The growth of discount retailing

Joe Berry Australian Retail Industry Executive Award: the winning essay written by Sarah Hughes, Coles.

Globally, discounter and specialty retailers are winning market share – ALDI, Costco, Primark and Zara are all good examples. This trend is fully evident in the Australian market. How should a mainstream retailer respond to the challenge? What other emerging markets trends will add pressure to existing Australian retailers?

It is evident that the Australian retail industry has undergone and continues to undergo significant change: in the way customers shop to the type of products they buy and the frequency at which they purchase. The entry of discounters and specialty retailers has further fuelled these changes. Australia’s grocery industry has moved from a market dominated by two main players to a more complex mix of foreign discounters, independents and premium, specialised grocers. Similarly, Australian fashion retailers have seen the entry of multinational fast fashion brands. This has naturally shifted market share away from traditional players.

In addition to this, emerging trends such as online shopping and mobile technology have changed consumer preferences and therefore impacted the industry. This essay will examine exactly how key players in grocery and fashion retailing can win share of wallet and therefore retain and grow market share when faced with agile, global competitors.

Implications for Australian retailers of rise of discount and specialty players

State of play – grocery industry
In order to survive and thrive, the Australian retail industry must adapt to changing operating and economic conditions. Customers have more information than ever before at their disposal and are increasingly savvy in terms of the way they shop. This, coupled with the current unemployment rate of 6.3 per cent¹ and the rising cost of living, indicates low consumer confidence, which translates into increased pressure on retailers to win and retain share of wallet from customers.

Currently, Coles and Woolworths’ combined market share is over 73 per cent² with Metcash Ltd and ALDI the next biggest players as per Figure 1.

Figure 1: Australian supermarket market share as at September 2014³

When ALDI entered the Australian retail market in January 2001⁴, few would have believed its rapid growth to a network of 360 stores today and sales of circa $5.3 billion per annum⁵. As is evident in Figure 2, analysts believe this trend will continue as ALDI moves into South Australia and Western Australia in 2015. Moreover, rival German discounter Lidl is very interested in expansion opportunities, having opened a head office in Melbourne⁶.

Figure 2: Australian FMCG market share trends⁷

Most importantly, it is evident that Australian customers increasingly accept discounters as a true alternative to grocery retailers. This puts pressure on shareholder profit from traditional players through weaker sales and market share losses. When Woolworths released its 2015 half-year financial results, CEO Grant O’Brien noted that, “… we’re competitive but we can be cheaper. That’s what this investment is about, providing greater value to consumers.”⁸ Australian retailers are cognisant of the UK experience, where Tesco’s market share declined from 30.2 per cent to 28.8 per cent⁹.

So, why have these discount retailers succeeded in Australia? It is because they have been relentless in executing their low operating cost strategies and made it clear to their customers what they stand for. For example, Costco does not offer 30,000 products on-shelf like a traditional supermarket offering, but what it does offer is great value on branded products through bulk buys and exclusivity to deals through its membership cards. As a result of this, customers recognise the savings that can be made and have opted in, allowing Costco to grow to seven warehouses across Australia and capture one per cent market share¹⁰.

ALDI has also been able to alter customers’ previous perceptions of quality and brand loyalty. Over the space of 14 years, ALDI has managed to convince customers that private label products are of both great value and quality and that by offering a smaller range and no frills, customers are able to benefit through efficiency gains in the form of low prices. Their value proposition and product offering are clear to customers, who know what they will get when they shop at ALDI.

State of play – fashion industry

Australian fashion retailers such as Country Road and traditional emporiums such as Myer and David Jones have seen the entry and maturation of international fashion powerhouses such as H&M, Topshop and Zara in the Australian market. These retailers benefit from vast international supply chains where speed to market is a key success factor. They have central design hubs where catwalk fashion is reworked into everyday wear before being sent to factories across the world. The sheer speed at which they can turn concepts into wearable items in store (two weeks in the case of Zara)¹¹ allows them to effectively compete in a myriad of markets.

