Aldi turns up the heat on Coles and Woolworths

Aldi's Australian managing director, Tom Daunt, was being a touch disingenuous yesterday when he insisted that the low-cost supermarket chain was not a competitive threat to the big boys, Coles and Woolworths.

Yes, the Aldi small-store, low-product range model is not going to replace Coles and Woolworths, who offer their customers as many as 30,000 items with much more in-store customer service from bakeries to upmarket delicatessens and online shopping.

Daunt points out that Aldi's local turnover of $6 billion is only about a third the size of Coles' supermarket business and a quarter of market leader Woolworths.

He argues Aldi's potential market share could go up from about 11 per cent on the eastern seaboard to a maximum of about 15 per cent -- but plateau from then on.

But the existence of the German player, which is carving out a serious niche in the Australian market after 14 years on the ground here, clearly adds to competitive pressure on the big boys.

Someone going to Aldi to fill up their weekly shopping trolley (an exercise which Daunt claims will save them 30 per cent), may not go to Coles or Woolworths that week.

But the reality is that the arrival of Aldi has brought much needed competition into the food and grocery retail market still dominated by the big two players with their ‘big box' category-killer supermarket model.

In the British supermarket business five operators make up the same 70 per cent market share. In the US the market is much more diverse.

The expansion of Coles and Woolworths into petrol and liquor also gives them a massive hold on the Australian retail dollar.

Years ago, the old Franklins was seen as the low-cost competitor to the big two. But its successor, Metcash, which supplies some 2,400 independent stores operating brands such as IGA, Foodland and Foodworks, has never quite fulfilled its early promise of being a major third force in the market.

In contrast, Aldi is able to run a very efficient, low-cost business precisely because its model is standardised and disciplined.

As Daunt revealed yesterday, the group has been profitable in Australia for several years and is ploughing all of its earnings back into expanding its local footprint.

Broker Morgan Stanley argues Aldi has a ‘critical mass' in the Australian market which can give it an edge with both suppliers and customers. In its latest outlook for the retail sector, JP Morgan cites the continued growth of Aldi as a “challenge for the industry”.

“While this may be a factor spurring greater value focus at Coles, we suggest Aldi is gaining share and all are at risk,” its analysts say. “The private label offer of Woolworths, with its focus on basic products under Home Brand, is poorly positioned to manage the growth of Aldi whose products are increasingly compared to third party brands.”

Aldi also has an unusual model of combining its regular food and grocery offerings with special deals two times a week.

About a million Australians receive emails about the special deals each Wednesday and Saturday on a ‘while stocks last' basis.

While there are no official barriers to entry for new supermarket operators in Australia, the reality is acquiring the sites to pitch to the country's highly urbanised population, provides a good physical ‘moat' for existing players.

Aldi's smaller-store format could be even more attractive if overseas trends are followed here.

In Britain and Europe, there is a move away from the big-box and hypermarket-sized supermarkets. Smaller-store formats are able to service the customers of the future who are increasingly opting to live much closer to the cities, in apartments rather than houses. Woolworths recently opened a smaller-format store in Sydney's Surry Hills. Its opening comes as the once shabby inner-city area, which still features its share of housing commission accommodation and brothels, has moved upmarket.

In this case, the new Woolworths is providing serious competition to the proliferation of convenience stores in the area.

Aldi's format, which is based on sales area of about 1,000 square metres, is about a third of the area of many traditional supermarkets with their massive car parks, but they make much more sense in an increasingly urbanised Australia.

Aldi has provided much-needed competition in the Australian supermarket industry at a time when Australian consumers are more cost conscious than they have been for many years.

Its entry has been healthy for Australia's highly concentrated food and grocery market and its expansion plans will only keep up the pressure.

This article first appeared in The Australian and is reproduced here with permission.