(Adds background on promotional campaign) Aug 22 (Reuters) -...

(Adds background on promotional campaign)

Aug 22 (Reuters) - Supermarket operator Coles Group (COL) reported a 9% drop in annual profit on Thursday, hit by higher expenses, and warned that sales next year could be hurt as a promotional programme comes under pressure from more competition.

Coles and its bigger rival Woolworths Group Ltd (WOW) have been locked in a discount war for several years and have come up with innovative promotional campaigns to grab customers.

Earlier this year, Coles sought to refresh a 2018 promotional effort by offering collectible miniatures of fruits and vegetables as part of its "Little Shop" campaign on purchases of over A$30.

Rival Woolworths has a similar campaign that gives away toys based on characters from the Disney film "Lion King".

"Cycling the comparable sales growth from last year's Little Shop campaign will be challenging given competitor activity in market," the company said in a statement.

Coles' sales from its supermarkets division rose 3.2% in the year, while gross margin improved 20 basis points.

On a comparable basis, sales grew 2.7% as inflation rose due to severe drought conditions in Australia.

The company's net profit came in at A$1.43 billion ($969.97 million) for the year to June 30, down from A$1.58 billion last year, hurt by higher costs related to its separation from parent Wesfarmers (WES) late last year.

The company declared a final dividend of 24 cents a share and a special dividend of 11.5 cents a share, its first dividend as a public company.

($1 = 1.4743 Australian dollars)