Australian FMCG suppliers could face even more cost-cutting in the coming months, as the price gap between German supermarket giant Aldi and the big-two local players, Coles and Woolworths, widens, according to Morgan Stanley analysts.
There is now an 18 per cent price gap between the major supermarkets and Aldi, up from 14 per cent two years ago, a new Morgan Stanley report has found.
The increased differential follows a period of heavy investment by Aldi, which dropped prices by 1.6 per cent year-on-year in August alone. With Morgan Stanley estimating that 75 per cent of Australians are now able to shop at an Aldi or Costco, analysts are predicting further price drops are to come.
“Aldi effectively sets the supermarkets pricing umbrella, we think Coles and Woolworths will need to continue to incrementally invest in price,” the report said.
Woolworths currently holds momentum in the market after recording strong food sales in Q417, grabbing market share back from Coles, which has been struggling to keep up in recent months. Morgan Stanley are confident that increased investment from Coles can right the ship though, while they said the market has been a little bit too optimistic about Woolworths’ prospects.
The deflationary trend is “worrisome” news for suppliers, according to the Australian Food and Grocery Council’s new CEO, Tanya Barden, who maintains that price pressures are combining with macro factors such as power prices to create headaches for the FMCG industry.
“The current high cost and retail price deflationary environment is putting a lot of pressure on margins in food and in food and grocery manufacturing,” she said.
Morgan Stanley highlighted the appeal of cheaper groceries to customers amid flat wage growth and cost inflation pressures from power prices among other factors, which will likely provide an edge to Aldi in the coming year.
Amazon’s entry into the market is also set to cause headwinds for the major supermarkets, and could be an opportunity for the FMCG community, as Barden has noted. But while Morgan Stanley analysts believe Amazon will disrupt the local majors, they don’t believe Aldi will suffer the same headwinds, saying that “Aldi will continue to succeed”.