Coles will step up home brand and weekly special offers to catch increasingly discerning customers as it warns of chocolate and sugar price spikes.
The nation's second-largest supermarket chain released its first-quarter sales on Thursday, showing food division sales rose 3.5 per cent to $9.5 billion year-on-year.
Meat, dairy, health and beauty and homecare categories were all in deflation during the quarter.
But the rising cost-of-living continues to bite, leading customers to visit seven or eight food retailers a month for groceries, up from four retailers a year ago, Coles said.
"It tells us the upcoming festive season will be more competitive than ever," chief executive Leah Weckert said.
Woolworths told a similar story and watched its share price slump on Wednesday, despite rising sales.
Both retailers have been under scrutiny recently as investigations continue into whether they misled customers with fake discount schemes.
Coles' investment in exclusive brands is paying off, collecting $1 in every $3 spent in the chain's 857 supermarkets.
Its premium range is catching dollars that would have been spent in restaurants or on fast food, Ms Weckert said.
Promotional intensity has not increased but was more important than ever.
"Customers are definitely seeking out those bigger half-price specials, and those things that can really attract the customer into your store to do the big basket shop for the week," Ms Weckert said.
Overall supermarket inflation, excluding tobacco, fell slightly to 1.0 per cent.
But Ms Weckert warned of inflationary headwinds ahead on cocoa, sugar and shipping rates.
The Coles Group's beleaguered liquor division remains a drag, a month after a rebranding of Vintage Cellars and First Choice Liquor was announced.
Sales fell 4.4 per cent on a like-for-like basis - cancelling out growth in the supermarket division.
The fall was blamed on Australians cutting back on alcohol due to broader inflation, as well as Coles pulling out of bulk alcohol sales.
While comparable growth was steady across the group, overall sales rose 2.9 per cent.
Shares in the group opened marginally above Wednesday's closing price of $17.70.
Coles and Woolworths make up 67 per cent of the supermarket sector, with Aldi holding about nine per cent of market share.
