Supermarket giants Coles and Woolworths close price gap on Costco

CHRIS KOHLER
March 2, 2017
The Australian

Editor, BusinessNowSydney
@_chriskohler

Costco remains as much as 27 per cent cheaper than Coles and Woolworths, but that price gap is steadily closing as incumbent retail giants begin to tackle the warehouse retailer at its own game — bulk packaging.

In February 2015 a 27-item shop at Woolworths was 37 per cent more expensive than at Costco, according to Morgan Stanley analyst Thomas Kierath, but that discount has fallen to be 24 per cent last month.

“We think part of the industry deflation is the shift to larger pack sizes (in part to combat Costco) which enables the retailer to reduce the cost per unit. For instance, back in February 2015 the best value/largest pack size of washing powder at Woolworths was 1.8kg vs. 4kg today (Costco 9kg),” Mr Kierath said.

Woolworths has invested around $1 billion in lowering prices since Morgan Stanley first starting collecting price comparison data from Costco in February 2015, and Coles is believed to have taken a similarly aggressive approach. With a roughly 13 per cent fall in the overall price difference, analysts say the tactic is working.

But shoppers will notice that the level of discount is considerably varied across the items in store, with household items considerably cheaper and fresh food still the domain of Coles and Woolies.

“Clearly, the type of product that we buy influences the level of discount achieved at Costco — for instance the saving on dishwashing tablets is around 50 per cent, whereas blueberries are 10 per cent more expensive at Costco,” Mr Kierath said. 

Despite the $65 joining fee, Costco still represents a significant saving to Australian shoppers on household items. However market share figures show the retailer is still a long way behind the major players.

Aldi, meanwhile, is making rapid inroads in growing its locations.

A price comparison between Aldi and the major supermarkets is more difficult because of the different brands carried, but industry sources report the price difference on comparable items between Aldi versus Coles and Woolworths is between 18-20 per cent.

Morgan Stanley estimates Costco currently claims around 1 per cent of the Australian supermarket industry and expects that to grow to 1.8 per cent by 2020, Aldi has grown to 7.7 per cent from 4.1 per cent in 2011.

Thomas Kierath says between them, Coles and Woolworths hold around 65 per cent of the Australian supermarket industry, so gains from other players come directly out of their pockets.