In addition to this, their customer value proposition is clear in terms of H&M and Zara’s synonymy with fast fashion. For these reasons they pose a strong challenge to department stores who have high input costs and cannot compete with the agility and economies of scale that these international organisations have at their disposal. These competitive advantages will present a challenge to the current 90 per cent market share of Kmart, Target, BIG W, Myer and David Jones¹².

Responding to the challenge of discount and specialty players

Be proactive and get the basics right

UK and European markets have shown the advantages of being proactive rather than reactive to the entry of discounters and specialty retailers. In France, Carrefour and Casino have reduced prices, simplified their private label ranges and product assortment¹³ and improved their online offerings. Each of these measures addresses the changing retail environment by beating the discounters at their own game, but most importantly, it is reflective of consumer sentiment and therefore shopping behaviour. It may sound simplistic, but by truly understanding the motivations of customer purchases, supermarkets have a greater ability to win share of wallet and therefore address the rise of discount retailers.

Traditional retailers should not necessarily respond to discount competition by seeking to replicate the discounter model in its entirety. There has been significant conjecture about whether Australian retailers should adopt the Sainsbury’s model and operate a discount chain, as is the case with Sainsbury’s joint venture with Netto¹⁴. Although there are benefits of this, such as smaller store footprints, lower operating costs and opening up a new segment of the market, it also means that retailers risk cannibalising their current store network and indicates that they cannot compete using their existing operating model.

Execute a strong value strategy

Customers are seeking value and now accept and indeed prefer private label products. This is evidenced in the rise of ALDI’s market share and the number of private label products that can be found on Australian supermarket shelves in general. By ensuring a clearly tiered good, better, best offering for customers, there are options across various price points to meet customers’ needs. Moreover, as many of these products are at consistently low prices, they engender customer trust of pricing and therefore encourage repeat purchase. By employing a clear value proposition through private label and stable low prices on branded items, supermarkets are able to actively execute their own value strategy to win back or gain new customers.

Ensure the right product is at the right price in the right place

Availability of products through efficient supply chain processes is another way to ensure customer satisfaction by having the right product at the right price in the right place. This in part, can be improved through the creation of long-term supplier partnerships where the symbiotic nature of the relationship can benefit and create value for both parties, let alone the customer who is able to purchase the product when they wish to do so. In addition, by listening to and acting upon customer feedback, it is possible to develop a more tailored offer, such as clustered stores that offer localised ranging in response to customer demand. This in turn can foster loyalty and repeat purchase. Due to the standardised nature of discount retailing, this can be difficult to deploy and therefore acts as a competitive advantage for traditional retailers.

Differentiate through improving the customer shopping experience

Although price is a key factor for customers, their shopping experience remains a very important part of their interaction with grocery and fashion retailers. Therefore it is of utmost importance that team members are adequately trained on how to address customer queries and to create a pleasant shopping experience with great service across all customer interactions. Retailers can improve the shopping environment by reducing wait times through the provision of self-checkouts and increasing the number of outlets where online shopping can be collected as well as home delivery options. In the US, Macy’s has implemented ‘Buy Online Pick-up In Store’¹⁵ as a way to offer customers convenience and their ‘omnichannel’¹⁶ strategy enables more than 650 stores to ship direct to customers through improved store fulfillment. Macy’s strategy is clearly succeeding with double-digit growth on earnings per share for the past five years¹⁷. Customer experience is the differentiating factor that discounters find hard to emulate given their cost base must be lower in order to invest in prices, therefore it is an effective method in order to retain market share.

Moreover, through exclusivity of ranging and celebration of new products, anticipation and excitement (as well as increased foot traffic) can be created for customers and team members alike. This can be done through weekly catalogue specials and radio and television commercials. For example, ALDI’s ‘Special Buys’ are only available on Wednesdays and Saturdays and while stock lasts, which enables a sense of urgency for customers to get into store to secure the latest ski gear or electronics at market-leading prices. Delivering true value relative to the market can lead to a stronger value proposition and influence shopper behaviour.

Make your strategy widely known and accepted

In terms of communicating value and therefore facing into the challenge of discount retailing, it is important to clearly stand for value. At the end of the day, perception is reality. It is necessary to ensure that any pricing strategy is widely communicated and importantly, accepted by customers. Great examples of retailers who know what they stand for are McDonald’s and Kmart. Both of which have executed value strategies that are centred on a high volume, low-margin strategy. Customers recognise this. They know where to go for a cheeseburger, just as they know where to find brightly coloured, on-trend kitchenware at cost-effective prices.

