Posted July 07

Australia’s Supermarket Shake-Up

By Nik Wallis

Shopping at a supermarket in Australia used to be a fairly predictable experience. Coles and Woolworths have been the dominant players for the past 30 years, accounting for over 70 percent of the market. Coles and Woolworths both offer well-stocked large stores in convenient locations, with good car parking. They have large produce, bakery, meat, and deli fresh departments, and a large range of branded and home brand goods.
But today a transformative wave of new competition is changing the supermarket retail sector, providing greater choice for consumers and adding pressure on the profitability of supermarket operators. The market is changing and it may be that the standard full-line 3,000 to 4,000 square meter supermarket may not fulfill the needs of all. Australian consumer’s lifestyles are changing, and supermarket operators need to adapt to this changing market.

Some of the major factors influencing change in supermarket retailing are the expansion of discount supermarket brands, the imminent arrival of new entrants (be this discounters or superstores), and the growth of inner suburban convenience stores. These drivers are challenging the pricing and service delivery models of established supermarket chains and may open up new opportunities for property developers.

In recent years, several discount supermarket retailers, such as Franklins and Jewel, entered and departed the market, but it appears that German chain ALDI is here to stay. Another successful German discount supermarket operator, LIDL, is looking to enter the Asia Pacific region. The Australian market offers plentiful opportunities for both companies to expand in a similar way as they have across Europe.

ALDI entered Australia in 2001, and has gained over10 percent market share. Its efficient, no-frills model is designed to keep costs low. It operates smaller stores, of around 1,200 to1,500 square meters, and shoppers receive limited services even having to pack their own shopping bags. However, they enjoy low-prices on home brand groceries and basic food items.
Should LIDL enter Australia, it would likely adopt a similar strategy. LIDL was founded as a grocery wholesaler in Germany in the 1930s, and is now one of Europe’s largest grocery retailers. It enjoys particular success in the UK, where it has opened more than 600 stores since 1994.

The experience of the UK supermarket sector is relevant. In recent years, consumer sentiment towards the large, established supermarket brands, such as Tesco, ASDA and Sainsbury, has waned as discount chains offer a competitive alternative. Customers are moving away from the major full-line supermarkets in favor of smaller of more convenient options. As a result, the UK’s main full-line supermarkets are struggling with negative comparative growth, while ADLI and LIDL are expanding.

Cast your eye around any small town or suburb in Australia, and another improvised retail format is increasingly visible. Convenience and independent stores tend to operate as franchisee businesses enabling them to expand at a relatively fast pace.

Customers are generally willing to pay a little extra for their basic and top-up items in return for the convenience of a store close to home.

Superstores are another factor to consider in the ongoing shake-up of Australia’s supermarket sector. Usually supersized at over 5,000 square meters, this format is new to Australia. The market leader is COSTCO, which has established membership-based superstores in each main city in Australia, with some second tier stores starting to roll out. Coles has also opened some superstores with limited success. COSTCO’s model is quantitative – based on bulk sales, big packs, and large quantities of product. It is a destination shop model, with lots of special deals aiming to increase basket sizes with additional unplanned purchases.

Australian cities are becoming more European in their urban planning, with tighter space constraints, more high-rise apartments and less room for large format supermarkets. At the same time, the buying of electrical goods and apparel has transitioned online removing the need to dedicate supermarket space for those product categories. Convenience has become a critical factor in shopping habits, and price and value are stronger considerations with a volatile dollar. Shopping habits are also becoming smarter. Buying as required, rather than stocking up on a weekly basis, has become the preferred method of food shopping for time-poor commuters.

It’s clear that the retail landscape in Australia is changing, with more overseas brands appearing on high streets, in malls and suburbs than ever before. With this in mind, domestic owners and developers will need to look outside of the country to stay ahead of the curve.