Woolies, Coles steely amid Aldi's rise

Madeleine Heffernan
February 18, 2015
inShare
Aldi Australasia chief executive Tom Daunt sees a clear niche for his chain’s discount format. Photo: Daniel Munoz
Aldi’s rise and rise in Australia has delivered all the right headlines for a company that has long sought to quietly achieve.
But complaints from customers of finding maggots, fingernail and metal in their products has put Aldi – which boasts of “very high quality products at heavily discounted prices” – into the spotlight for the wrong reasons.
Just before its 2001 Australian launch, Aldi marketing manager Julie Allsop said the chain had a “global policy” not to talk to the media. The German discount retailer has continued to seek a low profile: refusing to release its financial accounts, and only slowly beefing up its government relations activities compared with the intense “issues management” undertaken by the big two chains, Woolworths and Coles.
But Aldi is now increasingly engaging with the market and is boosting spending on traditional advertising – to $29 million in the year to January, compared with $68 million for Coles, and $87 million for Woolworths. Aldi did not confirm the ad figures.
Make no mistake, the German discount supermarket is making its presence felt in Australia’s $88 billion food and grocery market, long home to juicy margins. When Wesfarmers was seeking to take over Coles in 2007, Aldi had 150 stores, with a plan to eventually have 500 stores in eastern Australia.
It now has 367 across Australia and is eyeing 15 per cent market share through expansion into Western Australia and South Australia and double-digit store openings each year on the east coast.
But Woolworths and Coles say they will manage.
Richard Goyder, the boss of Coles’ parent company Wesfarmers, said Aldi was a “serious player” and his company “look[ed] forward to taking them on”.
“The move across into the middle of Australia and west, we’ve already accounted for in terms of our future plans. We don’t see the returns being materially changed by that move at all,” he said after the company’s recent results.
“We don’t make excess returns in South Australia and Western Australia, those states are just as competitive as other markets at the moment.”
So is Coles prepared for serious market-share loss?
“We don’t actually think about national market share, we think about how each of stores perform. And we expect our stores to continue to improve their performance and as a consequence maintain a strong position in the market.”
Grant O’Brien, CEO of Woolworths, said Aldi had “grown at a fairly rapid pace” and made a “good offer that obviously resonates with customers”.
“All that makes is for a competitive market and from our point of view we want to make sure that we remain the market-leading food offer in Australia,” he said last month.
Woolworths chief financial officer, David Marr, was more direct: “They’ve rolled out sort of circa 30 stores per year. We understand their model, we understand what it takes to compete against them.”
As Woolworths cuts prices to curb market-share loss in groceries, John Dahlsen’s comments dating back to 2000 spring to mind. Then chairman of Woolworths, he told shareholders almost 15 years ago: “We’re not too worried about Aldi. We’ll match them.”
Aldi now has greater access to land thanks to the removal of restrictive provisions in leases between Woolworths and Coles and shopping centre landlords, and a push by the competition regulator for local councils to take a more “pro-competitive approach” to the development of standalone outlets.
This has led to comments such as this from Scott Dundas, fund manager of Charter Hall Retail REIT, that Aldi was a “viable third anchor” for their shopping centres.
“We see the expanded offerings of three supermarkets as an opportunity to drive real value. Aldi satisfies a niche in our customer base and we will talk to them about rolling out more, where possible.”
Aldi agrees. “We have become a viable anchor for shopping centres. This sentiment has also been reinforced by owners of major shopping centres across the country,” a spokeswoman said.
Justin Dowers, of real estate agents CBRE, said Aldi was “well and truly past their initiation with investors. They see them as secure a tenant as Coles and Woolworths.”
“They traditionally do 10-year leases with CPI increases, whereas Coles and Woolworths will generally do 15-20 year leases with turnover provisions,” he said, referring to giving the landlord access to sales figures.
“It’s definitely clear that having an Aldi next to a Coles or Woolworths supermarket would see that Coles or Woolworths supermarket trade better.”
O’Brien, during Woolworths’ recent first-half results when it cut its annual guidance, played down suggestions the rise in smaller baskets was due to people buying basics at Aldi and then getting extras at Woolworths.
“We’re [Australians] shopping more often, we’re planning less, and people are using it also in a way to budget. Rather than one big shop in a week or over a fortnight, as they traditionally did, they’re spending more often in smaller amounts.
“We’re [Woolworths] seeing that playing out in our stores: more visits, less baskets, but more sales overall. So it really is a change in lifestyle more than anything else.”
Aldi notes that interest in its business has grown as it grows, but it is still “about one-third and one-quarter the size of Coles and Woolworths respectively”.
Questioned whether it still sees Australia as one of the top two or three most concentrated markets in the world, Aldi said “in Britain, the top five chains hold 70 per cent market share. In comparison, Coles and Woolworths hold a similar market share here.”
Group managing director Tom Daunt said in a recent interview: “So I do see forever and a day a strong successful retail environment that has full-line supermarkets like Coles and Woolworths trading very successfully, that has a strong hard discount format like Aldi and a strong large format like Costco and potentially others in the future.”
Allegations of secrecy has dogged Aldi in Australia – a label it vehemently rejects.
Its trading entity is Aldi Stores (A Limited Partnership). Limited partnership are not required to be audited nor to disclose their accounts to the Australian Securities and Investments Commission (if they had to, their accounts could be viewed by the public and competitors). Instead, limited partnerships are registered with the states and territories. Aldi says it is subject to the same reporting requirements as other private firms.
Public disclosure from Aldi instead centres on interviews in which it states sales reached $6 billion in the 2014 calendar year, it paid $80 million in corporate tax in 2013 and its average corporate tax rate in the past few years was almost 31 per cent of net profit.
There are two Australian companies filing accounts to ASIC, Aldi Pty Ltd and Aldi Foods, both owned by Hofer (KG) Australia. Their last accounts, for the 2013 calendar year, show a small loss and total assets for Aldi Foods of $66.7 million, and total assets for Aldi Pty Ltd of $2.5 billion.
When it entered Australia, accounts filed with ASIC showed Aldi had total assets in the 2002 calendar year of $761 million. Filed financial accounts for 2003 showed total assets of $961 million, and that while it “continued to incur significant losses” during its start-up phases, it expected to be profitable “in the foreseeable future”.
Aldi said last year it had been self-funded “for a while.”
An ex-employee said Aldi was “ridiculously secretive”.
“The store managers run the day-to-day operations, but have pretty much no input into any ‘big picture’ decisions, and are not given any info on performance of any part of the business except their own,” he said.
“Area managers are actively discouraged from being ‘friendly’ with store managers or ordinary staff – ‘professionalism’ is expected. The German area managers would actually shake every staff member’s hand upon entering the store and only address them by their full name.
“Communication between staff is discouraged. No one is allowed to tell anyone anything. Information must not flow down.”
But Aldi says the comments are “completely untrue” and it promotes a workplace that is “open, honest and transparent at all levels” and has a management system that outlines clear structures to ensure “precise communication flows”.
Read more: http://www.smh.com.au/business/retail/woolies-coles-steely-amid-aldis-rise-20150313-13i52i.html#ixzz3UG6Gc3oY