Coles, Woolworths in for shake-up

aldiWoolworths and Coles are facing a number of headwinds that are undermining the historically stable structure of Australia’s grocery retail market, with the emergence of German discounter, Aldi, being the key driver, according to Moody’s Investors Service.

“The big two, which together control over 60 per cent of the market, according to our estimates, are being challenged by the aggressive expansion of Aldi, whose market share on the populous east coast of Australia exceeds 11 per cent, as well as the potential entry of new market players,” said Ian Chitterer, a Moody’s VP and senior analyst.

“Focusing on a strategy of offering high quality private-label products to low to middle income consumers, Aldi, which first emerged in Australia in 2001, has gained acceptance among consumers, and plans to expand rapidly in South and Western Australia where it is not currently operating,” said Chitterer.

Moody’s conclusions were contained in a new report, “Market Leaders Woolworths and Coles Face Rising Structural Headwinds”, and which was co-authored by Chitterer and Shawn Xiong, a Moody’s Associate Analyst.

Looking ahead, Moody’s expects the bulk of Aldi’s gains in market share to now come at the expense of smaller operators, such as Metcash’s IGA supermarkets, and other independent retailers, but Woolworths and Coles will also continue to suffer some loss in market share.

Moody’s also notes media reports that German supermarket chain, Lidl, which operates the same business model as Aldi, is preparing to enter the Australian market.

Meanwhile, David Jones, which operates high end department stores in Australia, has said it plans to reinvigorate its food offering by targeting the profitable premium end of the grocery market.

“Accordingly, while we expect that the scale of David Jones food retail operations, even over the longer term, will be very small in comparison with Woolworths and Coles, it will still lead to further market share losses for the big two. More importantly, it will mean that they will face increased competition at both ends of the socio-economic spectrum, that is from those groups which are price sensitive and those which have higher levels of disposable income,” says Chitterer.

“With this shake up of the strong duopoly structure of Australia’s grocery market, we expect the market share and profit margins of the two incumbents, but Woolworths in particular, to remain under pressure over the next 24 months,” said Chitterer.

Moody’s notes that Woolworths has a higher risk of material decline in its profit margin and it had issued a surprise profit warning on 17 June after its comparable store sales turned negative (-0.7 per cent) for the first time in 12 years.

Over the next two quarters, Moody’s expects Woolworths comparable store sales will remain negative, while Coles comparable store sales will weaken marginally due to the increased competition.

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