Emerging market trends – further challenges for traditional retailers

As has already been felt across the Australian retail industry, the plethora of information and choice available to customers is changing the role of retailers. With the advent of smart phones and online shopping, it is easier than ever to compare prices and shop online. Hunting for bargains has become a game, where shoppers’ successes are rapidly communicated through social media. Moreover, websites such as Cuzin.com offer consumers the ability to “find and buy anything from anywhere in the world¹⁸,” without leaving the comfort of their home.

Given these trends, it is paramount that retailers accept and engage online trends by introducing technology to make customers’ shopping experience an easy and pleasant one. Technology also represents a great opportunity to differentiate from competitors and increasingly discounters are utilising this space, such as Kogan.com which offers discounted electronics and pantry items¹⁹.

Conclusion

In conclusion, this essay has demonstrated that traditional Australian retailers find themselves in an increasingly competitive market. Market share is moving from these players to discounters and specialty stores. In order to survive and thrive, grocery and fashion retailers need to be proactive, get the basics right, execute clear value strategies and ensure availability. This should be clearly articulated to customers through active management of price perception and creation of a pleasant shopping environment, as ultimately customers vote with their wallets. Finally, in a world being shaped by technological changes, retailers should invest in online offerings and improved collection points.

References

1. ABS, ’6202.0 – Labour Force, Australia, Jan 2015’, last accessed 15/2/15, www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0.

2. IBISWorld, September 2014 ‘Supermarkets and Grocery Stores in Australia’.

3. Ibid.

4. ALDI, ‘The ALDI Story’ last accessed 27/2/15, corporate.aldi.com.au/en/about-aldi/.

5. UBS, ’Australian Supermarkets. Becoming negative on Australian Supermarkets. EPS forecasts cut. WOW downgraded to sell’. 18/11/15

6. Mitchell, S; 2014, ‘Move Over ALDI, more discount supermarkets could be on the way’, Sydney Morning Herald, 16/7/14, www.smh.com.au/business/retail/move-over-aldi-more-discount-supermarkets-could-be-on-the-way-20140716-ztoiz.html.

7. UBS, ‘Australian Supermarkets. Becoming negative on Australian Supermarkets. EPS forecasts cut. WOW downgraded to sell’. 18/11/15.

8. Mitchell, S; 2015, ‘Woolies faces lowest growth in two decades’, Australian Financial Review, 28/2/15, p. 35.

9. Ahmed, K; 2014 ‘Tesco, what went wrong’, BBC, 22/10/14, www.bbc.com/news/business-29716885.

10. Ibid.

11. IBISWorld, November 2014 ‘Clothing Retailing in Australia’.

12. IBISWorld, November 2014 ‘Department Stores in Australia’.

13. Reuters, ‘RPT-Fitch: French Hypermarkets Fight Back Against Discounters’, 25/4/14, www.reuters.com/article/2014/04/25/fitch-french-hypermarkets-fight-back-aga-idUSFit69604420140425.

14. Butler, S & Farrell, S; 2014 ‘Sainsbury’s does deal with Danish retailer Netto to take on discounters’ The Guardian, 20/6/14, www.theguardian.com/business/2014/jun/20/sainsburys-netto-deal-discount-supermarkets.

15. Macy’s, ‘Improvements in MOM’, last accessed 27/2/15, macysinc.com/macys/m.o.m.-strategies/default.aspx.

16. Ibid

17.  ‘Macy’s 2013 Annual Report’, last accessed 28/2/15, www.macysinc.com/Assets/docs/for-investors/annual-report/2013_ar.pdf.

18. Zuluzny, P; 2014 ’Social shopping network to beat Oz-tax‘ Choice 11/12/14, www.choice.com.au/media-and-news/consumer-news/news/social-shopping-network-cuzin-to-beat-australia-tax.aspx.

19. Kogan.com, last accessed 27/02/15 https://www.kogan.com/au/shop/pantry/.