Wesfarmers is sacrificing Coles' earnings growth to keep shoppers' grocery bills down.
Coles lifted its first half earnings 7.1 per cent to $895 million - half the growth rate it achieved in the same period two years ago.
The figure disappointed investors who are used to double-digit earnings growth from the supermarket giant, which enjoyed a 11 per cent profit rise in the same period a year ago, and 15 per cent two years ago.
Shareholders were disappointed with the result on Thursday, when Coles' parent company Wesfarmers unveiled its latest profit result.
Wesfarmers managing director Richard Goyder said it was a shame to disappoint the market but said it was critical for Coles to remain competitive with food and grocery prices.
He said as the supermarket giant's earnings grow, it gets harder to maintain huge growth rates in earnings.
"We think its important to position the business for the long term and for that we need to ensure we've got very competitive products and we'll continue to invest in pricing to do that," he said.
"If that moderates Coles' profit increases, then that's fine because we'll build a strong business."
Mr Goyder said he was not willing to follow in the footsteps of UK supermarket giant Tesco, which found itself at the centre of an accounting scandal after it overstated its profits and issued four earnings warnings last year.
"We're not going to do what the UK grocery business did for short-term profits and then end up with a big problem," he said.
Shares in Wesfarmers fell 71 cents to $45.18 amid disappointment at Coles' earnings.
"Wesfarmers had put a lot of money into Coles and they want good returns so the earnings was a little below what the market was expecting," CommSec market analyst Juliana Roadley said.
The market had also expected Wesfarmers' net profit to dip around 2.5 per cent but instead it slipped 3.7 per cent to $1.38 billion in the six months to December 31.
The decline was partly due to the loss of earnings from the sale of its insurance and industrial gas businesses.
But stripping out those businesses, Wesfarmers' profit rose 8.3 per cent.
Bunnings, Kmart and Officeworks all reported strong earnings growth, and combined with Coles, offset weaker profits from Wesfarmers' industrial operations.
The company's home improvement retailer Bunnings lifted earnings 10 per cent, while Officeworks' jumped 19 per cent.
Kmart's earnings rose 11 per cent, while Target was flat despite an almost two per cent slide in sales.
Mr Goyder said he was optimistic about the retail businesses, despite weaker consumer confidence and rising unemployment.
"Consumers are not feeling too bad at the moment," he said.
"Employment is still pretty strong in this country, interest rates are low, fuel prices are putting money back in people's pockets."
WESFARMERS DISAPPOINTS WITH COLES
* Net profit of $1.38b, down 3.7 pct, from $1.43b
* Revenue of $31.97b, up 0.4 pct, from $31.85b
* Fully franked interim dividend of 89 cents a share, up from 85 cents
Share
