The high-street retailer hopes the radio frequency identification (RFID) tags, which allow goods that are lost in transit or stolen to be tracked electronically, will improve margins to 5%.
Last month, Woolworths said theft by customers and employees at its 788 UK stores last year reduced gross margins from 7% to 1.7%.
During a trial period RFID tags will be placed on goods that can be easily sold on the black market, such as CD players and DVDs. A central distribution centre will then send the merchandise to the five participating stores.
Woolworths is one of the first large retailers to introduce RFID tags into its supply chain, but others are likely to follow suit as the technology gets cheaper and more reliable, said Tony Hart, managing analyst at research firm Datamonitor.
"It is well known the amount of money lost to the black market and how this can impact heavily on the bottom line," he said.
"The initial cost of installing such a system may be high, but over time this security mechanism will prove cost-effective in terms of the number of items tagged and the reduction in stolen stock."
Although systems such as enterprise resource planning or inventory management will have to be integrated with the logistics system before product tagging becomes fully effective, RFID tags can bring other initial benefits, Hart said.
"There will be other cost savings that can be achieved such as reducing staffing levels in the warehouse, as the tagging system could highlight packages that are missing, without warehouse staff counting them manually."