Is Woolies losing its market mojo?

A s debate rages over the power of the supermarket giants as they slog it out with price discounts, petrol discounts and other incentives, the latest annual sales figures from Woolworths suggest challenging times for suppliers - and the company - in the next 12 months.

The supermarket juggernaut managed to lift group sales 4.8 per cent to $58.5 billion for 2013, with Australian food and liquor sales contributing almost $40 billion

of that.

Much of the group's food and liquor sales, which increased 4.7 per cent on a normalised basis, can be attributed to Grant O'Brien's strategy to roll out stores, a new marketing campaign, a more aggressive customer loyalty program and deflation across a widening selection of products.

Nevertheless, the sales figures failed to inspire investors, with the company's share price falling 1.6 per cent on a day when the rest of the market was flat.

The issue for Woolworths is the growing perception that it has lost its mojo at a time when rival Coles has got its mojo back - in spades.

The latest sales figures raise questions about a strategy that appears to increasingly rely on sales growth by rolling out new stores. This is a multibillion-dollar strategy that a number of investors and retail analyst David Errington have questioned as the best use of company funds.

To put it into perspective, since 2009 sales in Woolworths food and liquor jumped 19.2 per cent while its space growth rose 18.4 per cent. This costly property grab strategy is in sharp contrast to Coles, which has opened 90 stores and closed 90 stores over a similar period but has left its supermarket floor space virtually unchanged.

The stakes are high and it has prompted more than a few tricks on both sides. My colleague Chris Vedelago and myself recently revealed that Coles used an elaborate tax haven structure to conceal its purchase of one of Woolworths' most profitable stores. The $40 million purchase of the Neutral Bay supermarket blindsided Woolworths, which learnt of the transaction only after we contacted it. Under the terms of the lease, the landlord, Coles, has the right to inspect Woolworths' sales records and the site.

It followed a move by Woolworths to eject Coles from its Katoomba store in the Blue Mountains in 2012 after more than 30 years in the spot. Woolworths had bought the site in 2000 and Coles had been forced to spend millions of dollars building a new centre down the road. The exercise took almost a decade.

From a productivity basis, the Australian food and liquor business produced relatively flat sales of $16,289 per square metre compared with $16,194 per square metre in the previous year and $16,424 per square metre in 2011.

With comparable sales in its Australian food and liquor rising about 2.7 per cent for the full year and 2.9 per cent for the fourth quarter after adjusting for Easter, yet costs going up and deflation rampant in some key categories, suppliers will need to play a bigger role in supporting Woolworths and its competitor Coles.

The quality of the results will be revealed when Woolworths releases its full-year profit results next month, along with a breakdown of capital expenditure and profit margins.

The company has already announced total net profit after tax will be up 5-6 per cent for 2013 but part of that comes from a one-off gaming profit of $100 million from regulatory changes in Victoria.

So when the $157 million loss from its Masters hardware business is thrown in the mix, with a similar loss expected next year, the one-off profit windfall from a regulatory change and sales in its supermarket and liquor business up largely due to the expensive rollout of stores and refurbishments, it paints a picture of tough times ahead.