However, analysts said they had no doubt Mr Durkan would be prepared to step up promotions, cut shelf prices harder or make more generous offers to loyalty card holders to prevent Woolworths from gaining momentum.

"Coles will do what's required to ensure they don't cede market share," said Macquarie Securities analyst Andrew McLennan.

Coles' same-store food and liquor sales rose 1.8 per cent in the three months ending September – the lowest rate of growth since the first quarter of 2009 and well down on growth of 3.3 per cent (Easter adjusted) in the June quarter and 3.6 per cent in the year-ago period.

The weaker than expected figures triggered a sell-off in Wesfarmers shares, which fell 5.7 per cent to $41.45, posting their biggest one-day slump since August 2009.

"Our strategy remains unchanged – we'll cycle through any short-term activity and make sure our customers see what they have seen for years" – Coles' MD John Durkan. Eddie Jim

Coles continues to outperform Woolworths, where same-store food sales are forecast to grow between 0.3 per cent and 0.5 per cent for the September quarter – the first growth since 2015.

Coles also continues to gain market share, with total sales growing 2.9 per cent to $7.85 billion, compared with estimated market growth of 2.5 per cent.

Momentum wanes


However, analysts say Coles' momentum is slowing and its market share gains are moderating as competition intensifies and Woolworths finally gets its act together after more than 12 months of negative same-store sales.

JP Morgan analyst Shaun Cousins said inflation-adjusted figures suggested that Coles' real like-for-like sales growth slowed to 2.8 per cent in the latest quarter, compared with 5.7 per cent in the June quarter, 6.4 per cent in the March quarter and 4.9 per cent in the first quarter 2016.

Coles cut promotional prices in the September quarter by as much as 55 per cent, reduced private label prices and added more products to its Every Day Value program, taking the number of products on EDLP (Everyday low price) to 4000.

Coles' food and liquor prices fell 1.0 per cent for the quarter, compared with deflation of 2.4 per cent in the June quarter, as fruit and vegetable prices rose after recent flooding, offsetting price cuts in packaged groceries.

Sales also fell sharply in Coles' convenience stores as lower fuel prices and volumes offset growth in snacks and drinks. Confirming recent reports that Coles' fuel prices were above-market, Mr Durkan said new trading terms with fuel supplier Viva made it more difficult for Coles to compete on price.

"Our terms with Viva don't allow us to be as competitive as we'd like in terms of pricing, which means our volumes are unlikely to get any better in the foreseeable future," he said. "But it will still be a profitable business for us going forward."

Masters wind-up crimps growth at Bunnings

Growth also slowed at Bunnings as Woolworths slashed prices at Masters by as much as 60 per cent as part of a $500 million wind-up sale.


Bunnings' same-store sales rose 5.5 per cent – the slowest rate of growth for Bunnings since the third quarter 2013 – compared with 8.3 per cent growth in the June and March quarters and 8.2 per cent in the year-ago period.

Home Improvement chief executive John Gillam said the discounting at Masters was "unprecedented", while trading in many areas was affected by wetter and cooler weather.

"There is an unprecedented element to what's going on, there is no transparency over the volumes that have been liquidated," Mr Gillam said. "Your guess is as good as ours."

However, the discounting should come to an end by the end of December. Sources said Woolworths planned to start closing the first Masters stores in November and all stores were likely to close by mid-December.

Total home improvement sales soared 30 per cent to $3.2 billion, buoyed by an additional $554 million in revenues from the Homebase business in Britain, which was acquired in March for $690 million or £340 million.

Mr Gillam said the Homebase restructuring, which involves reducing prices and changing the product range, was going according to plan. On a like-for-like basis, the number of customer transactions had risen by 8.4 per cent.

Target sales plunge 22pc

Same-store sales also slowed at Kmart, rising 8.2 per cent compared with 8.6 per cent in the year-ago period and 11.8 per cent in the June quarter.


However, the gains at Kmart were almost entirely offset by a 21.9 per cent slump in same-store sales at Target, which is four months into a new structuring program under Guy Russo, the head of Wesfarmers' department store division.

While Wesfarmers' retail businesses are coming under increasing competitive pressure, earnings from resources will rebound this year following a spike in coal prices.

Wesfarmers managing director Richard Goyder said he expected coal to "broadly" break even in the first half of 2017 after losing $118 million in the first half of 2016.

Coal prices have doubled in the past three months and some analysts had been forecasting a stronger rebound in the first half.

However, Mr Goyder said production at the Curragh mine had fallen 11.8 per cent in the first quarter due to wet weather and high levels of carryover tonnage in the second quarter would partially offset recent increases in metallurgical coal prices.