Woolworths Group: How Australia’s Biggest Grocer Lost a Year

Woolworths is the clearest example in Australian business of how a dominant market position can coexist with a badly deteriorating profit line. Nothing about its scale, store network or customer base changed materially in FY2025. What changed was the price it charged, the cost of running its distribution network, and its relationship with a public that had decided supermarkets were profiting from inflation. This article covers how the business works, what went wrong, and what the recovery depends on.

How does Woolworths actually make money?

By moving very large volumes of low-margin goods through an owned distribution network. A supermarket earns a few cents on a dollar of sales, so profitability is determined by throughput, shrinkage, labour productivity and the terms it negotiates with suppliers — not by the price of any individual item.

The group is broader than the supermarket brand suggests. Australian Food is the core, with sales of A$13.05 billion in the third quarter of FY2025 alone. Around it sit Woolworths Metro convenience stores, the WooliesX e-commerce and loyalty business, an Australian B2B operation supplying institutions and food service, the Big W discount department chain, and the New Zealand business.

E-commerce has become the fastest growing part. Group e-commerce sales rose 15.7% to A$2.2 billion in the third quarter of FY2025, with WooliesX growing over 15%. That growth is strategically necessary and financially awkward: online orders carry higher fulfilment costs than a customer walking the aisles, so a mix shift toward digital compresses margin even when it grows revenue.

Why did FY2025 go so badly?

Three things happened at once. First, Woolworths cut prices deliberately — roughly 1.4% across the basket excluding tobacco and fresh produce — to respond to cost-of-living pressure and to political and regulatory scrutiny of supermarket margins. Price cuts flow straight to the bottom line in a business earning a 5% to 6% operating margin.

Second, industrial action disrupted distribution centres, leaving shelves short of stock during the dispute. Analysts estimated the disruption handed rival Coles around A$120 million of additional sales — a direct, measurable transfer of revenue to a competitor because customers who cannot buy what they want simply shop elsewhere.

Third, cost growth continued. Labour, energy, transport and supply chain costs all rose while prices were being cut, which is the definition of margin compression. Australian Food operating profit fell 13% to about A$1.4 billion and the divisional margin dropped from 6.1% to 5.2%, while Coles held its supermarket margin higher with a roughly flat pricing position.

How did the market react?

Brutally. Woolworths shares fell 14% on the day of the FY2025 result, and Coles came close to overtaking it on market capitalisation for the first time ever — an outcome that would have been unthinkable a few years earlier. The final dividend was cut 21% to 45 cents and the full-year dividend fell 41% to 84 cents.

The specific concern was not the reported numbers, which were broadly in line with consensus, but the outlook. Investors concluded that Woolworths had lost momentum to a competitor executing better, and that regaining share in grocery is slow because shopping habits are formed over years and switching is driven by convenience and location as much as price.

Analysts also noted a disconnect: supplier feedback did not suggest a performance gap as wide as the reported divergence between the two majors, which raised questions about how much of the difference was execution and how much was one-off disruption. That distinction determines whether the FY2025 result was a cyclical low or a structural shift.

Is Woolworths recovering?

The early evidence says yes. In the quarters following the FY2025 result, Woolworths supermarket sales growth moved ahead of Coles — around 6% against 4% in one comparable quarter — reversing an extended period of underperformance. Woolworths also delivered an EBIT recovery of around 14.4% in the first half of FY2026, though from a depressed base.

That pattern is consistent with how grocery competition normally works. Relative advantage between two operators of similar scale rarely persists, because each can observe and copy the other’s pricing, ranging and promotional decisions within weeks. Analysts at Morningstar have argued sales momentum between the two should converge again, with supermarket EBIT margins averaging around 5.4% across the industry over the next decade.

The structural headwinds do not go away. The mix shift to online raises fulfilment costs, price-sensitive shoppers trade down to cheaper products and to Aldi, and both majors now operate under heavy regulatory and political scrutiny that constrains how aggressively they can price. The realistic outcome is a business with high market share and permanently thinner margins than the peak.

What role does Big W play?

A frequently questioned one. Big W is a discount department store competing directly with Kmart, which is owned by Wesfarmers and has been one of the strongest performing retail businesses in the country. Big W has spent years oscillating between losses and modest profits and has repeatedly been the subject of speculation about closure or sale.

The strategic argument for keeping it is customer overlap and centre economics: Big W anchors shopping centres where Woolworths supermarkets also trade, and the loyalty programme spans both. The argument against is capital efficiency — a business consuming management attention and capital while a competitor with a sharper product model takes share.

The comparison is unflattering and instructive. Kmart rebuilt itself around a single owned-brand range with tight price points and a simplified supply chain, and grew earnings 9.2% in FY2025. Big W has never committed to an equivalently distinctive proposition. In discount retail, being the second-cheapest option with no clear identity is the worst place to stand.

How exposed is Woolworths to regulation?

Substantially, and permanently. The ACCC’s supermarkets inquiry final report found that Coles and Woolworths are among the most profitable supermarket businesses among global peers and that their average product margins increased over five financial years, and it made 20 recommendations covering pricing transparency, supplier relations and planning laws.

Separately, the ACCC brought Federal Court proceedings in September 2024 alleging that Woolworths’ “Prices Dropped” promotions on 266 products across 20 months were misleading, on the basis that prices were raised at least 15% for a short period before being “discounted” to a level at or above the original. The Court found against Coles in a parallel case in May 2026; judgment in the Woolworths proceeding was reserved.

The commercial cost of these matters is smaller than the reputational one. Trust research showed both majors moving sharply from among Australia’s most trusted brands to among its most distrusted during the inflation period, with “tricky pricing” cited as a primary driver. In a market where two retailers take about two thirds of every grocery dollar, public trust is the licence that permits that share to continue. Our detailed analysis of the inquiry is in our guide to the ACCC supermarkets review.

What should other retailers learn?

First, that price investment must be funded by cost reduction, not by margin. Woolworths cut prices without an offsetting productivity programme large enough to absorb them, and the result was visible within two reporting periods. Retailers that cut price sustainably — Aldi, Kmart, Costco — do it by removing cost from the model first.

Second, that supply chain reliability is a competitive weapon. A distribution dispute that empties shelves for a few weeks does not just cost the sales missed; it teaches customers that a competitor is a viable alternative. Recovering those customers takes far longer than losing them.

Third, that scale attracts scrutiny. Once a company reaches a share where it is treated as an essential service rather than a competitor, its pricing decisions become political. Every large Australian retailer, bank and utility eventually learns that the cost of dominance is a permanent regulatory audience — and that planning for it is cheaper than reacting to it.

How does supermarket loyalty data change the economics?

It turns a retailer into a media business. Woolworths’ Everyday Rewards programme captures basket-level purchase data across millions of households, and that data is valuable to the suppliers whose products sit on the shelf. Retail media — selling advertising placement, search prominence and targeted offers using first-party purchase data — carries margins many times higher than selling groceries.

The strategic significance is that it monetises a customer relationship that already exists, with almost no incremental cost of goods. Every large grocer globally is building the same capability for the same reason: a few hundred million dollars of high-margin media revenue can offset a great deal of price investment in the core basket.

It also creates a governance question the ACCC noticed. A retailer that sells shelf prominence to suppliers while also ranging its own competing brands has an obvious conflict, and the transparency of how those decisions are made was one of the supplier concerns raised during the inquiry. Retail media is genuinely valuable and genuinely difficult to run without conflict.

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