Coles, Woolworths feeling online bite from retailers

Sue Mitchell
May 28, 2014
Australia’s major supermarket chains will soon face the same digital disruption that has carved a swath through discretionary retail sectors such as ­electronics, books and homewares.
The local supermarket duopoly is coming under attack from pure-play online retailers and packaged goods suppliers seeking growth by selling directly to consumers, according to management consultant A. T. Kearney.
A. T. Kearney’s global consumer and retail partner, Michael Brown, says low-cost, pure-play online retailers ­selling products from pet food to health and beauty supplies, and packaged goods companies selling toilet paper, nappies and cleaning products direct to consumers will siphon sales from the major chains overseas, undermining their business models.
Unless Woolworths and Coles ­maintain their dominance over online grocery sales, they risk losing volumes to smaller rivals and becoming less ­relevant to consumers.
“What Woolworths and Coles offer is the convenience of the one-stop shop, but if online players start to siphon off pet care, health and beauty and bulky goods like toilet paper, the more that gets siphoned off, the one-stop shop is not as important,” Mr Brown told The Australian Financial Review.
“And if I didn’t need to do a one-stop shop, Woolworths and Coles might not be the best place for my fresh ­produce or fresh meat,” he said.
Online grocery sales represent only 1 per cent or 2 per cent of the Australian market, compared with 8 per cent in the US and 12 per cent in Britain.
But A. T. Kearney expects online grocery sales to reach 20 per cent and start disrupting the market when they reach 12 per cent.
Australian suppliers are two to three years behind their overseas peers in e-commerce and omni-channel ­marketing, but A. T. Kearney says they can lift sales by 3 per cent to 5 per cent by selling directly to shoppers and better engaging with consumers through multiple channels and social media.
Mr Brown, who is speaking to sup­pliers at the Australian Food and Grocery Council’s annual Highlands conference on the Gold Coast this week, points to the collapse of duopolies in electronics, books, homewares and toys in the US in recent years.
“Where there has been significant online penetration, we’ve lost one of the two players in the duopoly because the online players, whether Amazon or others, have taken that volume, making it impossible for two to be able to service the market in the way they did,” Mr Brown said.
“If we look forward to what could happen in grocery and fast-moving consumer goods, [the internet] is opening up the door for very specialised niche players to come into certain segments and start to siphon off volume which could, eventually, lead to again the inability of the duopoly to compete and be able to run their store networks the way they do today,” he said.
“The threat to Coles and Woolworths is if they’re not the leaders in the omni-channel space, enabling the ­customer to shop where and when she wants and how she wants, you have this opportunity for volume to be ­transferred to these new entrants.”
For example, US online pet care business Pet Flow has grown sales from zero to $US1 billion ($1.08 billion) in five years by delivering big bags of dog food and expensive flea and tick treatments to consumers on a regular monthly basis.
Amazon’s Vine marketing tool is now being used to sell specialty foods directly to consumers with specific health needs such as gluten intolerance and peanut allergies – reducing their need to search for suitable products in supermarkets – while online grocer Ocado is taking significant market share from Tesco and Asda by targeting consumers in London.
Dollar Shave Club, which sells razors through an online subscription model in Australia and the US, is taking sales from major suppliers such as Gillette and depriving retailers of one of the most expensive items in a grocery store.
“Every dollar they siphon out, especially in higher-margin products like razors, you’re siphoning out some of those profits,” Mr Brown said.
“They may not disrupt the whole store but enough niche players spread around could begin to disrupt the profit model.”
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