German supermarket Kaufland made the shock announcement today that it will pull out of the Australian market, offering little explanation but leaving 200 employees in the lurch.
Related story: What Kaufland stores would have looked like
The company was set to open 20 stores, with 14 in Victoria alone, and had invested more than $450 million in its Australian distribution plan. The Victorian government had also expected Kaufland’s investment to create between 1,500 and 2,400 jobs.
However, it announced on Wednesday that it would instead focus on its European markets, prompting Coles’ and Woolworths’ shares to both jump more than 3 per cent by close of trade.
In a statement, the acting CEO of Kaufland International, Frank Schumann said the decision was “not easy”.
“We always felt welcome in Australia. We would like to thank our employees and we apologise for the disruption this decision will cause.”
Kaufland has 1,300 stores across Europe, with its Australian investment representing a small fraction of its overall network.
However, the shock departure leaves one big question: why?
Retail expert and founder of consultancy firm Retail Doctor Brian Walker told Yahoo Finance it was likely a combination of factors that pushed Kaufland to retreat to the European market.
“What could be said about Kaufland’s expansion into Australia was perhaps ill-timed, given the global sector’s challenges,” Walker said.
These include online shopping posing a bigger challenge for physical retailers, in addition to increased pressure to keep prices low.
“All of those factors together mean it’s a more intense environment globally for this sector than it was two years ago.”
Very ‘unusual’ move
Queensland University of Technology (QUT) retail expert Professor Gary Mortimer said the decision was “very unusual”, given Kaufland’s sizeable investment and time spent consulting with local governments.
Mortimer put it down to the viability of the Australian food and grocery market, describing the sector as one with “very slow growth and increasing costs”.
“There's also the challenge of those increasing costs of fresh produce and meat, and that increase over the last couple of years is a direct result of drought and more recently bushfires.”
Another major obstacle for Kaufland to overcome would be the Coles and Woolworths stronghold in the Australian market. Through long-term contracts with suppliers of fresh produce, meat and dairy the supermarket duopoly makes it difficult for other players to get a foot-hold in the Australian market.
“To enter a marketplace without any of those operational mechanisms in place is very difficult,” Mortimer said.
The timeline for Kaufland to deliver a return on investment may have simply stretched too far, he added.
What does it mean for grocery prices?
Aldi and Metcash’s Foodland stores in South Australia significantly challenged Coles and Woolworths’ stronghold, but the chance of even cheaper groceries through Kaufland’s entrance has died with its departure.
“Any hopes of greater competition and lower prices have come to a close as Kaufland has made the decision to exit the market,” Mortimer said.
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