Sue Mitchell
September 6, 2017
AFR
Australia’s’ “cosy” grocery duopoly is no longer cosy and will disappear altogether as discounter Aldi lifts its market share to 15 per cent.
New store formats with a focus on fresh food and new greenfield stores are expected to turbocharge Aldi’s sales over the next nine or 10 years, according to a report by Morgan Stanley.
Morgan Stanley analyst Tom Kierath expects Aldi’s sales to rise from an estimated $8.1 billion in 2017 to $18.7 billion by 2024, and reach $20.5 billion by 2026, lifting its national market share from 7.8 per cent to 15 per cent.
Mr Kierath said new-format stores that devoted twice as much space to fresh foods including fruit, vegetables and freshly baked bread were proving to be a “game changer” for Aldi, which is better known for its cheap packaged groceries and general merchandise.
Citing research by industry expert Paul Foley, Mr Kierath said foot traffic at about 50 stores refurbished to date had risen 7 per cent or 8 per cent, and basket spending had risen by 6 to 7 per cent, implying an overall sales increase of 13 to 15 per cent.
“Margins tend to be higher in fresh food products, which means the success of the refurbishment gives Aldi more dollars to invest in price,” said Mr Kierath.
“We think life gets more difficult for the supermarkets post the refurbs.”
Scope for more stores
Mr Kierath estimates the store refurbishments will boost Aldi’s market share by an additional 25 to 30 basis points a year to 2020, while new stores would take total share gains to 110 basis points a year.
When the German-based discounter arrived in Australia in 2000 it originally had ambitions to open 600 stores. It currently has 483 stores – mostly on the eastern seaboard – and Mr Kierath sees scope for at least 800 stores in the next seven years.
“It only needs another four warehouses from the current six to support this number of stores,” he said.
Morgan Stanley said the price gap between Aldi and Woolworths and Coles was widening again, after contracting following Woolworths’ $1 billion investment into reducing grocery prices, and that this would also fuel sales growth.
Mr Kierath said the average price gap between Aldi and Coles/Woolworths now stood at 18 per cent, compared with 14 per cent post Woolworths’ price investment and 22 per cent before the investment.
When the price gap fell to 14 per cent Aldi’s share gains slowed (and in some regions fell), but as the price gap expanded Aldi’s share gains accelerated.
“To us it seems likely that Coles moves again on price to re-accelerate the top line,” Mr Kierath said.
Coles target cost savings
Coles invested about $200 million net of cost savings into price reductions and service in the June-half – three times its investment in the December-half and in 2016 – in an attempt to reinvigorate same-store sales growth.
Coles managing director John Durkan has forecast further investment in the current half but expects same-store sales to start to recover in the June-half – depending on market conditions. Earnings are also likely to rise in the June-half, helped by cost savings, after falling 13.5 per cent in 2017.
If Coles invests more in price, Woolworths will likely do the same to ensure its prices remain competitive, potentially triggering a full-blown price war.
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