What should Luscombe do against a resurgent Coles?

In his fifth year at the helm of Woolworths, Michael Luscombe is facing some stiff competition from arch-rival Coles.

After almost 20 years of Woolworths' dominating the Australian supermarket landscape, Coles has come out with all guns blazing to win over shoppers and, to date, the strategy is working under the leadership of Ian McLeod.

Coles has left Woolworths on the back foot with a number of consumer-focused strategies, including allying with TV shows like MasterChef, leveraging off celebrity chef, Curtis Stone, and launching a massive price-cutting war, most notably, in milk.

The figures tell the story: Coles' food and liquor grew sales 6.3 per cent in the latest half, while Woolworths could muster only 3.5 per cent growth, alongside its first profit downgrade in 19 years.

Overshadowing all this is talk that Luscombe will step down in the near future, with his heir-apparent, Woolworths' supermarket boss Greg Foran, expected to take over as CEO, possibly by the end of the year.

But while he is still in the hot seat, what is it that Luscombe, a Woolworths veteran of 33 years, can do to salvage the situation?

Management consultant, Timothy Millar, of Intrinsic Corporation says Woolworths has two choices.

"There are only two strategies,” says Millar. "You can either mirror your competition, or do the complete opposite.”

Woolworths has already ventured down the 'emulate' road, by matching the price war on milk and entering the hardware arena to take on Bunnings (owned by Coles' parent, Wesfarmers) through its joint venture with US-based giant, Lowe's.

But Millar sees the alternative of doing the opposite as equally desirable.

"Instead of being diversified, Woolworths should consider focusing on just food and divest its other businesses,” says Millar.

A retail analyst from one of the major broking firms, who did not wish to be named, says its a cost-margin question.

"Woolworths can either lower costs or protect margins,” the analyst says.

"So Luscombe can either fight with price and target market share, or ... focus on margins. And if you go for price-cutting, then Woolworths will hurt more, as it has the larger market share. The view is that Luscombe wants to protect margins, whereas heir-apparent, Foran, is a market-share believer.”

Retail consultant at Deakin University, Stephen Ogden-Barnes, says Woolworths should be looking at its image.

"If I were Michael Luscombe, I'd be looking at giving the business a stronger and more robust personality,” says Ogden-Barnes.

"Woolworths needs less formality. They are seen as efficient, but not so approachable. It's a question of loosening their top button and showing a business in tune with the consumer.

"They need some good dialogue relevant to the consumer. There is more of an Aussie personality coming through at Coles and it is also playing the role of the Aussie battler, being an old presence in the market getting back into shape.”

He argues that Coles is riding the tide of consumer sentiment, pointing to the ethical ownership it has taken of hormone-free beef promotion.

Professor David Round, director of the Centre for Regulation and Market Analysis at the School of Commerce at the University of South Australia, says Woolworths has been caught napping, after almost two decades of market supremacy.

Round believes Woolworths will be racking its brains to deliver a counter-punch strategy and the retailer should be holding focus groups to find out how it can retaliate.

"There are a number of possible things that Luscombe and Woolworths can do,” says Round.

"They could be looking to cut prices on other regularly purchased products, such as coffee or cereals; two-for-one deals, or coupons, might be linked to something other than petrol, such as discounted airline tickets given their existing link with Qantas.

"But it needs to be big enough for it to be worthwhile.”

Francine Garlin, senior lecturer at the school of marketing at the University of Western Sydney, observes that consumer loyalty is fickle.

"Loyalty has declined [over the years] and switching costs [from one supermarket chain to another] are not high,” says Garlin.

Gillian Bullock is a Sydney-based financial journalist.