Last week I wrote a post about ALDI and how they are changing their business model slightly with the introduction of a new style of store. They've basically decided to take on the big boys in the competition by opening a few upmarket trial stores to poach customers directly from Coles' and Woolworths' supermarkets. Unsurprisingly, this in turn has threatened 'the big two' which has lead to them innovating slightly.
The 2015 Q1 financials from Woolworths were dismal for the brand and its shareholders. Coles on the other hand had a great Q1, which showed strong performance across the company. Despite this, Coles is certainly going to have to keep a close eye on underdog ALDI as it relentlessly pursues the current Duopoly’s grocery empire.
In a market place where there have been two leaders for such a long time its understandable that when a third retailer comes in and starts making a name for itself, the other two get flustered. Coles was founded in 1914 by George James Coles and has been a staple point in supermarket shopping across Australia for almost the entirety of the last century. The brand now has 762 stores across Australia, employs over 100,000 people and turns over $32.07 billion. Coles and Woolies have been at loggerheads since Woolworth’s founding year of 1924. The two brands for a number of years have dominated 80% of the grocery market up until now.
ALDI, on the other hand, was founded in 1946 and has grown across Europe into the United States and in recent years has decided to take on the Australian market. The brand has become so popular that it now has 9,600 stores open across the world and turns over €53 billion per year (AUD$74.8 billion). Interestingly enough, ALDI is actually two seperate companies operating under the same name. Two brothers split the business in 1946 calling them Aldi Nord and Aldi Sud. Internationally Aldi Nord operates in Denmark, France, Poland, the Iberian Peninsula and the Benelux countries, whilst Alid Sud operates in the UK, Ireland, Hungary, Switzerland, Australia, Austria and Slovenia.
Either way, whatever these guys are doing its surely working because ALDI has Coles and Woolies scrambling left and right to become more innovative to retain their customer base. Woolworths has introduced Sushi and Fish Counters into is stores, whilst also introducing more store-branded items to compete with ALDI prices.
Forty-seven per cent of Australia’s 14 million grocery shoppers say that they will more likely go out of their way in order to get a bargain, a report conducted by Roy Morgan Research revealed. 70% stated that they would stick to the brands they enjoy for the majority of the products they buy. However, only 38% said they buy more store branded items than branded items, so this begs to question, will Coles and Woolworths plans to release more store branded items actually work?
What ALDI do extremely well is that they sell branded products for cheaper prices than competitors. As a result customers don't feel 'cheap' when their baskets are filled with tacky, nastily labelled products, which would be the case at Coles and Woolies.
Angela Smith, the Group Account Director of Roy Morgan Research stated “Over the last five years, the proportions of grocery buyers who say they buy more stores’ own products than well known brands has remained static.”
This is good news for the likes of Coles and Woolworths who should be concentrating their efforts on doing what they do best. Angela supports this with her comment “Grocery buyers who usually shop at Aldi are a striking exception, being keen bargain-hunters and prolific consumers of stores own products. A products brand or label is less likely to be a conscious factor in their purchasing decisions.”
But do you think this is the right plan of action for Coles and Woolworths to adopt? Attacking ALDI with its own game plan would surely mean they are at a disadvantage already. A recent report by "Eye On Australia" showed that 40% of respondents are buying store branded products more than they used to, whilst another 65% agreed that they are just as good as branded products.
Looking at the situation from a different perspective, this big effort to knock down prices for store branded items is putting increased pressure on farmers and the entire food manufacturing industry. The main concern is if lots of farmers go out of business due to an inability to compete on price, customers will be left with less choice on the shelves.
The battle for the Australian $80 billion grocery industry has caused competitiveness to heat up, especially as new companies are challenging the current powers. The reduced prices are great for customers however, the long term affects of lower prices might result in an unsustainable food industry. An anonymous source I came across online who didn’t want to speak out from within the industry, due to fear of repercussions, stated “Private label is exploding. Its hurting manufactures of branded products, even the multinationals are hurting.”
This is a direct result of shelf space being allocated to cheaper house brand products. So, whilst we as customers are relishing the drop in prices across the supermarket industry, is the whole movement actually detrimental to the market.
Will lower prices push out all the smaller farmers and supermarkets leaving us with the survivors who then have all the power to set whatever prices they choose? Only time will tell.