- IBISWorld's latest supermarket forecasts intensified competition in the industry.
- A wave of new threats is coming for Coles and Woolworths.
- A supermarket price war is likely over the next five years.
Australia's supermarket industry is bracing for a fresh wave of competition.
Industry research group IBISWorld forecasts that new players, price wars and a review of the Food & Grocery Code are looming over major players Coles and Woolworths.
On the horizon are Kaufland, a German hypermarket chain, and Amazon Fresh, a possible next move for US retail giant Amazon in Australia.
"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," says IBISWorld Senior Industry Analyst Andrew Ledovskikh.
The Australian supermarket sector has been facing increasing competition from overseas discount players. Woolworths latest sales growth was 4.3% but Coles is only reporting 2.1%.
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," says Ledovskikh.
"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 specialised operators."
Ledovskikh says 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 the more convenient shopping experience offered by Kaufland for time poor consumers.
"This market has the potential to be substantially larger than the one targeted by Aldi, and this is likely to worry Coles and Woolworths,” says Ledovskikh.
Coles and Woolworths will also have to contend with a potential entry from Amazon Fresh.
“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," says Ledovskikh.
"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."
Woolworths also has its new 3.0 store and the Woolworths Metro store to create a differentiated shopping experience and to increase the convenience of its online offering among young urban professionals who are most at risk of being drawn into Amazon Fresh’s orbit.
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 gain a 9% market share over the past five years.
“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," says Ledovskikh.
"Nevertheless, the impact of Aldi is already irreversible. 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."
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 25% to 30% cheaper than 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,” says 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."
The peak of the price wars, which started in 2011, appears to have passed.
Coles and Woolworths have looked at other avenues of competition and gradually started to adjust their consumer pitches away from prices. However, IBISWorld sees this a short to medium-term armistice rather than a full-on peace treaty considering rising competition in the broader industry.
“Coles and Woolworths are indicating a reduced focus on rampant discounting, building up profit margins and cash for investments into innovation," says Ledovskikh.
"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."
Food and Grocery Code Review
Coles and Woolworths have had multiple run-ins with the consumer watchdog ACCC over their dealings with suppliers. In 2014-15, the ACCC penalised Coles over pushing suppliers into providing rebates.
Woolworths was accused of unconscionable conduct in 2015 over payments by suppliers to help the supermarket close gaps in its profit margins. The company was found to have not broken consumer law.
The Food and Grocery Code of Conduct was set up in 2015 in response to concerns about the treatment of suppliers. However, the Code is voluntary and Metcash, the operator of IGA, has refused.
This year the code is being reviewed.
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 such as 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," says Ledovskikh.
"However, it is clear that a tougher code of conduct is necessary."