Jul 23 2019
Since 2014-15, strong price-based competition has made price discounting the typical strategy for most supermarket operators. Major industry players have used strategies based on lowering prices to hold or boost market share. However, years of discounting have resulted in untenably low margins, which has led major players to seek alternate strategies to boost margins.
Product prices have risen over the past two years, and are expected to continue rising in the current year as industry competition remains lower than that reported over most of the past decade. However, revenue growth for the Supermarket and Grocery Stores industry is anticipated to be subdued in 2019-20, with revenue rising by a modest 1.0%. While underlying demand for staple items is forecast to support revenue growth over the next five years, many consumers will likely opt for cheaper goods, such as private-label brands, as tough economic conditions constrain household expenditure.
Coles and Woolworths have shifted their strategic focus from increasing market share to boosting profit margins over the past two years. This strategic change is most apparent in the companies’ respective advertising campaigns.
“Advertisements now entice consumers with discounts less frequently and instead focus on promoting core brand values. For example, Woolworths has revamped its ‘Fresh Food People’ campaign, leveraging the brand’s association with quality produce. In June 2019, Coles announced a refreshed strategic direction with three core pillars, none of which reference winning market share or lowering prices,” said IBISWorld Senior Industry Analyst, Tom Youl.
Strategies put in place to retain market share have moved away from discounting and towards loyalty programs, including Woolworths Rewards and Coles’ flybuys. In addition, loyalty campaigns involving collectables, notably, Coles’ Little Shop campaign, have become more prevalent over the past two years. These strategy changes underline the industry’s shift from chasing revenue growth to increasing profit margins.
ALDI’s marketing and product mix further exemplify this shift in the industry’s landscape. ALDI’s business model formerly involved offering a limited range of branded products and a wide range of private-label products, and little to no marketing. This strategy allowed ALDI to pass on savings to consumers through lower prices, enabling the company to undercut its competitors.
“Notably, ALDI has increased its advertising expenditure over the past two years, promoting product quality and range, rather than low prices. Coles and Woolworths have reported similar changes to their strategies over the past five years,” said Mr Youl.
Coles and Woolworths have also been streamlining their corporate structures over the past five years to focus on core food operations:
- In July 2019, Woolworths announced its intention to combine its drinks and hospitality businesses, Endeavour Drinks and ALH Group, into a single entity. Following the combination, Woolworths intends to separate the business through a demerger, which is expected to take place in calendar year 2020.
- Coles completed a landmark demerger from Wesfarmers in July 2018, although the primary rationale for the split was to free up cash for Wesfarmers’ remaining divisions, rather than to make Coles more efficient.
Coles and Woolworths are aiming to become more agile and streamlined in a faster-paced retail sector, and effectively meet ever-changing consumer demands.
Major industry operators have boosted their digital capabilities to better understand consumer trends and meet buyer expectations. Loyalty programs play an important part in this transition, with detailed consumer data feeding into more sophisticated analytics systems.
“Woolworths has been growing its WooliesX division, which uses data to improve its digital offerings, such as mobile apps and scan-and-go shopping. In March 2019, Coles announced a partnership with Ocado, an online grocery website that specialises in optimising online shopping experiences, packing technology and home delivery. Online grocery sales have become increasingly important for industry operators over the past five years,” said Mr Youl.
Industry operators are also aiming to compete more effectively against foodservice firms, as consumers become increasingly time-poor and attempt to spend less time on food preparation. As a result, pre-prepared and semi-prepared meals are becoming an increasingly prominent feature at supermarkets.
“These meals and meal kits typically attract higher margins than standard produce, making them an attractive venture for industry operators. Similarly, supermarkets have sought to boost margins by increasing private-label product ranges, which typically have higher margins than branded goods,” said Mr Youl.
IBISWorld reports used to develop this release:
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