Michael Luscombe, chief executive of the retail Goliath Woolworths (ASX: WOW) declared he will not be the first to blink on milk prices.

For the third quarter of the financial year, an increase of 5.1 per cent or $654 million in the sales gave Woolworths total sales of $13.6 billion.

The Australian food and liquor division announced the result as it posted sales revenue of $9.16bn, a 4.6 per cent rise, when the profit of new store opening was excluded.

This featured the fastest rate of parallel store sales growth in five quarters. It was achieved amidst an ongoing price war that forced a 3.6 per cent decline in standard shelf prices not including tobacco.

According to Luscombe, despite a 13.8 per cent peak in the costs of fresh products, Woolworths still handled to cut overall shelf prices. The price hike on fresh products was one of the major impacts of Cyclone Yasi and flooding incidents in Queensland and Victoria that diminished the source of many fruit and vegetable lines.

With prices increasing in huge 70 per cent due to the 40 per cent reduction in sales volumes, bananas were the fruits greatly affected, explained Luscombe.

Mango prices went up by 69 per cent, onions up by 48 per cent and watermelons rose by 39 per cent. These increases had been partly offset by the price drop of pears, which were down 20 per cent, and other citrus fruits which fell by 33 per cent.

Keeping overall supermarket prices down is a gauge of how frociously Woolies has been cutting shelf prices to stay competitive with Coles.

While Mr Luscombe described the Coles-led discounting of milk to just $1 a liter for in-house brands as untenable, he specified he would not be the first to put them back to their previous costs.

"We've said it's unsustainable for a lot of the dairy farming businesses, and clearly they've had a decrease in their income, and if that is sustained their businesses will be under threat," Luscombe stated.

The Woolworths chief executive added, "But whatever happens, Woolworths will make sure that our customers get the same price as the cheapest in the marketplace . . . we didn't take it down first, we're not going to take it up first."

Woolworths supermarkets managed to increase its number of customers as well as faster growing sales returns.

Luscombe expects that Coles had also taken market share from smaller rivals at the same time. Credit Suisse predicts Coles to have grown its supermarket sales by 6.5 per cent in the third quarter, excluding new store opportunities.

Woolworths has preserved leadership for net profit growth of between 5 per cent and 8 per cent during the full financial year. Its shares closed 19 cents higher at $26.72 yesterday.