Spotlight on Australia’s supermarkets and grocery industry

By Jessica Mudditt.

IBISWorld’s ‘Supermarkets and Grocery Stores in Australia’ report describes Australia’s supermarket and grocery industry as “fiercely competitive” and highly concentrated. ALDI’s rapid growth since its debut in Australia in 2001 has shaken up the industry, with its private-label products proving highly popular and spurring improvement in the private-label products available in Coles and Woolworths.

Discount operators such as ALDI and Costco are projected to continue influencing shopping trends. Large foreign companies, such as Amazon’s grocery division, AmazonFresh, and the Germany-based Schwarz Group’s supermarket brands, Lidl and Kaufland, will further intensify competition when they enter Australia’s market over the next five years, although AmazonFresh has not publicly stated its intention to set up a presence in Australia.

Both Lidl and Kaufland are known for aggressive price-discounting strategies and their presence may slow ALDI’s already rapid expansion in Australia. The new players are expected to have a significant impact on Coles and Woolworths as well.

“Lidl and Kaufland would likely increase price competition in the industry, which would put further pressure on Coles and Woolworths to lower prices to maintain market share,” the report said.

Another defining feature of Australia’s supermarket and grocery industry is that it is highly concentrated, with the four largest operators accounting for almost 80 per cent of total industry revenue. Coles and Woolworths account for 60 per cent.

ALDI’s strong growth has increased industry concentration over the past five years, states IBISWorld. The Germany-based discount supermarket chain currently holds an estimated 8.9 per cent of Australia’s market.

IBISWorld analyst Nathan Cloutman attributes much of ALDI’s success to its discount private-label products.

“The rise of ALDI has forced the two established industry giants, Woolworths and Coles, to cut prices and expand their private-label product ranges,” he said. “Smaller players, such as FoodWorks, have struggled to compete in an increasingly price-intense industry.”

ALDI announced a new operating strategy late last year, which includes a stronger emphasis on fresh food and bigger stores. The company plans to expand its stores across the eastern seaboard and include a larger range of fresh products. This expansion strategy is expected to further boost the company’s market share over the next five years.

Although Costco isn’t currently a major player in the industry, it plans to expand in Australia over the next five years and is expected to gain market share at the expense of smaller operators, as its discounted prices across a mass range of products appeal to price-conscious consumers in other markets.

Competition leads to price cuts

Industry-wide profit margins have fallen over the past five years as the major players have cut prices and margins to stay competitive. Industry revenue is projected to have grown by an annualised 4.2 per cent in the five years up to 2016-17, reaching $105.3 billion. This includes forecast revenue growth of 3.3 per cent in 2016-17.

The two biggest players, Coles and Woolworths, have had varying degrees of success in responding to increased competition.

Coles’ ongoing ‘Down Down’ price campaign began in 2010 and has been effective in slightly increasing its market share, as has the development of its private-label range.

Woolworths has fared less well, according to IBISWorld, the retailer having struggled to adjust to the industry’s changing environment, with the company losing market share to Coles and ALDI over the past five years. Its profit margins declined and, in July last year, it announced that many of its underperforming stores would close and 500 management jobs would be axed.

Woolworths and Coles have gone against overseas trends by reducing prices as a competitive strategy rather than through product differentiation, IBISWorld notes. Consequently, both Woolworths and Coles have focused less on profit margins and more on market share.

ALDI’s business model is different in that it has a limited range of branded products and a lower marketing budget. This allows it to pass on savings to consumers and undercut Coles and Woolworths on price. ALDI, which now operates more than 450 stores in Australia, was initially concentrated on the eastern seaboard but recently expanded into South Australia and Western Australia.

“This expansion has put further pressure on Coles and Woolworths nationally, and has also intensified competition for IGA-branded stores in the states,” states IBISWorld.

Golden age for private labels

Private-label product ranges now account for around a quarter of all supermarket sales, the report says. Such goods are now offered across all product segments, including basic household goods and high-end and organic product ranges. The expansion of private-label product ranges is expected to continue, as such products are more profitable because of their higher margins. However, the industry’s average profit margin is expected to decrease slightly over the next five years.

The expansion of private-label products will contribute to price deflation and constrain industry revenue growth, IBISWorld predicts. The quality of private-label products has improved in recent years and will continue to do so, further enhancing the already strong appeal of such products among low and middle-income families.

Australia readies for Amazon

The ongoing development of sophisticated online sales platforms is expected  to have an increasing influence on shopping patterns, notes IBISWorld, with convenient online shopping options, such as pick-up and home delivery, helping industry firms boost demand over the next five years.

Last June, Coles opened its first online-only ‘dark store’ in Melbourne. Dark stores have no customers and house only staff stocking online orders. IBISWorld predicts dark stores will become increasingly prevalent over the next five years. Online shopping is itself anticipated to become ever more important for industry operators, with time-poor consumers demanding convenient delivery services.

Demand for online grocery services is expected to continue rising, the report says. In 2008, Amazon launched online-only grocery-delivery service AmazonFresh in the US city of Seattle. Amazon has been in talks with third-party logistics suppliers in Australia, but a date has not been announced for its launch, along with that of AmazonFresh, in this market. When it does arrive, it is expected to affect the industry’s major players significantly and increase price competition.

“AmazonFresh is likely to offer lower prices due to its strong negotiating power and lack of storefronts,” IBISWorld notes.