Shares in Australia's Wesfarmers drop as grocery sales disappoint

By Tom Westbrook

SYDNEY, Oct 26 (Reuters) - Shares in Australian retail and resources conglomerate Wesfarmers suffered their biggest fall in seven years on Wednesday, hit by weaker-than-expected quarterly sales in its Coles supermarket division.

Food and liquor sales growth at Australia's No. 2 supermarket halved in July-August from the same period last year, according to figures announced by the company on Wednesday.

That sparked concerns that Coles could be losing ground to its main rival Woolworths Ltd and new entrants to the market such as German discount grocer Aldi, pushing down Wesfarmers' shares by as much as 5.2 percent.

"The market reaction is telling us that this is a significant disappointment to investors," said Michael McCarthy, chief market strategist at stockbroker CMC Markets.

"There have been a number of analysts questioning whether it's as good as it gets for Wesfarmers and these results point to the idea that a peak has been passed. I expect that we'll see continuing pressure on the share price as investors adjust to this new outlook."

A price war between Coles and Woolworths has been so fierce that its effects have been felt in Australia's headline consumer price index (CPI).

Price reductions, which had been hitting profits, eased in the quarter, Wesfarmers said Wednesday, as Australia's CPI also ticked higher.

"Market growth has slowed, while at the same time there has been an increase in competitive intensity," Coles managing director John Durkan said in a statement, calling sales growth "satisfactory".

Shares in Wesfarmers touched a three-month low on Wednesday.

(Reporting by Tom Westbrook; Editing by Joseph Radford)