Sep 19 2018
Supermarket Update Q3 2018: IBISWorld reveals the new wave of threats looming over Coles and Woolworths
The supermarket industry is on the threshold of a fresh wave of competition. The major players, Coles and Woolworths, are girding themselves for a fresh set of competitive threats on all sides, in an industry that, for well over a decade, has been dominated by a seemingly unassailable duopoly. Australia’s largest industry research company, IBISWorld, has explored these latest threats the pair will likely face, and predicts that new players, price wars and the Food & Grocery Code Review will not only loom over Coles and Woolworths, but also shake up the entire industry as a whole.
According to IBISWorld, Aldi’s success has been surprising, but also limited. The company has successfully targeted a specific section of the Australian market that values price over anything else, including product range and customer service.
The focus on price has seen the company own a 9.0% market share over the past five years, with compound annual growth in the double digits. While this has been an astonishing success for a new entrant, Aldi’s focus on a specific subset of consumers will likely limit its ultimate growth potential.
“There are some signs that new Aldi stores are already creating market share cannibalisation issues for the company, and there are concerns about its ability to continue its streak of strong growth over the next five years unless it can appeal to a wider range of shoppers. Nevertheless, the impact of Aldi is already irreversible,” said Senior Industry Analyst, Andrew Ledovskikh.
“Not only is the company likely to continue to maintain a significant market share in the Australian market for years to come, it has also signaled to multinational operators around the world that it is possible to break into the Australian market and take on the big domestic players,” said Mr. Ledovskikh.
This message has been received by multinational operators, and the pending entry of European ‘hypermarket’ store chain, Kaufland, is possibly just one symptom of the changing shape and perception of the Australian supermarket industry, according to IBISWorld.
IBISWorld analysts believe the entry of Kaufland presents a different challenge for local operators to that of Aldi. Kaufland has announced plans to compete heavily on price, and is likely to present a threat to not only Coles and Woolworths, but also Aldi. However, unlike Aldi, Kaufland offers a point of differentiation for consumers other than price.
“Kaufland’s ‘hypermarkets’ are expected to offer more than double the product range of the traditional supermarkets, and offer not only groceries, but traditional department store products such as homewares and outdoor equipment. This will mean Kaufland will not only compete on price, but also in terms of convenience. Convenience-based competition can be very dangerous for more specialized operators,” said Mr. Ledovskikh.
“The decline of major toy retailers, such as Toys ‘R’ Us, over the past five years can be, largely, attributed to competition from department stores, which allow consumers to shop for clothing, stationery, homewares and toys all at once. Woolworths and Coles will have to compete with a more convenient shopping experience for time poor consumers, offered by Kaufland. This market has the potential to be substantially larger than the one targeted by Aldi, and this is likely to worry Coles and Woolworths,” said Mr. Ledovskikh.
Costco and Amazon
Meanwhile, Coles and Woolworths will have to contend with a potential entry from Amazon Fresh, and the expansion of the Costco store chain and its launch of a significant online offering.
“The potential entry of Amazon Fresh has been well documented, and it’s fair to say that the big two supermarkets are concerned about its potential impact on their business models. Both companies have increased their spending on data analytics and upgrading their loyalty programs over the past two years. Indeed, the new Flybuys Max scheme steals more than a few pages from Amazon’s grocery business model,” said Mr. Ledovskikh.
“Both companies have also invested in pilot programs, such as the Woolworths 3.0 store and the Woolworths Metro store that, aim to create a differentiated shopping experience designed to increase the convenience of its online offering and defending its market share among young urban professionals, who are most at risk of being drawn into Amazon Fresh’s orbit,” said Mr. Ledovskikh.
Costco’s entry into the online grocery market is also a potential threat, with the company constructing a $78 million distribution centre in Sydney. Costco will be able to couple the convenience of online shopping with prices that are often 25-30% cheaper than their competitors.
“Costco’s well-established membership program also encourages strong customer loyalty, influencing customers to stick with them year-round to maximise the value of their membership fees,” said Mr. Ledovskikh.
“Woolworths and Coles are not taking these threats lightly, however adapting is costly, and the companies are likely to see rising capital costs as they work to refurbish existing stores, launch new concept stores and continue to build their data analytics departments,” said Mr. Ledovskikh.
Innovation is key to a successful business, particularly one with rising competition, but as with all ventures, there will likely be a few costly missteps that are likely to weigh down profit margins for these companies over the next five years, according to IBISWorld’s predictions.
There have been indications over the past six months that the worst of the price wars, which started in 2011, are over. Coles and Woolworths have looked at other avenues of competition and gradually started to adjust their consumer pitches away from prices. However, considering the rising competition in the broader industry, IBISWorld sees this a short to medium-term armistice rather than a full on peace treaty between the two rivals.
“Coles and Woolworths are indicating a reduced focus on rampant discounting, building up profit margins and cash for investments into innovation. This is key to testing and deploying new concepts that will help the companies differentiate themselves from online competitors such as Amazon and Costco. However, considering the competitive forces that are likely to be stacked against them over the next five years, it’s not hard to imagine that there will be a new price war within the next few years,” said Mr. Ledovskikh.
Food and Grocery Code Review
“Considering the rising competition in the Supermarkets and Grocery Stores industry, suppliers may be more vulnerable than ever to unethical behavior on the part of supermarkets,” said Mr. Ledovskikh.
Coles and Woolworths have had multiple run-ins with ACCC concerning their dealings with suppliers over the past decade. In 2014-15, the ACCC penalised Coles over their 2011 ARC program, which coerced suppliers into providing rebates.
Woolworths was accused of unconscionable conduct in 2015 in reference to its pressuring of suppliers to provide payments to help the company close gaps in its profit margins. Although the company was found to have not broken consumer law, many remained unconvinced that suppliers had not been unduly imposed upon.
In response to concerns about the treatment of suppliers, the Food and Grocery Code of Conduct was established in 2015. The purpose of the Code was to protect suppliers in their dealings with supermarkets. However, the Code is voluntary and not everyone signed up. Metcash, for example, has refused.
In 2018, a review of the Code was instigated. Draft recommendations include independent adjudicators employed by the supermarkets to monitor dealings with suppliers, banning retrospective changes to supply agreements and banning a recently reported practice whereby the supermarkets required suppliers to show their financials to justify price increases.
Graeme Samuel, the independent expert designated to oversee the review, has also suggested that operators like Metcash be forced to either sign on to the revised code of conduct, or have a mandatory code imposed upon them.
“The review is ongoing, and it is not clear which of these provisions will make it into the final draft. However, it is clear that a tougher code of conduct is necessary. The entry of Kaufland and Amazon, as well as the expansion of Costco, will all work to intensify competition in the industry, making a new price war more likely over the next five years. Against this backdrop, suppliers will need more protection than ever,” said Mr. Ledovskikh.
IBISWorld Industry Reports used in this release:
- Supermarkets and Grocery Stores
- Online Grocery Sales
- Woolworths Group Limited (WOW)
- Wesfarmers Limited (WES)
- ALDI Stores Supermarkets Pty Ltd
- Costco Wholesale Australia Pty Ltd
For more information, to obtain industry reports, or to speak with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: (03) 9906 3641 Mobile: 0422 773 995