfolio manager Bradley King. "We haven't seen it come through in Wesfarmers' accounts yet [but] Wesfarmers has been doing a better job and their strategy is resonating more with consumers."

Fund managers said the drop in profits indicated that $500 million in cost savings flagged in May were yet to come through and the $300 million-plus invested in grocery prices over the last six months had yet to move the dial. Woolworths invested $100 million into reducing prices and forgoing price increases in the latest quarter, on top of the $200 million invested between February and June, and launched new marketing campaigns, "Price Drop" and "Low Price, ALWAYS" to communicate the reductions to customers. However, same-store food and liquor sales fell for the second consecutive quarter – down 1 per cent – as Woolworths struggled to reverse customer perceptions that its prices are higher than Coles. The decline in first-quarter sales followed a 0.9 per cent drop in the June quarter, indicating that Woolworths supermarkets are still losing momentum. Customer service boosted Last week, Coles reported a 3.6 per cent increase in September quarter same-store food and liquor sales after investing about $100 million into grocery prices, double its investment a year ago, sending prices down by 1.3 per cent, or almost 2 per cent excluding tobacco.

At Woolworths, average food prices fell 1.8 per cent and prices for packaged groceries, produce, baked goods and general merchandise fell even more. Food Group managing director Brad Banducci said Woolworths also invested in service by boosting store labour, particularly in produce and checkout queues. After cutting 1200 supply chain and back office jobs earlier this year as part of the $500 million cost-cutting program, Woolworths will add 16,000 casual staff in the first-half, equivalent to an additional 40,000 labour hours a week, including 10,000 to cover Christmas trading, a step up from last year. It plans to add 10,000 casuals in the second staff. Mr Banducci said key customer metrics including net promoter score and value perception had improved, but deflation was outweighing volume growth and it would take time to change customer shopping habits. "Grocery shopping is one of the most routine experiences you can have, people shop two or three times a week – it takes a lot for them to leave and it takes a lot for them to come back," Mr Banducci said.

"If we do the right things they will put us first. We have a number of future investments we need to make in order to get to where we need to be." Same-store sales fell at discount department store chain BIG W for the seventh consecutive quarter, dropping 8.1 per cent after plunging 11.7 per cent in the previous quarter. BIG W has cleared most of its excess inventory, but has been struggling to get stock on the shelves after problems implementing a new merchandise management system. BIG W's interim boss, Penny Winn, who took over after the sudden departure of Alistair McGeorge in August, said the systems implementation problems had now been largely resolved and sales momentum was expected to improve ahead of Christmas. In home improvement, group sales rose 20.3 per cent and sales per store at the loss-making Masters chain improved after Woolworths introduced a new store format.

However, speculation is growing that Woolworths will pull the plug sooner rather than later. Home improvement managing director Matt Tyson, who took the helm in January 2014, played down rumours that he was planning to leave. "I'm no spring chicken and the journey we're on with Masters is a journey that will take some time. I fully intend to be engaged with this business on that journey for quite some time to come," Mr Tyson said. However, he would not say if he would still be here this time next year.