Get Ready for a Food Fight

Have you ever been to Coles late in the evening? Right after people rushing around after work trying to figure out what to make for dinner have left?

It’s the time that the Coles shelve stocker army comes out. And watching them makes you realise how much manpower it takes to keep the overloaded shelves full. There are at least 2–3 employees per aisle…working away.

Go to Aldi at the same time, and the aisles are deserted. You may see one employee, at most, roaming the store.

And this is one of the reasons why Aldi has disrupted the Australian supermarket industry. They keep things simple.

According to a research by Morgan Stanley, Aldi employs an average of 24 employees per store. Coles [ASX:WES] and Woolies [ASX:WOW] employ a whopping 110–120.

How does Aldi keep employee numbers to a minimum?

They don’t really have shelves. Stock is displayed in pallets, or inside stacked boxes. All they need to do is rip the front of the box open and they are ready to go.

There are no shopping baskets; to get a trolley you need to insert a coin, which you get back once you return the trolley. So they don’t need an employee to gather trolleys or stand at the entrance handing out baskets.

They have a smaller, more efficient operating model.

They sell fewer brands than Coles or Woolies. These brands are quality, cheap alternatives to specific brands.

Their stores are smaller, which means less rent.

There is no nice warm feeling when you enter Aldi. It looks like a warehouse. And that is exactly what they want it to be. A bargain store.

Aldi’s main focus is not on customer experience but on keeping prices low.

In the middle, usually in disarray, are the weekly special buys. They are big discount items that Aldi takes from suppliers’ excess inventories.

It is with these weekly special buys and cheap cleaning products that they get people in the store. Soon enough, they gradually increase purchases after they see that the quality and price of products is good.

Aldi currently holds 12.5% of the market share compared to Woolies who has 37.5% and Coles 32.5%. But Aldi also has half the amount of stores they have.

And they will be soon getting a larger share of the market. As they plan to expand throughout Australia, Morgan Stanley estimates that Aldi will reach 15 billion in sales in 2020.

One difference from Coles and Woolies is that Aldi does not provide online delivery.

Does it need to?

All Australian supermarket providers seem to lag behind other international supermarkets in online delivery. Coles’ and Woolies’ online sales only amount to 2% each.

A Fairfax Media study found that some prices online were 10% more expensive than instore. Coles justified the extra price to cover expenses from staff picking and packing orders.

But all this may be about to change. Amazon Fresh, which provides free same-day delivery of fresh groceries and local products, just announced that it is looking to enter the Australian market next year.

So if a giant like Amazon gets into the online delivery market, all three players may have to step up their online game.

While Aldi fights to win market share, Coles and Woolies are trying to retain theirs. So far, they have been battling Aldi’s advances by lowering prices.

But even with big discounts, it is not a war they can win. A study by Choice confirmed that Aldi was still the cheapest of all three supermarkets.

Without an increase in efficiency, it will be hard for the supermarket giants to keep prices low in the long run.

Woolies and Coles should be competing on a different level, by giving priority and highlighting their compromise and quality to Australian farmers and products. By slashing prices, they are only hurting their profits and their suppliers — as recent milk scandals have shown.

In the most recent price war saga, Coles and Woolies lowered lamb prices. Just during the time of the year where lamb supply runs low and prices tend to be high.

And even though Coles and Woolies have announced they will absorb the price cost, suppliers are still worried it will affect their business.

And there is more trouble on the horizon.

Aldi may be winning the supermarket war so far — but it won’t last.

Lidl, the fourth largest retailer in the world, is gearing up to enter the Australian market.

The German supermarket chain has a very similar business model to Aldi. And they will spur competition from all three supermarkets, especially Aldi. So prepare for more price wars.

Will the entrance of another big discounter push suppliers to new limits?

Only time will tell. But what is clear is that this competition will be good for consumers’ pockets.


Selva Freigedo,
For Markets and Money

PS: Selva recently joined the Port Phillip Publishing team as our macroeconomic analyst. She works closely with Markets and Money editor Vern Gowdie on his advisory service, The Gowdie Letter.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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