Woolworths says the last quarter was tough for both sales and customers - and it expects the challenging trading conditions to last another 12 months due to sticky inflation and increased competition.
The supermarket giant had seen a noticeable shift in customer sentiment and shopping behaviours since Christmas as customers adjusted their budgets, Woolworths chief executive Brad Banducci said on Thursday.
"Customers across all segments (are) telling us they're struggling to make ends meet given the material increase in mortgages, rent, utilities, insurance and other key household expenditures," he said.
A big increase in rents since January and February had particularly impacted younger singles and couples, Mr Banducci told reporters.
Their spending on what Woolworths calls "conscious products" - such as environmentally friendly or fair trade goods - had suddenly dropped significantly, he said.
Customers have also been shopping more frequently but buying slightly less each time, he said.
They have been looking for more ways to save, buying more own brands and more products on promotion.
Mr Banducci said customers had been particularly attuned to promotions for higher-value non-food items such as household, pet and personal care products.
Shoppers have been buying those items from Woolworths' traditional supermarket competitors as well as non-traditional competitors such as Bunnings, KMart and even Amazon, he said.
Mr Banducci indicated food prices at Woolworths supermarkets finally stopped rising last quarter, dropping 0.2 per cent.
Increased supply reduced fruit and vegetable prices by 6.2 per cent while meat prices fell 9.0 per cent due to lower livestock costs.
The supermarket group said its Australian food sales were up 1.5 per cent to $12.6 billion in the 13 weeks to March 31, compared to a year ago.
Woolworths' total sales - including its New Zealand supermarkets, Big W stores and business-to-business food sales - were up 2.8 per cent to $16.8 billion.
Big W sales were down 4.1 per cent to $1 billion, with customers cutting back in all areas, in particular clothing and home items.
A slow start to winter had led to fewer clothing sales.
E&P Capital retail analyst Phillip Kimber said Woolworths' results were below expectations for Australian food and New Zealand supermarkets, while Big W beat expectations.
While Coles ran a successful Pokemon campaign, Mr Kimber said Woolworths' Australian supermarkets did not run a collectible promotion, which impacted results.
He noted the opposite occurred a year ago when Woolworths gave away Bricks Farm collectibles and Coles had no collectibles campaign, amplifying the impact on growth rates.
Woolworths also reported its Everyday Rewards program had increased to 9.7 million active customers, from 8.9 million a year ago.
E-commerce accounted for 12.4 per cent of total sales, up from 10.6 per cent a year ago.
Woolworths' digital platforms had an average weekly traffic of 27 million, up from 22.8 million a year ago.
In mid-afternoon trading, Woolworths shares were down 4.1 per cent to $30.52.
