Supermarkets look to life after the price war

STUART O’NEILL
June 5, 2018
The Australian

Australia’s grocery giants have been fighting a no-holds-barred price war for years but the situation is coming to a head. With dwindling margins and the arrival of heavyweight global rivals, keen minds are looking for alternatives to mutual destruction. 

Within the next year and a half, Australian consumers will have five major grocery retail brands to choose from. German hypermarket, Kaufland, and Amazon’s grocery arm, Amazon Fresh are both set for launch.

It remains to be seen whether the market is big enough to support them all but it’s clear that retailers can’t continue the limbo dance of forever lowering prices. The demerger of Coles from the Wesfarmers group may be a sign of things to come, with the parent company distancing itself from the challenges in the FMCG sector and taking advantage of profits while they’re still there to be made.

Global competition is forcing Australian retailers to clearly demonstrate how they’re adding value to people’s everyday lives. Consumers stand to benefit significantly from this slow dawning realisation if retailers get it right. In Coles’ case, its demerger should give it more freedom to focus on how it will react to this challenge.

We’ve seen this play out before. Unlike in the one-size-fits-all Australian market, UK retailers have segmented into high-end, mid-range and discount. Marks and Spencer and Waitrose are selling ready-made meals that offer a genuine alternative to cooking for time-poor families — an increasingly popular convenience that’s yet to really catch on here.

Woolworths is leading the charge with its foray into premium meal kits, which include all of the ingredients needed to make certain dishes. By moving in this direction, it’s entering white space with the potential to capture a share of the booming takeaway market. This grew 30 per cent to $1.5 billion in 2017, according to Morgan Stanley.

Its competitors have already felt an impact as Woolworths moves into this niche. At the start of May Woolworths announced a 4 per cent gain in comparable sales over competitors, with growth to $9.57 billion for comparable food sales for the first quarter of 2018.

This shift in focus doesn’t mean we won’t see further discounting. Aldi has propelled itself to a 13.3 per cent market share after convincing Australian consumers there’s still room to get new deals on the weekly shop.

Digitising the grocery shop

Retailers need to digitise the shopping experience to interact with consumers on their terms. This isn’t just about the online shopping experience — it’s about getting to know consumers a little better so they get the most out of online and offline shopping. Supermarket brands have a significant opportunity to increase customer loyalty by simplifying the entire customer journey with technology.

This could mean offering consumers an app that pre-loads their weekly staples, or the choice to collect a basket that’s already been filled before you get to the store. Maybe some customers will just want to select the fresh produce — meat, veggies and dairy — because they don’t trust supermarket staff to pick out the best.

Or better yet, a click-and-collect option that allows customers to collect the weekly shop from a local Caltex or Australia Post office. Copying the German model, shoppers could get their shopping at a drive-through. Click and collect has driven bumper sales for the UK’s John Lewis Partnership, with two-thirds of its Christmas shoppers opting to use the service last year.

Australia has specific challenges when it comes to adding more digital value. Geographic scale limits how far some retailers may be willing to extend a click-and-collect option. This could see the emergence of strategic niches that take geography into account, with IGA in a great spot to be a key player.

Either way, marketing and automaton tools will help provide relevant offers based on analysis of previous behaviour. The devil will definitely be in the detail. Retailers need to choose a niche, apply technology to learn about the customers in that niche and use different channels to make their lives easier. There’s a lot to learn but consumer expectation and increased competition mean the only alternative is a race to the bottom that nobody wants to win.

Stuart O’Neill is Head of SAP Hybris ANZ